What are Good Faith Violations?

Written by Bode
Updated 2 years ago

When a security is purchased on your account and sold prior to being paid for with settled funds in the account, a good faith violation has occurred. Normally, it takes 2 business days for funds from a stock sale to be settled.

The reason it is referred to as a good faith violation is that trade activity is giving the appearance that sales proceeds are being used to cover buy orders when there is insufficient settled cash to cover these purchases. Basically, trade activity indicates that a good faith effort to deposit additional cash into the account will not happen.

Trading accounts with three good faith violations in a 12-month period will be restricted to purchasing securities with settled cash only for a period of 12 months.

Good faith violation example 1:

Cash available to trade = $0.00

  • On Monday morning, a customer sells Y stock netting $5,000 in cash account proceeds.
  • On Monday afternoon, the customer buys X stock for $5,000. - If the X stock is sold prior to Wednesday (settlement date of the Y sale), a good faith violation would be charged as the X stock is not considered fully paid for prior to sale.

Good faith violation example 2:

Settled cash = $5,000

  • On Monday morning, a purchase is made for $5,000 of X stock.
  • On Monday mid-day, the customer sells the X stock for $5,500.
  • Near market close, the customer purchases $5,500 of Y stock.
  • At this point no good faith violation has occurred because the customer had sufficient funds for the purchase of X.
  • If Y is sold prior to being paid for (settlement) then a good faith violation will have occurred.

Good faith violation example 3:

  • Cash available to trade = $10,000 minus cash credit from unsettled activity = $5,000 (proceeds from a sale of stock the prior Friday – trade settles on Tuesday).
  • On Monday morning, the customer purchases $15,000 of Y stock.
  • A good faith violation occurs if this customer sells the Y stock on Monday.
  • The purchase is not considered fully paid for because the $5,000 proceeds are not considered sufficient funds until they are settled on Tuesday.

Please send an email to support@chaka.ng or call 07011204586 for more clarifications.

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