A Good Faith Violation (GFV) occurs when you have liquidated stocks that were bought on unsettled proceeds.
Cash accounts have T+2 settlement period. When you sell stocks, the amount received from that sell is considered unsettled funds until two business days later.
Please note that when these funds are not settled, we allow our customers to use them for opening a new position, but if you close the new position within T+2, your buying power will only replenish on the next business day.
Here's an example.
On Monday Nick sells 100 settled shares of ABC, which generates proceeds of $100. This trade will settle on T+2, which is Wednesday. He then uses the funds to purchase shares of XYZ on the same day. On Tuesday Nick sells the shares of XYZ. Because the shares of XYZ were bought and then sold using unsettled funds from the ABC sale, a GFV will be issued and funds will not be made available in buying power. To avoid a GFV, the customer would need to hold the XYZ shares until Wednesday (when the sale of original ABC trade settles), before selling. In the example above buying power will be replenished the following day once the funds settle.
Each GFV will automatically expire 12 months after the violation date. No cash deposit or stock liquidation will alleviate the violation.
After the second GFV occurs, the account's buying power will be restricted to settled funds. Selling positions will no longer increase buying power until settled (T+2). After four violations, your account will be restricted for 90 days. After your fifth violation, your account will be closed for 90 days.
For more trading-related terms, please visit "Glossary-Trading" section