Good Faith Violation

A Good Faith Violation (GFV) is a trading blunder that occurs in a Cash Account when you sell a security that was purchased with funds that have not yet settled. Imagine you sell your old bike for $100, and the buyer promises to pay you on Friday. On Tuesday, you use that promised $100 to buy a new helmet. On Wednesday, you decide you don't like the helmet and sell it. The problem? You sold the helmet before you ever actually received the cash for the bike. In the investment world, this is a GFV. When you sell Securities like stocks or ETFs, the cash from that sale isn't officially yours instantly. It must go through a Settlement Period (typically one business day, or T+1, for stocks in the US and two days, T+2, in Europe). A GFV happens when you buy a new security with those “unsettled” funds and then sell that new security before the original funds have cleared. It violates the “good faith” principle that you will fully pay for your investments with settled money, and your broker takes it seriously.

Understanding the timing is key to avoiding a GFV. Most Brokerage Account platforms show you “cash available to trade” and “settled cash.” A GFV happens when you mix them up. Let's follow an investor named Alex:

• Monday: Alex has $0 in settled cash. He sells 10 shares of Company A for $1,000. This $1,000 is now “unsettled.” His “cash available to trade” might show $1,000, but his “settled cash” is still $0.
• Tuesday: Alex sees a great opportunity and buys $1,000 worth of Company B stock. He is allowed to do this using the unsettled funds from Monday's sale. So far, so good.
• Wednesday: Company B's stock jumps, and Alex decides to sell it for a quick profit. This is the violation. He sold Company B before the funds from the Company A sale (from Monday) had settled into his account. Alex has just committed a Good Faith Violation.

The key mistake was selling the second investment (Company B) before the funds used to purchase it (from the sale of Company A) were officially settled.

Brokers are required by regulators to enforce rules against GFVs. The penalties are not fines, but they are certainly inconvenient.

• First Few Violations: You'll typically get a warning. Your broker will send you a notification explaining what you did wrong.
• Too Many Violations: If you accumulate too many GFVs in a 12-month period (usually four or five, depending on the broker), your account will be restricted.
• The 90-Day Restriction: This is the main penalty. For 90 calendar days, you will only be able to buy securities with fully settled cash. This means you can't “recycle” your money quickly. You must sell an asset, wait for the settlement period to pass, and only then can you use that cash to buy a new asset. This severely limits trading frequency.

Avoiding a GFV is simple once you know the rules. It's all about patience and paying attention to your account details.

• Know Your Balances: Pay close attention to your “settled cash” balance, not just your “buying power” or “cash available to trade.” Only make purchases you can cover with your settled cash balance to be completely safe.
• Wait It Out: The easiest method is to simply wait for your funds to settle before using them to buy something new. If you sold a stock on Monday, wait until Wednesday (assuming a T+1 settlement) to be sure the cash is yours to use freely.
• Keep a Cash Buffer: A small amount of settled cash held in your account at all times can act as a buffer, preventing you from accidentally using unsettled funds for a quick trade.
• Consider a Margin Account: GFVs are a feature of Cash Accounts. A Margin Account allows you to borrow from your broker, which bypasses these specific settlement rules (though it introduces its own set of risks, like interest charges and Margin Calls).

For a disciplined value investor, a Good Faith Violation should be a non-issue. The entire philosophy of value investing is built on long-term holding periods, patience, and avoiding the kind of rapid, speculative trading that leads to GFVs in the first place. These violations are a byproduct of a short-term mindset—trying to make a quick buck by flipping stocks in a day or two. A true value investor buys a business, not a ticker symbol, with the intention of holding it for years. Therefore, the settlement period is just a minor administrative delay, not a barrier to your strategy. If you find yourself frequently running into GFVs, it might be a good moment to reflect on whether you are investing or simply trading.