What is a Good Faith Violation?

If a security purchased in the customer’s cash account is sold prior to being paid for with settled funds in the account, a good faith violation has occurred. The reason it is referred to as a good faith violation is that trade activity is giving the appearance that sales proceeds are being used to cover buy orders when there is insufficient settled cash to cover these purchases. Basically, trade activity indicates that a good-faith effort to deposit additional cash into the account will not happen.

Accounts with three good faith violations in a 12-month period will be restricted to purchasing securities with settled cash only for a period of 90 days.

Example: 

Cash available to trade = $0.00. On Monday morning, a customer sells Y stock netting $5,000 in cash account proceeds. On Monday afternoon, the customer buys X stock for $5,000. If the X stock is sold prior to Tuesday before market opens (settlement date of the Y sale which is T+1 business days), a good faith violation would occur as the X stock is not considered fully paid for prior to sale.

Note:

- Buying a stock with unsettled funds is not a violation but selling the same even before the said cash is settled leads to a violation. Violation can be avoided by selling the stocks that were bought with unsettled cash after the cash settlement.

- Settled funds mean the amount is settled in your account and can be used to trade or withdraw whereas unsettled funds are the amount to be received from the Sales proceeds and is in the process of being settled for you to use the same.