Account restricted due to 3 good faith violation

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
texasfight
Posts: 367
Joined: Mon Jul 27, 2020 3:12 pm

Account restricted due to 3 good faith violation

Post by texasfight »

All,

I got 3 good faith violations in the 365 day period. I was completely unaware of the rule because I have ever had it happen. Well I had 3 in one day as I was moving around my energy portfolio (selling low risk before it settled to move into higher risk and vice versa. Please no lecture on how bad day trading and individual stocks are.

Can I transfer to a margin account with another broker or current broker and have this removed essentially? Or will I be waiting 90 days regardless before I can trade unsettled funds?
livesoft
Posts: 86076
Joined: Thu Mar 01, 2007 7:00 pm

Re: Account restricted due to 3 good faith violation

Post by livesoft »

I do not know the answer to your question, but it is not too terrible a wrist slap since it does not prevent you from trading.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
texasfight
Posts: 367
Joined: Mon Jul 27, 2020 3:12 pm

Re: Account restricted due to 3 good faith violation

Post by texasfight »

livesoft wrote: Thu Mar 18, 2021 8:38 am I do not know the answer to your question, but it is not too terrible a wrist slap since it does not prevent you from trading.
I know. Just annoying, and I don't want to miss out on upside/downside when trading my factor rotations, duration, and individual energy stock
User avatar
galawdawg
Posts: 5231
Joined: Thu Dec 14, 2017 11:59 am
Location: Georgia

Re: Account restricted due to 3 good faith violation

Post by galawdawg »

texasfight wrote: Thu Mar 18, 2021 8:35 am I got 3 good faith violations in the 365 day period. I was completely unaware of the rule because I have ever had it happen.
If you are going to play the frequent trading game, it would be wise to educate yourself on the applicable regulations that apply to your account and your trading activity. You may find more applicable help on Reddit or some other forum devoted to day trading as such is inconsistent with the Bogleheads investing philosophy and most here eschew that type of activity.

Whether your broker will consider an application for a margin account during the period of your Regulation T account restriction is a question you would need to pose to your broker.

Good luck.
User avatar
TheTimeLord
Posts: 12130
Joined: Fri Jul 26, 2013 2:05 pm

Re: Account restricted due to 3 good faith violation

Post by TheTimeLord »

galawdawg wrote: Thu Mar 18, 2021 9:22 am
texasfight wrote: Thu Mar 18, 2021 8:35 am I got 3 good faith violations in the 365 day period. I was completely unaware of the rule because I have ever had it happen.
If you are going to play the frequent trading game, it would be wise to educate yourself on the applicable regulations that apply to your account and your trading activity. You may find more applicable help on Reddit or some other forum devoted to day trading as such is inconsistent with the Bogleheads investing philosophy and most here eschew that type of activity.

Whether your broker will consider an application for a margin account during the period of your Regulation T account restriction is a question you would need to pose to your broker.

Good luck.
+1
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
dcop
Posts: 364
Joined: Fri Sep 08, 2017 6:06 pm

Re: Account restricted due to 3 good faith violation

Post by dcop »

There are other rules for frequent trading when it's a margin account. As far as can you just open a margin account and get the 90 day dropped simply call the broker and ask.
Topic Author
texasfight
Posts: 367
Joined: Mon Jul 27, 2020 3:12 pm

Re: Account restricted due to 3 good faith violation

Post by texasfight »

Well with the way energy dumped today I am pretty happy I sold those stocks before settlement. :sharebeer
Topic Author
texasfight
Posts: 367
Joined: Mon Jul 27, 2020 3:12 pm

Re: Account restricted due to 3 good faith violation

Post by texasfight »

These weren't day trades. More of a mistake in portfolio positioning that I corrected (sold) without thinking twice about it.
S_Track
Posts: 535
Joined: Sat Feb 18, 2017 11:33 am

Re: Account restricted due to 3 good faith violation

Post by S_Track »

texasfight wrote: Thu Mar 18, 2021 3:35 pm These weren't day trades. More of a mistake in portfolio positioning that I corrected (sold) without thinking twice about it.
May I ask what you did that caused the problem? Was it multiple buys and sells with the same fund? Thanks
kabob
Posts: 308
Joined: Wed Oct 16, 2019 9:01 am
Location: Loudon, Tn

Re: Account restricted due to 3 good faith violation

Post by kabob »

texasfight wrote: Thu Mar 18, 2021 8:35 am I got 3 good faith violations in the 365 day period. I was completely unaware of the rule because I have ever had it happen. Well I had 3 in one day as I was moving around my energy portfolio (selling low risk before it settled to move into higher risk and vice versa. Please no lecture on how bad day trading and individual stocks are.

