Who is affected by Good Faith Violations?
Cash accounts are affected by good faith violations, on M1 all IRAs are cash accounts.
What is it?
A good faith violation occurs when you buy a security and sell it before paying for the initial purchase in full with settled funds in cash accounts. Only cash or the sales proceeds of fully paid for securities qualify as "settled funds." Selling a position before it was ever paid for with settled funds is considered a "good faith violation" because no good faith effort was made to deposit additional cash into the account prior to settlement date. The following example illustrates how you can get a GFV:
Good faith violation example, Chris:
- On Monday trading window, Chris sells XYZ stock and nets $10,000 in cash account proceeds and with those cash proceeds he purchases ABC in the same window
- On Tuesday Chris sells ABC before his initial sale of XYZ has settled (t+2)
- Chris needed to wait until his sale of XYZ settled on Wednesday before he could have sold ABC without a GFV
Consequences:
90-day restriction comes after your 4th GFV. You may need to contact M1 directly to trade so you don't receive your 5th violation. We do this to mitigate any risk that you hit your 5th GFV which would cause additional restrictions. A 5th GFV will cause a 90-day restriction from all trading.