A Good Faith Violation (GFV) occurs when you buy securities using unsettled funds and then sell those securities before the funds used for the purchase have settled. This article explains what these violations are, provides examples, and offers guidance on how to avoid them.
What Is a Good Faith Violation?
Good Faith Violations happen when you:
- Purchase securities using proceeds from a sale that has not yet settled
- Sell those newly purchased securities before the original sale proceeds have settled
In essence, you're trading with "unsettled" funds and then selling before those funds actually settle in your account.
Examples of Good Faith Violations:
Example 1: Selling Securities Purchased with Unsettled Funds
- Wednesday: You purchase 100 shares of XYZ for $1,000, but you don't have $1,000 of settled cash in your account.
- Thursday: Before your $1,000 cash settles, you sell the 100 shares of XYZ.
This creates a Good Faith Violation because you sold the shares before the funds used to purchase them had settled.
Example 2: Reusing Proceeds Before Settlement
- Tuesday morning: You have $0 available cash. You sell ABC stock for $5,000.
- Tuesday afternoon: Using the $5,000 unsettled proceeds from your morning sale, you purchase DEF stock.
- Tuesday evening: You sell the DEF stock you just purchased.
This creates a Good Faith Violation because you sold DEF stock before the proceeds from your ABC sale had settled (which typically happens T+1, or Wednesday in this example).
Example 3: Selling a Portfolio After Rebalancing
- Monday: A portfolio you've copied undergoes rebalancing, selling some securities and buying others.
- Same day (Monday): You decide to liquidate or sell this portfolio.
This creates a Good Faith Violation because the purchases made during the rebalance were funded with proceeds from sales that haven't yet settled.
Consequences of Good Faith Violations
If you incur multiple Good Faith Violations within a 12-month period, your account may be restricted:
- First violation: Warning notification
- Second violation: Additional warning
-
Three or more violations: Your account may be restricted for 90 days, during which you can only buy securities with settled cash
How to Avoid Good Faith Violations
To prevent Good Faith Violations:
- Track your settled vs. unsettled funds: Know which portion of your cash balance has actually settled
- Wait for settlement: If you purchase securities with unsettled funds, hold them until those funds settle (typically T+1 for most securities)
- Plan ahead: Before selling a recently rebalanced portfolio, check if the rebalance transactions have settled
-
Use settled cash for trading: When possible, only make purchases with fully settled funds
Settlement Timeframes
Understanding settlement periods is key to avoiding violations:
-
Stocks and ETFs: T+1 (trades settle one business day after execution)
Need Help?
If you have any questions or need assistance during the account opening process, please contact us at support@dubapp.com