Settlement Practice Questions for the SIE

Answer: One business day

Regular-way settlement for corporate stocks and bonds is one business day after the trade date (T+1) under SEC Rule 15c6-1, which was shortened from T+2 effective May 28, 2024. Municipal securities settle regular-way T+1 as well, under MSRB Rule G-12 (amended alongside the same 2024 change rather than by Rule 15c6-1, which carves out municipal and government securities). U.S. government securities and listed options also settle T+1 — but note these were already next-day before 2024, so the old exam contrast of 'options settle faster than stock' no longer exists. The practical takeaway: essentially everything regular-way is now T+1, and the real tested contrast is regular-way versus cash settlement. Same-day settlement does exist, but it is called cash settlement and requires the mutual agreement of both parties at the time of the trade (choice A). Two business days (choice C) was the old T+2 standard retired in May 2024; study materials still showing T+2 are out of date. Three business days (choice D) confuses the settlement date with the Regulation T payment deadline, which gives the customer until two business days after settlement — T+3 in total — to pay for the purchase. Remember to count business days, not calendar days: a Friday trade settles Monday.

The Trap: stale T+2 as regular-way settlement

• Two business days: Misconception: T+2 was the regular-way standard only until May 28, 2024, when it was retired. Many older prep materials still show T+2, making it the most common out-of-date answer on this topic.
• On the trade date itself: Misconception: confuses regular-way settlement with cash settlement. Cash settlement does settle the same day, but only when both parties expressly agree to it at the time of the trade — it is not the regular-way default.
• Three business days: Misconception: conflates the settlement date with the Regulation T payment deadline. Reg T gives the customer until two business days after settlement to pay, which works out to T+3 in total — but settlement itself is still T+1.

Verified against: primary: SEC Rule 15c6-1(a) (corporate securities; excludes exempted/government/municipal securities), MSRB Rule G-12(b)(ii) (munis), 12 CFR 220.2 'payment period' = settlement cycle + 2 business days (Reg T, T+3)

Answer: Federal Reserve Board

Regulation T is a Federal Reserve Board rule governing the extension of credit by broker-dealers; it sets the initial margin requirement (currently 50%) and the deadline for customers to pay for their purchases. FINRA (choice A) writes maintenance-margin and conduct rules for its members and, as a firm's designated examining authority, can grant extensions of the Reg T payment deadline — but it did not write Reg T. The SEC (choice B) enforces the federal securities laws and sets the settlement cycle, and the MSRB (choice D) regulates the municipal securities market; neither issues Reg T. Keep the regulator map straight: the Federal Reserve Board sets margin and credit rules, FINRA sets member conduct and maintenance-margin rules, and the SEC enforces the federal securities laws and oversees the markets and the SROs.

The Trap: regulator mapping: crediting FINRA or the SEC with Regulation T

• MSRB: Misconception (regulator-mapping trap): the MSRB writes rules for the municipal securities market only; it does not issue margin or credit regulations.
• FINRA: Misconception (regulator-mapping trap): FINRA writes maintenance-margin and conduct rules for its member firms and, as a firm's designated examining authority, can grant extensions of the Reg T payment deadline — but it did not write Reg T.
• SEC: Misconception (regulator-mapping trap): the SEC enforces the federal securities laws and sets the settlement cycle, but the credit and initial-margin rules in Reg T come from the Federal Reserve Board.

Verified against: Regulation T (Federal Reserve Board, 12 CFR Part 220)

Answer: Seven calendar days

Section 22(e) of the Investment Company Act of 1940 bars an open-end fund from postponing payment of redemption proceeds more than seven days after the shares are tendered, so the fund generally must pay within seven calendar days (choice D). Two separate ideas commonly get confused here. First, forward pricing sets the redemption price at the next NAV computed after the request arrives — but pricing the shares and paying the money are different steps, and nothing requires same-day payment (choice A). Second, the T+1 settlement cycle is an Exchange Act rule (Rule 15c6-1) that governs when a securities trade a broker-dealer effects must settle; it is a different rule from the Act's redemption-payment deadline, which is what this question asks about. Note the practical wrinkle that makes choice B tempting: most funds pay far faster than seven days, and many prospectuses promise proceeds on the next business day. That describes typical practice, not the legal requirement — seven days is the outer limit, not the norm. Choice C echoes the T+2 cycle retired in May 2024, which likewise sets no redemption deadline. Two details worth locking in: the seven days are calendar days, not business days; and the Act permits the payment obligation to be suspended in narrow circumstances — such as when the NYSE is closed, during certain emergencies, or under an SEC order delaying redemptions to protect fund shareholders — which is why the requirement is stated as 'generally.'