Can I transfer to a margin account with another broker or current broker and have this removed essentially? Or will I be waiting 90 days regardless before I can trade unsettled funds?
What broker are ya talking about? For doin What? Good Faith Violation?(Huh?)
Vanguard is the ONLY broker I have ever had that even has a Message that UnSetteled funds are being used - and that even has a OK button to continue... I called Vg bout that message, they said they don't like that! - I said I don't like that MSG!, Whats the solution? (nicely) - a Margin ACCT was suggested, I changed to a Margin Acct (like I have had with most all other brokers), haven't seen it since...
(although I NEVER have gone out on Margin in my entire 40ys of inventing with any broker anyway)
dcop
Posts: 364
Joined: Fri Sep 08, 2017 6:06 pm

Re: Account restricted due to 3 good faith violation

Post by dcop »

kabob wrote: Thu Mar 18, 2021 4:16 pm
What broker are ya talking about? For doin What? Good Faith Violation?(Huh?)
Vanguard is the ONLY broker I have ever had that even has a Message that UnSetteled funds are being used - and that even has a OK button to continue... I called Vg bout that message, they said they don't like that! - I said I don't like that MSG!, Whats the solution? (nicely) - a Margin ACCT was suggested, I changed to a Margin Acct (like I have had with most all other brokers), haven't seen it since...
(although I NEVER have gone out on Margin in my entire 40ys of inventing with any broker anyway)
Yea Vanguard gives that warning. They just want you to verify to yourself that you are using settled funds. I never understood that they can restrict you for violating and are then able to prevent you from violating. But without the restriction they don't stop you. Weird.

To S_Track - The OP sold for a profit without waiting T+2 for the sale. Basically he made money without actually using his own money.
S_Track
Posts: 535
Joined: Sat Feb 18, 2017 11:33 am

Re: Account restricted due to 3 good faith violation

Post by S_Track »

dcop wrote: Thu Mar 18, 2021 4:23 pm To S_Track - The OP sold for a profit without waiting T+2 for the sale. Basically he made money without actually using his own money.
Now I understand, and does that apply only to Mutual funds or also individual stocks in your account? If that is the case, how do these day traders work with other brokers, Is that why you have to setup Margin accounts. Basically some sort of collateral to cover trades while funds settle? I just contribute monthly to my funds so have no experience. Thanks
User avatar
Nate79
Posts: 9372
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Account restricted due to 3 good faith violation

Post by Nate79 »

kabob wrote: Thu Mar 18, 2021 4:16 pm
texasfight wrote: Thu Mar 18, 2021 8:35 am I got 3 good faith violations in the 365 day period. I was completely unaware of the rule because I have ever had it happen. Well I had 3 in one day as I was moving around my energy portfolio (selling low risk before it settled to move into higher risk and vice versa. Please no lecture on how bad day trading and individual stocks are.

Can I transfer to a margin account with another broker or current broker and have this removed essentially? Or will I be waiting 90 days regardless before I can trade unsettled funds?
What broker are ya talking about? For doin What? Good Faith Violation?(Huh?)
Vanguard is the ONLY broker I have ever had that even has a Message that UnSetteled funds are being used - and that even has a OK button to continue... I called Vg bout that message, they said they don't like that! - I said I don't like that MSG!, Whats the solution? (nicely) - a Margin ACCT was suggested, I changed to a Margin Acct (like I have had with most all other brokers), haven't seen it since...
(although I NEVER have gone out on Margin in my entire 40ys of inventing with any broker anyway)
Schwab gives this warning too. This is nothing new.
Topic Author
texasfight
Posts: 367
Joined: Mon Jul 27, 2020 3:12 pm

