What a broker may do in the account. Section 220.8(a) is a permission list. In a cash account a broker may buy a security for a customer if "there are sufficient funds in the account" or if it "accepts in good faith the customer's agreement that the customer will promptly make full cash payment for the security or asset before selling it and does not contemplate selling it prior to making such payment." It may sell a security for a customer if the security is held in the account or the customer states in good faith that it is owned and will be promptly deposited. And it may write, endorse or sell an option for the customer "as part of a covered option transaction," a defined term for option and warrant positions whose risk is limited and fully covered by cash, cash equivalents or the underlying position held in the account, which is why covered calls and cash-secured puts can be written in a cash account while uncovered option writing cannot.
The payment period, and the arithmetic behind "three business days." Section 220.8(b)(1) requires the broker to obtain full cash payment "within one payment period" of the date a security was purchased. Section 220.2 defines a payment period as "the number of business days in the standard securities settlement cycle in the United States, as defined in paragraph (a) of SEC Rule 15c6-1 ... plus two business days." Rule 15c6-1(a), as amended in 2023, bars a broker from contracting for settlement "later than the first business day after the date of the contract." One business day plus two is three: a purchase made on Monday settles Tuesday and must be paid for by Thursday. Two special cases run longer. A purchase settled by delivery against payment, where the delay is "due to the mechanics of the transaction and is not related to the customer's willingness or ability to pay," gives the broker up to 35 calendar days to obtain payment, and a foreign security may be paid for within one payment period of the trade date or within one day after the date the foreign market's own rules require settlement, so long as that does not exceed the delivery-against-payment maximum. If the customer has not paid within the required time, section 220.8(b)(4) directs the broker to "promptly cancel or otherwise liquidate" the transaction, with permission to disregard any sum due of $1,000 or less.
The 90-day freeze. Section 220.8(c) is the provision behind the restriction brokers describe as a freeriding penalty. It reads: "If a nonexempted security in the account is sold or delivered to another broker or dealer without having been previously paid for in full by the customer, the privilege of delaying payment beyond the trade date shall be withdrawn for 90 calendar days following the date of sale of the security." During the freeze the customer can still buy, but must have the cash in the account on the trade date rather than three business days later. The freeze does not apply if full payment or a cleared check arrives within the payment period and the sale proceeds are not withdrawn first, or if the security was delivered to another broker for a cash account that already holds enough to pay for it. Section 220.8(d) lets the broker's examining authority, FINRA for most firms, extend a payment deadline or waive the freeze on application before the deadline passes, if the request is in good faith and exceptional circumstances warrant it. How the freeze and its narrower cousin, the good faith violation, actually play out for an investor who spends unsettled proceeds is covered on the settlement date page.
Two senses of "cash equivalent," and the fully-paid consequence. Regulation T's own definition of a cash equivalent, for purposes of covering option positions, is narrow: "securities issued or guaranteed by the United States or its agencies, negotiable bank certificates of deposit, bankers acceptances ... or money market mutual funds." That is a different, narrower list than the asset class the cash equivalents page describes, and a reader who meets the phrase in a brokerage agreement should assume the regulatory sense. Separately, because nothing in a cash account is collateral for a loan, its securities are "fully paid" under the SEC's customer protection rule, which means the broker must keep them segregated and cannot lend them out unless the customer signs up for a fully paid securities lending program. In a margin account, by contrast, the firm may lend the securities that secure its loan, under the written authorization FINRA's rules require the customer to have given, usually in the margin agreement itself.
What the account cannot do. No short sales, because a short sale is a borrowed security and Regulation T places borrowing in the margin account. No buying with money that is expected but not yet in the account beyond the payment period. No uncovered option writing. And no spending the proceeds of a sale to buy and then sell again before those proceeds settle without risking the restrictions above. For an investor who buys with settled cash and holds, none of these limits ever bites, which is why many long-term investors never need anything else.
