Series 7 Exam Prep 90, Customer Account Restrictions and Free Riding

0:00We are covering customer account restrictions, specifically focusing on free writing and frozen accounts for the Series 7 exam. This area is frequently tested through scenario-based questions, so understanding the mechanics is critical. The foundation of these rules is Federal Reserve Board's Regulation T, which governs the extension of credit by broker dealers. For a standard purchase in a customer's cash account, Regulation T states the customer must pay for the securities in full within two business days after the settlement date. With most equities settling in T plus 1, this effectively means payment is due by T plus 3, or trade date plus 3 business days. The exam loves to play with these dates, so be precise. A major violation of this rule is called free writing. Free writing occurs when a customer buys a security and then sells it without ever depositing the money to pay for the initial purchase. Essentially, the customer is using the proceeds from the sale to cover the cost of the purchase,

1:04which is a prohibited practice. For example, a client buys $10,000 of ABC stock on Monday in their cash account, which has a $0 balance. On Tuesday, the stock price increases, and the client sells the ABC stock for $11,000 intending to use that money to cover Monday's purchase. This is a classic free writing violation. The client is illegally leveraging the broker dealer's funds to finance their trade. The exam will test your knowledge of the consequence for free writing. The penalty is that the brokerage firm must freeze the customer's account for 90 days. This is a critical detail. A common exam trap is to offer answer choices like the account is closed, or the customer is banned from trading. Neither is correct. A frozen account can still be used for trading, but with a significant restriction. During the 90-day freeze, the customer must have sufficient settled cash in the account before a purchase order can be executed.

2:06The firm will not grant any credit. All purchases must be paid for up front. It's important not to confuse this with a restricted margin account. A margin account becomes restricted when the equity drops below the 50% regulation T requirement. This is an issue of equity levels, not the failure to pay, and the rules surrounding it are different. Also, be aware of a related but less severe infraction called a good faith violation. This happens when a customer sells a security that was purchased with unsettled funds from a different sale. The key distinction from free writing is that in a good faith violation, the customer had the proceeds from a previous sale. They just weren't settled yet. Whereas in free writing, the customer never had the funds to begin with. For the Series 7, the most heavily tested concept here is the direct line from the free writing violation to the 90-day freeze. A helpful mnemonic to remember this is, if you take a free ride, you'll do 90 days inside.

3:06This links the violation directly to its specific 90-day penalty, helping you cut through trick answer choices on the exam. For free practice questions, AI-powered explanations, and more exam prep tools, visit OpenExamprep.com. That's OpenExamprepall1word.com.