Re: Account restricted due to 3 good faith violation

Post by texasfight »

S_Track wrote: Thu Mar 18, 2021 3:39 pm
texasfight wrote: Thu Mar 18, 2021 3:35 pm These weren't day trades. More of a mistake in portfolio positioning that I corrected (sold) without thinking twice about it.
May I ask what you did that caused the problem? Was it multiple buys and sells with the same fund? Thanks
It was selling an ETF before settlement of the original purchase.
dcop
Posts: 364
Joined: Fri Sep 08, 2017 6:06 pm

Re: Account restricted due to 3 good faith violation

Post by dcop »

texasfight wrote: Fri Mar 19, 2021 11:01 am
S_Track wrote: Thu Mar 18, 2021 3:39 pm
texasfight wrote: Thu Mar 18, 2021 3:35 pm These weren't day trades. More of a mistake in portfolio positioning that I corrected (sold) without thinking twice about it.
May I ask what you did that caused the problem? Was it multiple buys and sells with the same fund? Thanks
It was selling an ETF before settlement of the original purchase.
You sold before settlement of a previous SELL(s). I don't believe purchasing can trigger a cash account violation.
Topic Author
texasfight
Posts: 367
Joined: Mon Jul 27, 2020 3:12 pm

Re: Account restricted due to 3 good faith violation

Post by texasfight »

dcop wrote: Fri Mar 19, 2021 11:05 am
texasfight wrote: Fri Mar 19, 2021 11:01 am
S_Track wrote: Thu Mar 18, 2021 3:39 pm
texasfight wrote: Thu Mar 18, 2021 3:35 pm These weren't day trades. More of a mistake in portfolio positioning that I corrected (sold) without thinking twice about it.
May I ask what you did that caused the problem? Was it multiple buys and sells with the same fund? Thanks
It was selling an ETF before settlement of the original purchase.
You sold before settlement of a previous SELL(s). I don't believe purchasing can trigger a cash account violation.
No. Like this example.

I have $0 in my settlement fund available to trade, but I want to buy some VTI by selling some VXUS.

Sell VXUS on 3/1 (proceeds don't settle until 3/3 (T+2))
Buy VTI on 3/1 (using unsettled funds from selling VXUS) completely fine. T+2 settlements match up.

Sell VTI on 3/2 (funds from original sale have not settled yet).

Freeriding violation
jmw
Posts: 328
Joined: Thu Jul 02, 2015 2:01 pm

Re: Account restricted due to 3 good faith violation

Post by jmw »

Trading with unsettled funds or margin is the first step to going down the daytrading rabbit hole which in the long run costs you money. Next thing you know you will be opening a margin account and spending every morning scalping tiny gains. Don't do it. Don't go to the dark side.
random_walker_77
Posts: 2212
Joined: Tue May 21, 2013 8:49 pm

Re: Account restricted due to 3 good faith violation

Post by random_walker_77 »

Thanks for posting, as I wasn't aware of these restrictions. (Then again, I don't trade and basically never sell)

To learn more about this, I found that fidelity has a pretty clear description of restrictions on cash brokerage accounts:
https://www.fidelity.com/learning-cente ... violations

and also a similar page for margin account restrictions:
https://www.fidelity.com/learning-cente ... violations

I'm glad I don't deal with margin nor frequent trading!
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Account restricted due to 3 good faith violation

Post by Grt2bOutdoors »

kabob wrote: Thu Mar 18, 2021 4:16 pm
texasfight wrote: Thu Mar 18, 2021 8:35 am I got 3 good faith violations in the 365 day period. I was completely unaware of the rule because I have ever had it happen. Well I had 3 in one day as I was moving around my energy portfolio (selling low risk before it settled to move into higher risk and vice versa. Please no lecture on how bad day trading and individual stocks are.

