Good Faith Violation

What Is a Good Faith Violation?

A good faith violation is a cash-account trading violation that happens when a security bought with unsettled funds is sold before the funds used to pay for it have settled. Brokerages use the term because the purchase was accepted on the good-faith expectation that the funding sale would settle in time, but the investor sold the new security before that happened.

The term matters because this is one of the most common ways active investors accidentally trip a cash-account restriction. The trade may look fully funded on the screen, but the account still has not received settled cash.

Key Takeaways

• A good faith violation happens in a cash account, not because the trade lost money, but because the funding cash had not settled.
• It usually occurs when an investor sells one security, uses those unsettled proceeds to buy another, and then sells the new security before the first sale settles.
• The violation is tied directly to the settlement date.
• Repeated violations can cause the broker to restrict the account to trading only with settled cash up front.
• A good faith violation is different from free riding, which is the more severe problem of selling a security before paying for that purchase at all.

How a Good Faith Violation Happens

Suppose you sell Stock A on Monday in a cash account. The proceeds generally settle on Tuesday under the current T+1 cycle. On Monday afternoon, you use those proceeds to buy Stock B. That purchase is usually allowed because the broker accepts that Stock A's sale will settle and cover the buy. But if you also sell Stock B on Monday, before the Stock A proceeds settle, you have created a good faith violation.

The problem is not that you traded quickly. The problem is that Stock B was sold before the account had settled funds to fully pay for Stock B.

Good Faith Violation Versus Free Riding

That distinction matters because both problems involve unsettled funding, but free riding is the clearer failure to pay for the purchase itself. A good faith violation is narrower and usually arises from reusing unsettled sale proceeds too quickly in a cash account.

Why Good Faith Violations Matter Financially

Good faith violations matter because they can restrict how flexibly an investor can trade in a cash account. If the broker places a settled-cash restriction on the account, the investor may have to wait for cash to settle before placing future purchases. That can slow down rebalancing, tax-loss harvesting, or any short-term trading strategy that depends on immediate recycling of sale proceeds.

They also matter because they are easy to trigger by mistake. An investor can see cash available to trade and still misunderstand whether that cash is actually settled.

Good Faith Violations and Margin Accounts

This issue is mostly a cash-account problem. A margin account can allow more flexibility with unsettled trade timing, though it introduces borrowing risk and different account rules. That means moving to margin does not eliminate risk. It only changes the mechanics and the kind of risk the investor takes.

The Bottom Line

A good faith violation is a cash-account trading violation that happens when a security bought with unsettled funds is sold before those funds settle. It matters because it can trigger account restrictions even when the investor never intended to borrow or break a rule.