The Trap: confusing the T+1 trade settlement cycle — or a fund's faster next-business-day payment practice — with the Investment Company Act's seven-day redemption deadline

• Two business days: Incorrect: echoes the T+2 settlement cycle retired in May 2024. No settlement cycle — retired or current — sets the Investment Company Act's redemption-payment deadline.
• The same day the request is received: Incorrect: confuses forward pricing with same-day payment. Forward pricing sets the redemption PRICE at the next NAV computed after the request arrives; pricing the shares and delivering the money are separate steps, and the Act requires no same-day payment.
• One business day: Incorrect: this is what many funds actually deliver in practice — and it mirrors the T+1 settlement cycle — but the question asks what the Investment Company Act REQUIRES. The Act's deadline is seven days; faster payment is a business choice or prospectus commitment, not the statutory requirement.

Verified against: Investment Company Act of 1940 §22(e); SEC Office of Investor Education and Advocacy, 'Mutual Fund Redemptions' (investor.gov)

Answer: The trade settles on the trade date itself and requires the mutual agreement of both buyer and seller

Cash settlement means the trade settles on the trade date itself, and because it departs from the normal cycle it must be agreed to by both buyer and seller at the time of the trade — neither side can impose it unilaterally. FINRA Rule 11320(a) puts it directly: in a transaction "for cash," delivery is made on the day of the transaction. Cash settlement is used when same-day ownership matters. The classic case is dividends: under the T+1 cycle the ex-dividend date and the record date are now normally the same day, so a buyer who trades regular way on the record date settles the next business day, is not on the books in time, and misses the dividend — buying for cash settlement on the record date settles that same day and preserves it. Tax year-end is the other common use, when a seller needs the sale and its gain or loss to fall in the current tax year. Choice B is the classic name trap: a cash account is a type of brokerage account (the customer pays in full and does not borrow), and trades in it still settle regular way; the two terms are unrelated. Choice C describes regular-way settlement — the default cycle, T+1 since May 28, 2024 (older study materials still say T+2) — not cash settlement. Choice D confuses settlement with the Regulation T payment deadline, a Federal Reserve rule giving customers until two business days after regular-way settlement to pay for a purchase.

The Trap: cash settlement confused with cash account

• The buyer is permitted to pay up to two business days after the settlement date: Misconception: describes the Regulation T payment deadline (two business days after regular-way settlement), which is a payment rule, not a settlement type.
• The trade settles one business day after the trade date: Misconception: T+1 — one business day after the trade date — is the regular-way (default) cycle, the standard since May 28, 2024, not cash settlement.
• Any trade executed in a customer's cash account: Misconception (name trap): "cash settlement" and "cash account" are unrelated concepts — a cash account is an account type, and its trades still settle regular way.

Verified against: ex-date generally same day as record date)

Answer: The following Monday

Settlement is counted in business days, not calendar days. A regular-way trade settles one business day after the trade date (T+1), so a Friday trade settles the following Monday — Saturday and Sunday are not business days, which is why choice A (counting calendar days) fails. Friday itself (choice B) would be cash settlement, which happens only when both parties agree to it. Tuesday (choice D) reflects the retired T+2 cycle; U.S. regular-way settlement moved to T+1 under SEC Rule 15c6-1 on May 28, 2024.

The Trap: counting T+1 in calendar days over a weekend

• The following Tuesday: Misconception: applies the obsolete T+2 cycle (two business days), retired May 28, 2024.
• Saturday: Misconception: counts T+1 in calendar days over a weekend; settlement is counted in business days, and Saturday is not one.
• The same Friday: Misconception: same-day settlement is cash settlement, which occurs only by mutual agreement, not regular way.

