Freeriding
Buying a security in a cash account and selling it before paying for the purchase — riding free on the proceeds. The penalty: the account is frozen for 90 days, requiring cash up front for every buy.
On the exam the tell is a cash account whose owner never had the money — the customer buys, then funds the purchase only with proceeds from reselling the same shares. The answer hinges on payment timing: regular-way equities now settle T+1 (since May 28, 2024 — some older question banks still say T+2), and Reg T’s payment period runs to roughly two business days after settlement, so selling before paying for the original buy is the violation. Watch for the cure: a firm may request a Reg T extension only for a bona fide, exceptional reason — a customer is never entitled to one — and absent it the 90-day frozen-account restriction attaches.
The classic trap is dragging in margin rules: freeriding lives in a cash account, so Reg T’s 50% initial and FINRA’s 25% long / 30% short maintenance figures are pure distractors. Don’t confuse it with market manipulation either — freeriding is a payment failure, not a false-appearance fraud. Hook: “no cash, no stash.”
PlayPrepHQ study notes are written and reviewed against primary exam sources. How we create & review content →