Account Restrictions

One way a broker-dealer could get in trouble financially is if too many customers fail to pay for securities purchases by the settlement date. In those cases, the firm's net capital takes a hit.

Therefore, under Regulation T, customer accounts are frozen if they don't make prompt payment for securities purchases. Regulation T is enforced by the Federal Re-serve Board. It covers both margin accounts and cash accounts.

Broker-dealers don't have to allow customers to buy stock without having sufficient cash in the account to cover it. But, if they decide to carry such transactions in their "good faith account," customers must make payment by no later than 2 business days after settlement. Although firms can request extensions from FINRA, a slow-paying customer is eventually subject to an account freeze.

That term sounds harsher than it is. All it prevents the customer from doing is making further purchases over the next 90 days without having or depositing the funds prior to entering the trade. If they wire the funds or deliver a cashier's check personally, then they can enter a purchase order up to the amount. But, they can't enter the purchase order and then promise to come up with the funds.
At least, not until the freeze is lifted.

Another action that leads to an account freeze is a customer purchasing the stock without having the funds in the account. Then, rather than sending payment promptly, the customer sells the stock to cover the buy side. The broker-dealer fills the order, but this "freeriding" violation of Reg T leads to a 90-day customer account freeze.

We looked at other account restrictions, including that officers, directors, and large shareholders of public companies are subject to volume limits when selling the company's common stock. Such people are also subject to lock-up periods if they buy the issuer's securities in a primary offer. And, if they purchase the issuer's stock through a private placement, they are subject to holding periods under Rule 144.

 A margin account extends a line of credit to customers, but they can't access that line if doing so brings the account's equity below the minimum maintenance, which is $2,000.

In an options account, a new customer must return the signed options agreement no later than 15 business days after receiving account approval. If he fails to do so, he can enter no new purchases but can only liquidate any positions he has already opened.


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