How To Avoid Good Faith Violation

How To Avoid Good Faith Violation

Avoiding a Good Faith Violation (GFV) is essential if you’re trading in a cash account and want to stay compliant with brokerage rules. A GFV occurs when you sell a security bought with unsettled funds and then use those funds from the sale before the original purchase has settled. This violates the SEC’s settlement rules and can result in account restrictions.

Here’s how to avoid a Good Faith Violation:

✅ 1. Understand the T+1 Settlement Rule

• As of May 2024, the U.S. moved to T+1 settlement, which means trades settle one business day after the trade date.
• If you buy a stock on Monday (T), the funds used for that trade will settle on Tuesday (T+1).
• You should not sell that stock and use the proceeds to buy another stock before Tuesday, unless you’re using fully settled funds.

✅ 2. Use Fully Settled Funds Only

• Only use cash that has already settled (from prior sales or deposits) to make new purchases in a cash account.
• Avoid using unsettled sale proceeds to make purchases unless you’re in a margin account, which has different rules.
• Example: If you sell stock A on Monday, don’t use that cash to buy stock B on Monday unless you’re sure it’s settled.

✅ 3. Wait for the First Trade to Settle Before Selling Again

• If you buy a stock, wait until after it settles (T+1) before selling it and using the proceeds.
• Selling it before settlement and using the funds to buy something else would trigger a GFV.

✅ 4. Avoid Same-Day Round Trips Using Unsettled Funds

• A same-day round trip (buying and selling the same stock on the same day using unsettled funds) is a common cause of GFVs in cash accounts.
• Use only settled cash to day trade, or avoid day trading altogether in a cash account.

✅ 5. Use a Margin Account (if appropriate)

• Margin accounts are not subject to GFVs because they allow you to trade using borrowed funds.
• If you trade frequently and want to avoid GFV-related issues, a margin account may be better—but know that margin trading involves more risk.

✅ 6. Track Your Settlement Dates

• Most brokers provide settlement status tools or cash available to trade indicators in your account.
• Use these tools to track when funds settle and only make trades based on settled cash.

✅ 7. Deposit Fresh Cash if Needed

• If you don’t have enough settled cash to make a trade, consider depositing new funds into your account to cover the purchase and avoid triggering a GFV.

✅ 8. Review Broker-Specific Rules

• Different brokerages may interpret and enforce GFV policies slightly differently.
• Check your broker’s cash trading guidelines or ask them for clarification if you’re unsure.

✅ 9. Limit Trades in Cash Accounts

• If you find GFVs hard to track, reduce the number of trades or extend your holding periods to ensure everything settles properly.

Summary Table: Avoiding Good Faith Violations

✅ DO This	🚫 AVOID This
Use fully settled funds	Using funds from a recent sale before they settle
Track T+1 settlement timing	Selling a stock before the original buy has settled
Consider a margin account if you trade often	Frequent trading in a cash account with unsettled funds
Use broker tools to monitor fund settlement	Ignoring cash balance vs. settled cash
Wait for trades to settle before reusing proceeds	Buying and selling the same security same-day