What is a Good Faith Violation? Definition, Formula, and Example
A good faith violation occurs in a cash brokerage account when you sell a security purchased with unsettled funds before the original purchase's settlement date.
Good Faith Violation Definition
A good faith violation (GFV) happens exclusively in cash accounts — never margin accounts — when a trader buys a security using proceeds from a sale that hasn't settled yet, then sells the newly purchased security before the *original* sale settles. Regulation T and FINRA rules require cash-account trades to be paid for with settled funds; a GFV is the penalty for trading on money you don't legally have yet, even though your broker's platform showed a positive buying-power balance and let the order through.
How a Good Faith Violation Is Identified
U.S. equity trades settle on T+1 — trade date plus one business day — since the SEC shortened the cycle from T+2 on May 28, 2024. The violation sequence is mechanical:
1. You sell Stock A on Monday. Cash from that sale won't settle until Tuesday (T+1).
2. You use the *unsettled* proceeds to buy Stock B on Monday afternoon.
3. You sell Stock B on Tuesday morning — before Monday's Stock A sale has settled (if it settles later Tuesday) or before the cash from Stock B's own purchase has cleared.
Because you sold Stock B without ever having paid for it with settled cash, the trade is flagged as a good faith violation — you acted in "good faith" that the funds would settle, but the rule doesn't accept good faith as payment. Three GFVs in a rolling 12-month period triggers a mandatory 90-calendar-day restriction, during which the account can only buy with cash that has already fully settled — no same-day recycling of proceeds at all.
Worked Example
A trader has $5,000 settled cash in a cash account.
- Monday, 10:00 AM: Buys $5,000 of SOFI with settled cash.
- Monday, 2:00 PM: Sells the SOFI position for $5,200. This $5,200 won't settle until Tuesday (T+1).
- Monday, 2:15 PM: Uses the unsettled $5,200 to buy $5,200 of PLTR.
- Monday, 3:30 PM: Sells PLTR for $5,350, before the SOFI sale has settled.
That last sale is a good faith violation — the PLTR purchase was funded entirely with unsettled proceeds, and it was sold before those proceeds cleared. The trader profited on both trades, but the account still gets flagged, because the rule concerns *settlement mechanics*, not profitability.
When Traders Use This Concept
Retail traders running a cash account specifically to avoid Pattern Day Trader (PDT) equity minimums need to track settlement dates manually, since most broker apps display "buying power" that includes unsettled funds without flagging the GFV risk until after the trade executes. Active swing traders in cash accounts stagger purchases across multiple settled-cash "buckets" — effectively holding a rotating three-day ladder of available capital — specifically to avoid ever needing to touch same-day unsettled proceeds.
Limitations and Misconceptions
A good faith violation is not the same as free-riding (buying a security with no intention of ever depositing settled cash, then selling before the buy even settles) — free-riding is a more severe violation that typically triggers an immediate 90-day cash-only restriction on the first offense, not the third. GFVs also aren't tied to profit or loss — a losing trade can trigger one just as easily as a winner. And moving to a margin account doesn't eliminate settlement risk entirely; it trades GFVs for different rules around Regulation T calls and maintenance margin, covered separately under the Pattern Day Trader Rule.