Good-Faith and Freeriding Violations: The Cash-Account Rule That Catches New Traders

Published August 1, 2026 · Updated August 1, 2026

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Key Takeaways

Cash accounts are meant to be the conservative option — you can't lose more than you deposit, because there's no borrowed money involved. But that safety comes with a strict rule most new traders never read until they've already broken it: you must pay for a purchase with cash that has actually settled, not cash that's merely present in the account. Sell too soon and you've committed a good-faith violation; buy and sell without ever having settled cash behind the trade at all, and you've committed freeriding, a more serious violation that regulators and brokers treat with an immediate account restriction.

Direct answer: A good-faith violation happens when you sell a security in a cash account before the funds used to buy it have settled. A freeriding violation happens when you buy and then sell a security entirely with unsettled funds, without ever depositing settled cash to cover the purchase — a more serious violation that typically triggers an immediate 90-day restriction on the account, versus the multiple-violation threshold that usually applies before a good-faith restriction kicks in.

A cash account requires you to pay for purchases with settled funds, under the credit provisions of Federal Reserve Regulation T.
A good-faith violation is selling a security before the funds used to buy it have settled — the funds were real, just not yet settled.
A freeriding violation is buying and selling a security using no settled funds at all, effectively paying for the purchase with the sale proceeds themselves.
Most brokers restrict an account to settled-cash-only trading for 90 calendar days after the third good-faith violation in a rolling 12-month period.
A single freeriding violation commonly triggers that same 90-day restriction immediately, with no multiple-violation grace period.
The T+1 settlement cycle is what creates the trap: trades can execute instantly, but the cash behind them takes a full business day to actually settle.

Why Cash Accounts Have This Rule at All

A cash account is the default, no-questions-asked account type most brokers open for new customers. Unlike a margin account, it doesn't let you borrow money from the broker to buy securities, and it doesn't require the broker to evaluate your creditworthiness or approve you for a credit line. In exchange for that simplicity, cash accounts are governed by a strict rule embedded in the credit-extension provisions of the Federal Reserve Board's Regulation T (specifically 12 CFR § 220.8, the cash account provision): every purchase must be paid for with cash that has actually settled in the account, not merely cash that appears in the account balance.

The distinction between "in the account" and "settled" is the entire source of the trap. When you sell a stock, the trade executes immediately and your account balance updates right away to reflect the sale — but the actual transfer of cash between the buyer's and seller's brokers, the part regulators call settlement, takes an additional business day under the current T+1 settlement cycle used for U.S. equities. Your broker's software will often let you see and even use the display balance from an unsettled sale to place a new trade, because enforcing settlement in real time on every order would make the platform painfully slow — but Reg T doesn't grade on the display balance. It only recognizes settled funds as valid payment.

That gap is where good-faith and freeriding violations happen. Neither requires intent to do anything improper; both can happen to a trader who is simply moving fast and assumes a dollar in the account is a settled dollar.

Good-faith violations: selling before your own purchase settles

A good-faith violation occurs when you sell a security in a cash account before the funds you used to buy that same security have finished settling. The name comes from the underlying assumption Reg T makes about a cash account: when you place a buy order, the broker extends you a kind of good-faith trust that you will actually pay for it with settled funds by the time the trade settles, rather than requiring payment up front on every single order. Selling the position before that payment has settled breaks that good-faith assumption, even though you never explicitly failed to pay — the funds were real, they just hadn't cleared yet.

A simple pattern that trips this rule: on Monday, you sell an existing, fully settled position for $3,000 and immediately use that cash — visible in your account balance the same day — to buy a different stock. Because the Monday sale hasn't settled yet (it settles Tuesday under T+1), the cash you used to buy the new stock isn't settled cash yet, even though your broker's software happily let you place the order. If you then sell that new position on Monday or Tuesday, before Monday's original sale has settled, you've triggered a good-faith violation: you sold a security bought with funds that were themselves unsettled at the time of purchase.

Freeriding violations: buying and selling with no settled funds behind either trade

Freeriding is a related but more serious violation. It occurs when you buy a security and then sell it again without ever having settled cash in the account sufficient to cover the purchase at any point — effectively, you paid for the buy order using the proceeds of the sell order itself, never putting your own settled money behind the trade at all. The name reflects exactly that: you got a "free ride" on the trade, participating in the market's price movement without ever having capital genuinely at risk and settled.

