What Is a Good Faith Violation? (Cash Account Rules, T+1)
A good faith violation happens in a cash account when you sell a security that was bought with unsettled sale proceeds before those proceeds settle. The name comes from Regulation T, which lets a broker accept in good faith that you will pay for a purchase before selling it.
How it works
A cash account must pay for what it buys. Regulation T, the Federal Reserve rule on broker credit (12 CFR 220.8), lets a broker buy for you in a cash account in two cases: there are sufficient funds already, or the broker “accepts in good faith the customer’s agreement that the customer will promptly make full cash payment for the security or asset before selling it and does not contemplate selling it prior to making such payment.”
That phrase is where the name comes from. Selling before payment breaks the good faith the broker extended. “Good faith violation” is the industry’s label for it rather than a term defined in the regulation, so each broker describes and enforces it in its own published policy.
Settled funds are the key idea. Fidelity’s definition (read 25 Sep 2026): “A good faith violation occurs when you buy a security and sell it before paying for the initial purchase in full with settled funds.” Only cash, or the proceeds of fully paid securities once they have settled, counts.
Settlement is one business day. SEC Rule 15c6-1 requires most US securities trades to settle no later than “the first business day after the date of the contract”, known as T+1. So the proceeds of a Monday sale become settled funds on Tuesday, and the proceeds of a Friday sale on Monday.
Buying with unsettled proceeds is allowed. The violation is the next step: selling that new position before the money that paid for it has settled.
A worked example
Take a hypothetical cash account holding one fully paid position, Stock A, and no other cash.
Friday morning: sell Stock A for $4,000. The proceeds show in the account at once, but they settle on Monday, the next business day. Saturday and Sunday do not count.
Friday late morning: buy Stock B for $4,000 with those proceeds. This is allowed. The purchase is paid for when Stock A’s proceeds settle on Monday.
Friday afternoon: sell Stock B. This is the good faith violation. Stock B was sold before the money that paid for it had settled, whether the sale made money or lost it.
Monday or later: sell Stock B. No violation. Stock A’s $4,000 settled on Monday and paid for Stock B in full, so Stock B can be sold at any time from then on.
Now count. Suppose the same pattern happens once in March, once in June and once in November of the same 12 months. Under Fidelity’s published policy, that third violation restricts the account for 90 calendar days: purchases are allowed only with settled cash already in the account.
Good faith violations, freeriding and cash liquidations
Freeriding is the stricter case. Fidelity defines it as buying securities and paying for the purchase “by using the proceeds from a sale of the same securities” — in other words, never paying at all. Regulation T 220.8(c) then withdraws the privilege of delaying payment for 90 calendar days, and Fidelity applies that after a single instance.
A cash liquidation violation is the third type. It happens when a purchase is paid for by selling other fully paid securities after the purchase date, instead of having settled cash by settlement. Fidelity restricts an account after three of them in 12 months.
The deadline to pay is slightly longer than settlement. Regulation T’s “payment period” is the settlement cycle plus two business days (12 CFR 220.2), so three business days under T+1. A broker must promptly cancel or sell out any purchase not paid in full by then.
Brokers differ in the details. The regulation sets the 90-day freeze for freeriding; the count of good faith violations that leads to a restriction is broker policy. Check your own broker’s page before relying on any single number.
The original data
46 titles in the 24,971-video search study are pitched at small accounts, from 34 channels, at a median of 44,824.5 views — 7,553,020 views combined. Small accounts are the ones most likely to trade in cash, and so the ones this rule catches.
Cash was also the classic way around the pattern day trader rule, which never applied to cash accounts. FINRA replaced that rule with intraday margin standards effective 4 June 2026 (Regulatory Notice 26-10), with a phase-in allowed until 20 October 2027, but the settlement rule behind good faith violations did not change.
The arithmetic worth remembering is one business day. A sale on Monday settles on Tuesday; a sale on Friday settles on Monday, 3 days later on the calendar. A holiday adds a day. Counting business days, not hours, is what keeps the account clean.
When it fails
The usual failure is trusting the buying power figure. Platforms often show a single number that includes unsettled proceeds, because buying with them is allowed. The trader sees $4,000 available, buys, sells an hour later, and the violation is recorded even though every screen said the money was there. The number that matters is settled cash, and it is often shown somewhere less prominent.
A second failure is the fast reversal. A position bought with unsettled proceeds drops sharply the same day. Selling it limits the loss and creates the violation; holding it until settlement avoids the violation and risks more of the loss. The time to decide between those is before buying, not after.
A third is losing count. Under Fidelity’s policy a single violation brings no restriction, which makes it easy to forget. Three spread across a year produce the restriction, and the 90 days then fall exactly when an active trader wants the money to move fastest.
And a fourth is switching to margin to escape the rule. It works mechanically, since the loan covers the gap, but it also brings interest and the possibility of losing more than the deposit. That is a different risk, not a smaller one.
Related
Settlement explains the T+1 cycle that every good faith violation runs against. A margin account removes the settlement wait by lending across it, and brings its own maintenance rules. And the pattern day trader page covers the rule cash accounts once sidestepped, which FINRA replaced in June 2026.
Before any sale in a cash account, check one number: settled cash. If the position you are about to sell was bought with money that has not settled yet, wait a business day. That single check prevents every good faith violation.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.