Can I transfer to a margin account with another broker or current broker and have this removed essentially? Or will I be waiting 90 days regardless before I can trade unsettled funds?
What broker are ya talking about? For doin What? Good Faith Violation?(Huh?)
Vanguard is the ONLY broker I have ever had that even has a Message that UnSetteled funds are being used - and that even has a OK button to continue... I called Vg bout that message, they said they don't like that! - I said I don't like that MSG!, Whats the solution? (nicely) - a Margin ACCT was suggested, I changed to a Margin Acct (like I have had with most all other brokers), haven't seen it since...
(although I NEVER have gone out on Margin in my entire 40ys of inventing with any broker anyway)
Fidelity has the message too, I had the cash in the account but it hadn’t settled so I waited a day and then no problem. Good thing too as the market tanked the day I executed the trade.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Dude2
Posts: 1780
Joined: Fri Jun 08, 2007 3:40 pm
Location: FL

Re: Account restricted due to 3 good faith violation

Post by Dude2 »

When this topic is discussed, I recall reading that having a margin account at Vanguard did not solve the problem. It might at other brokers, but Vanguard treats your margin account as separate (or something) and you can't use it to cover your free rides. I don't know what I'm talking about, but just keep it in mind that that might not be the solution.

I have had the 90 day "only able to use settled funds" walk of shame myself. It's a pain. It caused me to use mutual funds more to keep myself out of trouble, despite higher expense ratios.
Then ’tis like the breath of an unfee’d lawyer.
dcop
Posts: 364
Joined: Fri Sep 08, 2017 6:06 pm

Re: Account restricted due to 3 good faith violation

Post by dcop »

texasfight wrote: Fri Mar 19, 2021 1:38 pm
dcop wrote: Fri Mar 19, 2021 11:05 am
texasfight wrote: Fri Mar 19, 2021 11:01 am
S_Track wrote: Thu Mar 18, 2021 3:39 pm
texasfight wrote: Thu Mar 18, 2021 3:35 pm These weren't day trades. More of a mistake in portfolio positioning that I corrected (sold) without thinking twice about it.
May I ask what you did that caused the problem? Was it multiple buys and sells with the same fund? Thanks
It was selling an ETF before settlement of the original purchase.
You sold before settlement of a previous SELL(s). I don't believe purchasing can trigger a cash account violation.
No. Like this example.

I have $0 in my settlement fund available to trade, but I want to buy some VTI by selling some VXUS.

Sell VXUS on 3/1 (proceeds don't settle until 3/3 (T+2))
Buy VTI on 3/1 (using unsettled funds from selling VXUS) completely fine. T+2 settlements match up.

Sell VTI on 3/2 (funds from original sale have not settled yet).

Freeriding violation
But...when the violation occurred was when you 'Sell VTI on 3/2'. Had you just bought on 3/1 there would have been no violation. Now with your 90 day restriction you would not have been able to buy on 3/1. The violation will always be on the sell side.
S_Track
Posts: 535
Joined: Sat Feb 18, 2017 11:33 am

Re: Account restricted due to 3 good faith violation

Post by S_Track »

texasfight wrote: Fri Mar 19, 2021 11:01 am
S_Track wrote: Thu Mar 18, 2021 3:39 pm
texasfight wrote: Thu Mar 18, 2021 3:35 pm These weren't day trades. More of a mistake in portfolio positioning that I corrected (sold) without thinking twice about it.
May I ask what you did that caused the problem? Was it multiple buys and sells with the same fund? Thanks
It was selling an ETF before settlement of the original purchase.
Ok I remember reading about this in another post a while back and had the same comment. Why doesn't the website give you a warning or prevent you from doing it all together? I
Dude2
Posts: 1780
Joined: Fri Jun 08, 2007 3:40 pm
Location: FL

Re: Account restricted due to 3 good faith violation

Post by Dude2 »