Verified against: SEC Rule 15c6-1 (T+1 regular-way settlement, effective May 28, 2024)

Answer: I, II, III and IV

All four settle regular way at T+1. U.S. government securities and listed options have long settled the next business day, and that has not changed. Corporate securities joined them on May 28, 2024, when the SEC's amended Rule 15c6-1 shortened the standard settlement cycle from T+2 to T+1. Municipal securities moved to T+1 on that same date under parallel MSRB rules: Rule 15c6-1 by its own terms does not reach government or municipal securities, so the MSRB amended its own uniform practice rules (G-12 and G-15) to match the SEC's timetable. The practical result is that essentially everything regular way now settles in one business day. Choice B reflects the pre-2024 world, when only governments and options were next-day while corporates and munis took two days — that contrast no longer exists, and older exam questions built on it are obsolete. Choices A and C each wrongly assume some listed product still settles on a different cycle. The contrast worth remembering today is regular way (T+1) versus cash settlement (same day, by mutual agreement).

The Trap: obsolete corporates-T+2 vs governments/options-T+1 contrast

• I and II only: Misconception: assumes Treasuries and options settle on some other cycle; both have long settled next-day, and that has not changed.
• I, II and III only: Misconception: assumes listed options settle on a different cycle (e.g., same day); listed options settle regular way T+1 through the OCC.
• III and IV only: Misconception (stale contrast): under the pre-2024 regime, only governments and options were next-day while corporates and munis were T+2; that contrast is obsolete.

Verified against: SEC Rule 15c6-1(a), 17 CFR 240.15c6-1 (T+1 standard cycle; compliance date 2024-05-28; misconception pair: broken old contrast

Answer: Thursday

Two clocks run after a purchase. First, the trade settles regular way one business day after the trade date, so a Monday trade settles Tuesday (T+1). Second, Regulation T — a Federal Reserve Board rule governing the credit that broker-dealers extend to customers — then allows payment up to two business days after settlement: Wednesday is one, Thursday is two. Thursday is the deadline, three business days after the trade date in total. Choice A reflects the myth that cash-account customers must pay when the order is placed; paying in full up front is required only while an account is frozen. Choice B confuses the payment deadline with the settlement date — settlement is when the trade is due to clear, not the Reg T payment cutoff. Choice C miscounts by one business day. If payment does not arrive and the firm has not obtained an extension from its regulator, the firm must generally sell out the unpaid position, and the account is then frozen for 90 days, meaning the customer must have the cash in the account before any further purchase.

The Trap: Reg T payment due on the settlement date

• Monday, at the time the order is placed: Misconception: payment in advance of a purchase is required only while an account is frozen under Regulation T, not for ordinary cash-account trades.
• Tuesday, the settlement date: Misconception: Reg T payment is NOT due on the settlement date — the customer gets two additional business days after settlement.
• Wednesday: Misconception: stops one business day short — counts settlement plus one rather than settlement plus two.

Verified against: misconception pair: payment due at settlement

Answer: Sell out the unpaid position and freeze the account for 90 calendar days

When a cash-account customer fails to pay by the Regulation T deadline and the firm has obtained no relief, the broker-dealer must promptly sell out (liquidate) the unpaid position — and that sale triggers a 90-calendar-day freeze on the account. Note what 'freeze' actually means: the account is not shut down, and the customer is not banned from trading. What is withdrawn is the privilege of paying after the trade date. For the next 90 calendar days the customer may still buy, but only with sufficient cash already in the account. Any loss on the liquidation is the customer's responsibility. Choice B is the sharpest trap. The firm cannot unilaterally move the debt into a margin account and begin charging interest — that would convert an unpaid cash purchase into an extension of credit. Regulation T does contemplate such a transfer, but only where the firm applies to its examining authority and the transfer is authorized; the same is true of extending the payment deadline or waiving the freeze. Here the firm applied for nothing, so the default remedy — sell out and freeze — governs. Choice C is wishful thinking: the trade was binding on execution, and although the firm may cancel or liquidate the position, the market loss lands on the customer, not the firm. Choice D overstates the sanction: the freeze is a temporary 90-day, cash-up-front restriction, not permanent closure. Regulation T is a Federal Reserve Board rule governing the extension of credit by broker-dealers.

