Kevin J. Moynihan, Esq.
Vice President & Senior Counsel
Private Client Group
Office of General Counsel
Merrill Lynch
World Financial Center
North Tower
New York, New York 10281-1323

Dear Mr. Moynihan:

This is in response to your letter of August 20, 1997, concerning the application of Regulation T to a same-day purchase and sale transaction in the cash account portion of a customer's asset management account.

Section 220.8(a) of Regulation T ("Cash account -- permissible transactions") provides that a broker-dealer may effect a customer's purchase of any security if either (1) there are sufficient funds in the account on trade date or (2) the customer agrees to promptly make full cash payment for the security before selling it and doesn't contemplate selling it prior to making full cash payment. The ability to delay payment beyond trade date in the cash account is considered a privilege under Regulation T. If a customer does not have sufficient funds in the account on trade date and is proceeding under the second method, section 220.8(c) of Regulation T ("Cash account -- 90-day freeze") provides that the sale of a security that has not been paid for in full by the customer shall result in withdrawal of the privilege of delaying payment beyond trade date for 90 calendar days following the date of sale of the security. This is known as a "90-day freeze" and requires a customer to pay for future transactions on trade date during the 90-day period. Section 220.8(c) of Regulation T further provides that the 90-day freeze shall not apply if full payment is received or any check or draft in payment has cleared within the time period normally permitted under the second method and the proceeds from the sale are not withdrawn before full payment is received.

The transaction described in your letter involves a customer who purchases and sells the same security on the same day in the cash account. According to your letter, the customer has sufficient money market fund value in the account on trade date to cover the purchase. We assume this value is sufficient to cover all similar transactions on trade date.

Your firm believes that it is unnecessary for purposes of compliance with section 220.8 of Regulation T for it to redeem the money market fund shares to pay for the purchase and then reinvest the sale proceeds in money market fund shares. You note that under an asset management account arrangement the broker-dealer has the customer's power of attorney to pay for securities purchases by redeeming the customer's money market fund shares. You also note that any deficit resulting from the same day purchase and sale of a security is "pended" so that sufficient money market shares will be available for redemption on settlement date to ensure the firm receives full payment for the cost of the purchase. Finally, you note that a requirement that money market shares be redeemed to pay for the purchase would (1) be detrimental to the customer through the loss of money market fund dividends between trade date and settlement date; (2) be a windfall for the broker-dealer by creating a free credit balance between the date the money market fund shares are redeemed and settlement date of the security that sold; and (3) cause the broker-dealer and money market fund's transfer agent to incur substantial expense to process and record the transactions.

A similar situation was addressed in a staff opinion letter dated June 12, 1987, and digested in the Federal Reserve Regulatory Service ("FRRS") at 5-615.951. In that situation, a customer with $5000 worth of money market fund shares in a cash account bought $5000 worth of stock on Day 1 and sold the stock on Day 2. Board staff approved of the broker-dealer's practice of requiring the customer to order liquidation of the money market fund shares on Day 2 and stated that it would not be sufficient to wait until settlement date (which was Day 5 in 1987, but is Day 3 today), at which point the broker-dealer would order liquidation of the money market fund shares, because this does not establish the customer's ability to pay for the security on the day it was sold without before having been paid for (i.e., Day 2). Board staff concluded that liquidation initiated by the broker-dealer "because payment has not been received is not the equivalent of cash on hand."

Another staff opinion on point is dated April 7, 1988, and is digested at FRRS 5-615.954. A customer purchased a security in a cash account on Day 1 and sold it on Day 2. The staff opinion indicated that the customer would not be subject to the 90-day freeze if the customer issues instructions for the sale of money market funds to pay for the stock "simultaneously with the order to sell the stock."

Both of the above-cited staff opinions suggest that money market fund shares must be liquidated on sale date to avoid application of the 90-day freeze in the situation you have described. Based on our understanding of your letter however, Board staff believes that the customer may be treated as having sufficient funds in the account on trade date under section 220.8(a)(1)(i) of Regulation T if the account contains sufficient money market fund shares to cover the purchase on trade date, the broker-dealer has the customer's authorization to liquidate the money market fund shares to pay for the securities, and sufficient money market fund shares to cover any deficit incurred on trade date are "pended" in order to ensure settlement. The earlier staff opinions are superseded to the extent that they are inconsistent with this view.

This is a staff opinion only, as the matter has not been presented to the Board, and is limited to the facts presented. Different facts could result in a different conclusion.

Yours truly,

(signed) Scott Holz

Scott Holz