S_Track wrote: Fri Mar 19, 2021 10:25 pm
texasfight wrote: Fri Mar 19, 2021 11:01 am
S_Track wrote: Thu Mar 18, 2021 3:39 pm
texasfight wrote: Thu Mar 18, 2021 3:35 pm These weren't day trades. More of a mistake in portfolio positioning that I corrected (sold) without thinking twice about it.
May I ask what you did that caused the problem? Was it multiple buys and sells with the same fund? Thanks
It was selling an ETF before settlement of the original purchase.
Ok I remember reading about this in another post a while back and had the same comment. Why doesn't the website give you a warning or prevent you from doing it all together? I
Because they (broker) can never know if you have other funds that are all set to be wired directly into the settlement account, right? I have had to do this myself to prevent a trading violation. I believe the wire gives you instant money versus needing a check to clear or ACH which could take 2 days.
Then ’tis like the breath of an unfee’d lawyer.
MrJedi
Posts: 3540
Joined: Wed May 06, 2020 11:42 am

Re: Account restricted due to 3 good faith violation

Post by MrJedi »

S_Track wrote: Fri Mar 19, 2021 10:25 pm
texasfight wrote: Fri Mar 19, 2021 11:01 am
S_Track wrote: Thu Mar 18, 2021 3:39 pm
texasfight wrote: Thu Mar 18, 2021 3:35 pm These weren't day trades. More of a mistake in portfolio positioning that I corrected (sold) without thinking twice about it.
May I ask what you did that caused the problem? Was it multiple buys and sells with the same fund? Thanks
It was selling an ETF before settlement of the original purchase.
Ok I remember reading about this in another post a while back and had the same comment. Why doesn't the website give you a warning or prevent you from doing it all together? I
I know Vanguard will warn you of this before you confirm the sell order. There is an extra confirmation box you have to click through. They still let you do it, because you can transfer funds in to avoid the violation.
CardioMD
Posts: 205
Joined: Thu Feb 06, 2020 10:40 am

Re: Account restricted due to 3 good faith violation

Post by CardioMD »

texasfight wrote: Fri Mar 19, 2021 1:38 pm
dcop wrote: Fri Mar 19, 2021 11:05 am
texasfight wrote: Fri Mar 19, 2021 11:01 am
S_Track wrote: Thu Mar 18, 2021 3:39 pm
texasfight wrote: Thu Mar 18, 2021 3:35 pm These weren't day trades. More of a mistake in portfolio positioning that I corrected (sold) without thinking twice about it.
May I ask what you did that caused the problem? Was it multiple buys and sells with the same fund? Thanks
It was selling an ETF before settlement of the original purchase.
You sold before settlement of a previous SELL(s). I don't believe purchasing can trigger a cash account violation.
No. Like this example.

I have $0 in my settlement fund available to trade, but I want to buy some VTI by selling some VXUS.

Sell VXUS on 3/1 (proceeds don't settle until 3/3 (T+2))
Buy VTI on 3/1 (using unsettled funds from selling VXUS) completely fine. T+2 settlements match up.

Sell VTI on 3/2 (funds from original sale have not settled yet).

Freeriding violation
Your example is of a good faith violation. I believe a free ride violation would occur from a buy, sell, buy, sell all with unsettled funds which is an immediate 90 day cash restriction, a fed rule not your broker’s. Either your broker is pretty strict, because you typically get several good faith violations before a cash restriction occurs, or you’ve done this before. Either way, it isn’t your broker’s fault and the inconvenience is due to the uninformed investor.
“The stock market is a giant distraction from the business of investing.” -Jack Bogle
Dude2
Posts: 1780
Joined: Fri Jun 08, 2007 3:40 pm
Location: FL

Re: Account restricted due to 3 good faith violation

Post by Dude2 »

CardioMD wrote: Sat Mar 20, 2021 7:06 am Your example is of a good faith violation. I believe a free ride violation would occur from a buy, sell, buy, sell all with unsettled funds which is an immediate 90 day cash restriction, a fed rule not your broker’s. Either your broker is pretty strict, because you typically get several good faith violations before a cash restriction occurs, or you’ve done this before. Either way, it isn’t your broker’s fault and the inconvenience is due to the uninformed investor.
Yes, 100%, although this is a bit weird to call it a good faith violation. The person buys the first item with real money, but they don't wait until T+2 before selling that item and buying something else with the proceeds. In that person's mind, transactions are instantaneous. The bookkeeping may take 2 days to catch up, but they know that they executed a trade with the result that they ended up with enough or more than enough money to make the next transaction. Sure, Federal law and all of that, but most people are not going to understand that they did something wrong here. The answer should be to make settlements instantaneous. What are the downsides/ramifications/complications to do that?
wikipedia wrote:The main difference between a good faith violation and free riding is the eventual deposit of funds to cover the buy. In free riding the buyer sells the security without ever depositing the funds to pay for the initial purchase.