The clearest freeriding pattern: you have $500 of settled cash in an otherwise empty cash account. You buy $4,000 of a stock — far more than your settled cash supports — because your broker's platform, in this hypothetical, doesn't block the order in real time. Before the trade settles, you sell the entire position, using the sale proceeds to "cover" the purchase after the fact. At no point did you ever have $4,000 of settled cash behind that purchase; you rode the position using money that was never actually yours to deploy. This is functionally different from a good-faith violation, where at least some real, if unsettled, funds were behind the original purchase — freeriding involves no settled funds at all.

The T+1 settlement cycle is what creates the trap

Neither violation would be possible if trades settled instantly. The reason new cash-account traders fall into this without intending to is that stock trade execution and stock trade settlement are two different events separated by time: an order executes in seconds, but under the current T+1 standard, the actual cash and securities don't change hands between brokers until one business day later. A trader who thinks of "settling" and "executing" as the same moment — a reasonable assumption for anyone used to instant payment apps or crypto transfers that finalize in minutes — has no reason to expect that the cash sitting in their account balance today isn't actually usable for a new purchase-then-sell sequence yet. See Understanding the T+1 Settlement Cycle for a full breakdown of how settlement timing works and why it changed from the older T+2 standard.

This is also why the rule disproportionately catches new traders: it isn't about trading too aggressively, it's about the order of operations between settlement and re-use of funds — a mechanical detail with nothing to do with trading skill and everything to do with understanding how a cash account's plumbing works.

The Consequences: What the 90-Day Restriction Actually Does

Both violations lead to the same practical outcome — a 90-calendar-day restriction that forces the account onto a settled-cash-only basis — but they get there differently, and the freeriding path is much faster.

Good-faith violations: a multiple-violation threshold

Most brokers track good-faith violations over a rolling 12-month window and apply escalating warnings before restricting the account, but the standard threshold used across the industry is three good-faith violations within 12 months. On the third violation, the broker restricts the account to settled-cash-only trading for 90 calendar days. Some brokers apply a stricter internal threshold or issue a restriction sooner, so the exact number is broker-dependent — check your own account agreement rather than assuming three is universal.

Freeriding: typically an immediate restriction on the first occurrence

Freeriding doesn't get the same multiple-violation runway. Because it involves trading with no settled funds behind the position at any point — rather than merely unsettled-but-real funds — brokers and the rules they operate under treat a single freeriding violation as grounds for an immediate 90-day settled-cash-only restriction, often on the very first occurrence. There is no three-strikes accumulation period the way there is for good-faith violations.

What actually changes during the 90-day restriction

The restriction doesn't freeze the account or prevent you from trading altogether — you can still sell any position you already hold. What changes is how new purchases work: every new buy order must be fully covered by settled cash that is already sitting in the account before the order is placed, for the full 90 calendar days. You can't use proceeds from a same-day or recently unsettled sale to fund a new purchase during this window; the display balance simply doesn't count until it's genuinely settled. In practice, this slows an active trader down to the pace of their settled cash, since every new position has to wait for the cash behind it to actually clear first.

A broker's designated examining authority — commonly FINRA — can grant a waiver lifting the restriction early if the broker can demonstrate the violation happened due to unusual or exceptional circumstances and that the account holder acted in good faith, but this is not routine or guaranteed, and requesting it doesn't pause the restriction while under review.

Practical checklist

Before placing a new buy order, check whether the cash behind it comes from a trade that has genuinely settled, not just from your account's displayed balance.
Track how many business days have passed since any sale you plan to use as funding — under T+1, that's typically one business day past the trade date.
If you're unsure whether funds are settled, most broker platforms show a separate "settled cash" or "cash available to trade without restriction" figure distinct from the total balance — use that number, not the total.
Never sell a position purchased days earlier if you're not certain the original purchase's funding has settled, especially right after moving money between positions quickly.
If your trading style genuinely requires same-day buy-sell-buy sequences, consider whether a margin account with adequate buying power is a better structural fit than working around cash-account settlement timing. See Margin Account vs. Cash Account for how the two account types differ on exactly this point.

Worked Example: A Week That Triggers Both Violations

Illustrative numbers — for education only, not a specific brokerage's actual processing timeline.

Assume a trader opens a new cash account and deposits $5,000, which settles fully before any trading begins. All examples below use the standard T+1 settlement cycle, where a trade executed on a given business day settles on the next business day.

