Investment Company and. Variable Contracts Products Principals (Series 26) Practice Exam

What happens if a customer fails to meet the payment deadline set by Regulation T?

1. The trade is automatically canceled

2. The broker-dealer places the account into a watch list

3. A sellout occurs, and the account is frozen

4. The customer is penalized with fees

The correct answer is: A sellout occurs, and the account is frozen

If a customer fails to meet the payment deadline set by Regulation T, a sellout occurs, and the account is frozen. Regulation T, governed by the Federal Reserve Board, outlines the credit that broker-dealers can extend to customers for the purchase of securities. It specifies that customers must pay for their securities purchases by the specified settlement date. When a customer does not meet this deadline, the broker-dealer is required to liquidate the securities purchased in the account to cover the deficiency, which is referred to as a sellout. This means that the broker will sell the securities to recover the unpaid funds from the transaction. Following this action, the account may be frozen, preventing any further trading until the issue is resolved. This process helps ensure that broker-dealers manage credit risk and adhere to the regulations governing securities trading. The other options do not accurately reflect the consequences outlined by Regulation T. For instance, trades are not automatically canceled; instead, they are liquidated to cover the unpaid balance. Being placed on a watch list may occur in some compliance scenarios, but it is not a direct consequence of failing to meet payment deadlines. While penalties and fees can apply in various trading contexts, they are not the primary regulatory response to a Regulation T violation