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Question

Difficulty: MediumMargin Accounts and Borrowing Requirements

An investor purchases $8,000 of marginable stock in a margin account but fails to deposit the required Regulation T margin amount by the payment deadline. If no extension is granted by the self-regulatory organization (SRO), what action is the broker-dealer required to take?

  1. Liquidate the unpaid securities and place a 90-day freeze on the account.Answer
  2. B
    Immediately close all of the customer's accounts and report the default to FinCEN.
  3. C
    Transfer the positions to a non-margin cash account and assess an automatic 10% statutory penalty fee.
  4. D
    Grant an automatic 30-day grace period before initiating any liquidation of customer positions.

Answer

The broker-dealer must liquidate the unpaid securities to satisfy the margin call and freeze the customer's account for 90 days.
Under Federal Reserve Board Regulation T, if a customer fails to meet an initial margin call by the required payment deadline (settlement date plus two business days) and no extension is obtained from an SRO, the broker-dealer is required to liquidate the unpaid positions. Additionally, the customer's account is placed on a 90-day freeze, during which purchase trades can only be executed if the full purchase amount in cash is deposited into the account before the order is placed.

Step-by-Step Solution

1
Identify the payment timeline under Regulation T
Payment for margin purchases must be deposited within two business days after regular-way settlement (S+2S+2, or T+4T+4 business days).
Federal Reserve Board Regulation T governs customer payment deadlines for securities purchases.
2
Determine the mandatory firm action upon non-payment
If the customer does not pay by the deadline and no extension is granted, the broker-dealer must sell out the position.
Broker-dealers are required by Federal Reserve rules to enforce prompt settlement of customer obligations.
3
Identify the account restriction resulting from non-payment
The customer's account is frozen for 90 days.
During a 90-day freeze, the customer may still trade but must have full cash on deposit prior to executing any purchase orders.

Key Concept

Regulation T Settlement Deadlines and 90-Day Account Freeze Rules
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Topics

Margin Accounts and Borrowing Requirements