The Trap: believing nonpayment lets the firm carry the debt as a margin loan on its own initiative, or that it voids the trade and shifts the market loss to the firm

• Transfer the unpaid balance to a margin account and charge interest on it: Misconception (cash vs margin confusion): the firm cannot move an unpaid cash purchase into a margin account on its own initiative and start charging interest. That converts the purchase into an extension of credit, which Regulation T allows only if the firm applies to its examining authority and the transfer is authorized — and here the firm sought no such relief.
• Cancel the trade, with the firm absorbing any market loss: Misconception: the trade was binding when executed. The firm may cancel or otherwise liquidate the position, but that is the firm's remedy, not the customer's escape hatch — the resulting market loss falls on the customer, and the 90-day freeze still follows.
• Close the account permanently and prohibit the customer from future purchases: Misconception: confuses the temporary 90-calendar-day freeze (buying still allowed, but only with cash already in the account) with permanent closure of the account.

Verified against: transfers.

Answer: May continue to buy securities, but loses the privilege of delaying payment — each purchase must be paid for in full on the trade date

A 90-day freeze does not shut the account down. Regulation T's remedy is narrow and precisely worded: for 90 calendar days, the customer loses "the privilege of delaying payment beyond the trade date." Buying continues — the SEC's own investor guidance says an investor "may still purchase securities with the cash account" — but each purchase must be paid for in full on the date of the trade, instead of by the normal Regulation T payment deadline. Choices A and B overstate the restriction: both purchases and sales remain possible. Choice D confuses the remedy with margin; the account is not converted to a margin account, which would mean extending credit to the very customer who just failed to pay. Precision point worth remembering: the requirement is same-day full payment on the trade date — the rule does not demand that the cash already be sitting in the account before the order is placed. Note also what triggers the freeze: it attaches when a security is sold without having been paid for in full — here, the firm's sellout of the unpaid position — not to late payment standing alone. The freeze is imposed under Regulation T (12 CFR 220.8(c)), the Federal Reserve Board's credit rule for broker-dealers.

The Trap: frozen account means no trading at all

• May sell existing positions but is prohibited from making any purchases: Misconception: purchases are not prohibited during the freeze — they simply must be paid for in full on the trade date rather than by the normal Regulation T payment deadline.
• May not enter any orders of any kind until the freeze expires: Misconception: "frozen" is widely misread as a total trading ban. The account keeps operating — the SEC states that an investor "may still purchase securities" in a frozen cash account. What is withdrawn is only the ability to delay payment past the trade date.
• Must convert the account to a margin account to continue trading: Misconception (cash vs margin confusion): a frozen cash account is not converted to margin — that would extend credit to a customer who just failed to pay.

Verified against: Regulation T §220.8(c) (Federal Reserve Board) — 90-day freeze on cash accounts for unpaid-then-sold-out purchases

Answer: Request an extension of the payment period from its designated examining authority, such as FINRA

Regulation T permits a broker-dealer to request an extension of the payment period on the customer's behalf from its designated examining authority — for most firms, FINRA. Extensions are granted for legitimate, documented reasons such as a delayed bank wire. Choice A is wrong because extensions do exist; sellout and the 90-day freeze are required only when payment is missed with no extension in place. Choice C fails because the firm cannot grant itself an extension — the request must go to the examining authority. Choice D maps the request to the wrong regulator: the SEC sets the settlement cycle, but Regulation T is a Federal Reserve Board rule and extension requests are handled by the firm's examining authority.

The Trap: believing extensions are unavailable, self-granted by the firm, or granted by the SEC

• Apply directly to the SEC for an extension: Misconception (regulator-mapping trap): the SEC does not process Reg T extension requests; they go to the firm's designated examining authority.
• Nothing — Regulation T payment deadlines cannot be extended under any circumstances: Misconception: extensions do exist; Reg T allows the firm to request additional time for legitimate, documented causes before selling out.
• Grant the customer an extension of up to 30 days on the firm's own authority: Misconception: the firm cannot self-grant an extension; the request must be approved by the examining authority.

Verified against: Regulation T (Federal Reserve Board) — payment-period extensions requested through the firm's designated examining authority (e.g., FINRA)