The Federal Reserve considers a good faith violation an "abuse of credit" and requires the broker keep track of them. If the trader gets three violations in one year, the broker is required to restrict the account. This is compared to the free riding violation which results in an automatic restriction.
Appears that in 2017 we went from T+3 to T+2. How long before T+1 and then T+0?
sec.gov wrote:Washington D.C., March 22, 2017 —
The Securities and Exchange Commission today adopted an amendment to shorten by one business day the standard settlement cycle for most broker-dealer securities transactions. Currently, the standard settlement cycle for these transactions is three business days, known as T+3. The amended rule shortens the settlement cycle to two business days, T+2.

The amended rule is designed to enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle.

“As technology improves, new products emerge, and trading volumes grow, it is increasingly obvious that the outdated T+3 settlement cycle is no longer serving the best interests of the American people,” said SEC Acting Chairman Michael Piwowar. “The SEC remains committed to ensuring that U.S. securities regulation is reflective of modern times, and in shortening the settlement cycle by one day we aim to increase efficiency and reduce risk for market participants.”

Broker-dealers will be required to comply with the amended rule beginning on Sept. 5, 2017.
Then ’tis like the breath of an unfee’d lawyer.
lazynovice
Posts: 3369
Joined: Mon Apr 16, 2012 10:48 pm
Location: Denver area. Former Texan.

Re: Account restricted due to 3 good faith violation

Post by lazynovice »

Dude2 wrote: Sat Mar 20, 2021 9:06 am
CardioMD wrote: Sat Mar 20, 2021 7:06 am Your example is of a good faith violation. I believe a free ride violation would occur from a buy, sell, buy, sell all with unsettled funds which is an immediate 90 day cash restriction, a fed rule not your broker’s. Either your broker is pretty strict, because you typically get several good faith violations before a cash restriction occurs, or you’ve done this before. Either way, it isn’t your broker’s fault and the inconvenience is due to the uninformed investor.
Yes, 100%, although this is a bit weird to call it a good faith violation. The person buys the first item with real money, but they don't wait until T+2 before selling that item and buying something else with the proceeds. In that person's mind, transactions are instantaneous. The bookkeeping may take 2 days to catch up, but they know that they executed a trade with the result that they ended up with enough or more than enough money to make the next transaction. Sure, Federal law and all of that, but most people are not going to understand that they did something wrong here. The answer should be to make settlements instantaneous. What are the downsides/ramifications/complications to do that?
wikipedia wrote:The main difference between a good faith violation and free riding is the eventual deposit of funds to cover the buy. In free riding the buyer sells the security without ever depositing the funds to pay for the initial purchase.

The Federal Reserve considers a good faith violation an "abuse of credit" and requires the broker keep track of them. If the trader gets three violations in one year, the broker is required to restrict the account. This is compared to the free riding violation which results in an automatic restriction.
Appears that in 2017 we went from T+3 to T+2. How long before T+1 and then T+0?
sec.gov wrote:Washington D.C., March 22, 2017 —
The Securities and Exchange Commission today adopted an amendment to shorten by one business day the standard settlement cycle for most broker-dealer securities transactions. Currently, the standard settlement cycle for these transactions is three business days, known as T+3. The amended rule shortens the settlement cycle to two business days, T+2.

The amended rule is designed to enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle.

“As technology improves, new products emerge, and trading volumes grow, it is increasingly obvious that the outdated T+3 settlement cycle is no longer serving the best interests of the American people,” said SEC Acting Chairman Michael Piwowar. “The SEC remains committed to ensuring that U.S. securities regulation is reflective of modern times, and in shortening the settlement cycle by one day we aim to increase efficiency and reduce risk for market participants.”

Broker-dealers will be required to comply with the amended rule beginning on Sept. 5, 2017.
Welcome to the RobinHood/ meme stock conversation! The delays in settlement time and requirement for brokerages to post collateral for unsettled trades created the situation where RH had to stop some trading. The RH CEO has suggested same day settlement as a solution. It appears there is a plan for the industry to move to T+1 in the next few years.

Until then, you either need a margin account or you need to pay attention to the unsettled transactions on your account. Fidelity shows an unsettled transactions number at the bottom of the positions page. Not sure how Vanguard presents it.
Topic Author
texasfight
Posts: 367
Joined: Mon Jul 27, 2020 3:12 pm

Re: Account restricted due to 3 good faith violation

Post by texasfight »

Sorry yes good faith violation not freeriding.

The issue was I did 3 in a day so by the time I got the email it was too late. :beer
Topic Author
texasfight
Posts: 367
Joined: Mon Jul 27, 2020 3:12 pm

Re: Account restricted due to 3 good faith violation

Post by texasfight »

I am going to be converting to a margin account to prevent this from happening. No plans to use actually use margin. After I speak with the banker I will let you all know if it will bypass the 90 day restriction or if that is set in stone regardless.
User avatar
JamesSFO
Posts: 3404
Joined: Thu Apr 26, 2012 10:16 pm

Re: Account restricted due to 3 good faith violation

Post by JamesSFO »

Fidelity has a good page explaining these rules for anyone interested - https://www.fidelity.com/learning-cente ... violations
Caduceus
Posts: 3527
Joined: Mon Sep 17, 2012 1:47 am

Re: Account restricted due to 3 good faith violation

Post by Caduceus »

Out of curiosity, why don't brokers just prevent good faith violations from happening? When I buy stocks with unsettled funds, the alert will pop up warning me that I cannot sell the stocks I'm buying before they settle, so why doesn't the broker just restrict sales of those shares until when they settle?
langlands
Posts: 1093
Joined: Wed Apr 03, 2019 10:05 pm

Re: Account restricted due to 3 good faith violation

Post by langlands »

Caduceus wrote: Tue Mar 23, 2021 6:47 am Out of curiosity, why don't brokers just prevent good faith violations from happening? When I buy stocks with unsettled funds, the alert will pop up warning me that I cannot sell the stocks I'm buying before they settle, so why doesn't the broker just restrict sales of those shares until when they settle?
I agree that there should be a warning every time a sale would lead to a violation. Don't know why they can't do that. But straight up restricting the sale would be quite onerous. Sometimes you just want out of the market/need the cash now and a violation is a relatively small price to pay.
tryingtobogle
Posts: 51
Joined: Thu Jan 13, 2022 4:26 pm

Re: Account restricted due to 3 good faith violation

Post by tryingtobogle »

texasfight wrote: Mon Mar 22, 2021 7:06 pm I am going to be converting to a margin account to prevent this from happening. No plans to use actually use margin. After I speak with the banker I will let you all know if it will bypass the 90 day restriction or if that is set in stone regardless.
any update on whether you can transfer accounts while being restricted? I want to leave Vanguard and move to Fidelity, but I accidentally did what you did and am restricted until June. I guess I can just wait until then, but I was just curious since I couldnt find a direct answer online.
Topic Author
texasfight
Posts: 367
Joined: Mon Jul 27, 2020 3:12 pm

Re: Account restricted due to 3 good faith violation

Post by texasfight »

tryingtobogle wrote: Mon Apr 18, 2022 11:06 am
texasfight wrote: Mon Mar 22, 2021 7:06 pm I am going to be converting to a margin account to prevent this from happening. No plans to use actually use margin. After I speak with the banker I will let you all know if it will bypass the 90 day restriction or if that is set in stone regardless.
any update on whether you can transfer accounts while being restricted? I want to leave Vanguard and move to Fidelity, but I accidentally did what you did and am restricted until June. I guess I can just wait until then, but I was just curious since I couldnt find a direct answer online.
The good faith violations "transferred" over to the new account when I tried the workaround
tryingtobogle
Posts: 51
Joined: Thu Jan 13, 2022 4:26 pm

Re: Account restricted due to 3 good faith violation

Post by tryingtobogle »

texasfight wrote: Mon Apr 18, 2022 2:14 pm
tryingtobogle wrote: Mon Apr 18, 2022 11:06 am
texasfight wrote: Mon Mar 22, 2021 7:06 pm I am going to be converting to a margin account to prevent this from happening. No plans to use actually use margin. After I speak with the banker I will let you all know if it will bypass the 90 day restriction or if that is set in stone regardless.
any update on whether you can transfer accounts while being restricted? I want to leave Vanguard and move to Fidelity, but I accidentally did what you did and am restricted until June. I guess I can just wait until then, but I was just curious since I couldnt find a direct answer online.
The good faith violations "transferred" over to the new account when I tried the workaround
That is interesting. Thank you for the update!
Gecko10x
Posts: 390
Joined: Thu Jun 06, 2013 8:10 pm

Re: Account restricted due to 3 good faith violation

Post by Gecko10x »

lazynovice wrote: Sat Mar 20, 2021 10:08 am
Dude2 wrote: Sat Mar 20, 2021 9:06 am
CardioMD wrote: Sat Mar 20, 2021 7:06 am Your example is of a good faith violation. I believe a free ride violation would occur from a buy, sell, buy, sell all with unsettled funds which is an immediate 90 day cash restriction, a fed rule not your broker’s. Either your broker is pretty strict, because you typically get several good faith violations before a cash restriction occurs, or you’ve done this before. Either way, it isn’t your broker’s fault and the inconvenience is due to the uninformed investor.
Yes, 100%, although this is a bit weird to call it a good faith violation. The person buys the first item with real money, but they don't wait until T+2 before selling that item and buying something else with the proceeds. In that person's mind, transactions are instantaneous. The bookkeeping may take 2 days to catch up, but they know that they executed a trade with the result that they ended up with enough or more than enough money to make the next transaction. Sure, Federal law and all of that, but most people are not going to understand that they did something wrong here. The answer should be to make settlements instantaneous. What are the downsides/ramifications/complications to do that?
wikipedia wrote:The main difference between a good faith violation and free riding is the eventual deposit of funds to cover the buy. In free riding the buyer sells the security without ever depositing the funds to pay for the initial purchase.

The Federal Reserve considers a good faith violation an "abuse of credit" and requires the broker keep track of them. If the trader gets three violations in one year, the broker is required to restrict the account. This is compared to the free riding violation which results in an automatic restriction.
Appears that in 2017 we went from T+3 to T+2. How long before T+1 and then T+0?
sec.gov wrote:Washington D.C., March 22, 2017 —
The Securities and Exchange Commission today adopted an amendment to shorten by one business day the standard settlement cycle for most broker-dealer securities transactions. Currently, the standard settlement cycle for these transactions is three business days, known as T+3. The amended rule shortens the settlement cycle to two business days, T+2.

The amended rule is designed to enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle.

“As technology improves, new products emerge, and trading volumes grow, it is increasingly obvious that the outdated T+3 settlement cycle is no longer serving the best interests of the American people,” said SEC Acting Chairman Michael Piwowar. “The SEC remains committed to ensuring that U.S. securities regulation is reflective of modern times, and in shortening the settlement cycle by one day we aim to increase efficiency and reduce risk for market participants.”

Broker-dealers will be required to comply with the amended rule beginning on Sept. 5, 2017.
Welcome to the RobinHood/ meme stock conversation! The delays in settlement time and requirement for brokerages to post collateral for unsettled trades created the situation where RH had to stop some trading. The RH CEO has suggested same day settlement as a solution. It appears there is a plan for the industry to move to T+1 in the next few years.

Until then, you either need a margin account or you need to pay attention to the unsettled transactions on your account. Fidelity shows an unsettled transactions number at the bottom of the positions page. Not sure how Vanguard presents it.
Yes, the SEC has proposed moving to T+1. Comments on the proposal ended on April 11. The proposed compliance date is March 31, 2024.
Post Reply