Monday. The trader buys $5,000 of Stock A using the full settled deposit. This purchase will settle Tuesday. So far, no violation — the funds behind the purchase were fully settled at the time of the trade.

Monday, later the same day. Stock A rallies, and the trader sells the entire $5,000 position for $5,300, locking in a quick $300 gain. The account balance now displays $5,300 in cash. Still no violation yet on its own — selling a position you already fully paid for with settled funds is completely normal, even the same day.

Monday, still the same day. Using the displayed $5,300 balance, the trader buys $5,300 of Stock B. This is where the first problem is created: the $5,000 portion of that $5,300 came from Monday's sale of Stock A, which hasn't settled yet (it settles Tuesday). The Stock B purchase is therefore funded partly with unsettled proceeds.

Tuesday. Stock B drops, and the trader — worried about further losses — sells the entire position the same day, before Monday's Stock A sale has even settled and before the Stock B purchase itself has settled. This is a textbook good-faith violation: the trader sold a security (Stock B) before the funds used to buy it (from the Stock A sale) had settled.

Wednesday, a separate scenario building on the same account. Suppose instead that on Wednesday, with only $200 of genuinely settled cash remaining after the good-faith violation above, the trader buys $2,000 of Stock C — far beyond the $200 of settled cash actually available — relying on the display balance again. Before that Wednesday purchase settles, the trader sells Stock C on Wednesday afternoon, using the sale proceeds to "cover" the purchase after the fact, without ever having $2,000 of settled cash behind it at any point. This second event is freeriding, not merely a second good-faith violation, because no meaningful settled funds ever backed the Stock C purchase at all.

Result. In this scenario, the trader has one confirmed good-faith violation (Stock B) and one freeriding violation (Stock C) within the same week. Under typical broker policies, the good-faith violation alone wouldn't yet trigger a restriction — most brokers allow up to three within 12 months before restricting the account. But the single freeriding violation on Stock C is enough on its own: the broker restricts the account to settled-cash-only trading for the next 90 calendar days, regardless of the fact that the good-faith violation hadn't yet reached its own threshold. For the rest of that 90-day window, every new purchase — including any future Stock D, E, or F — must be fully covered by cash that has already settled before the order is placed.

Misconceptions Versus Reality

Misconception	Reality
If the cash shows up in my account balance, it's mine to trade with	The displayed balance can include unsettled proceeds from a recent sale; Reg T only recognizes funds as usable once they've actually settled, typically one business day later under T+1
Good-faith and freeriding violations are basically the same thing with different names	A good-faith violation still involves real, if unsettled, funds behind the original purchase; freeriding involves no settled funds behind the purchase at any point, which is why it's treated as more serious and usually restricts the account immediately
I need several violations before anything happens to my account	That's true for good-faith violations, which typically allow up to three within 12 months, but a single freeriding violation commonly triggers an immediate 90-day restriction with no such grace period
The 90-day restriction freezes my account and I can't trade at all	You can still sell existing positions during the restriction; what's restricted is buying, which must be fully funded by settled cash already in the account before the order is placed
These violations only matter for very large or frequent traders	The dollar amount and trade frequency are irrelevant to whether a violation occurs; a single mistimed sell-then-buy-then-sell sequence, even on a small account, is enough to trigger either violation
Margin accounts have this same settlement problem	A margin account with sufficient buying power generally avoids this specific trap, since the broker's extended credit — not settled cash — covers the purchase; margin accounts carry other risks not covered here, including borrowing costs and the risk of a margin call

Common Mistakes New Cash-Account Traders Make

Two mistakes account for the large majority of good-faith and freeriding violations among new traders, and both come from a mental model that doesn't match how cash accounts actually work.

Treating the account balance as the same thing as settled cash. Most broker platforms show a single prominent balance figure, and it's natural to assume that number is money you're free to use however you want. In a cash account, that number can include unsettled proceeds from a recent sale, and using it to fund a new buy-then-sell sequence before it settles is exactly what triggers both violations. Look for a "settled cash" or "cash available without restriction" figure, which most platforms display separately for this reason.

Chasing a fast reversal on a position bought with recycled proceeds. The worked example above shows the common trigger: a trader sells one position, immediately buys another with the proceeds, then panics and sells that second position quickly when it moves against them — all within the same settlement window. The intent is never to violate the rule; it's reacting to price movement without tracking whether the funds behind the position had settled. Checking settlement status before re-entering a new position, especially right after closing a prior one, avoids this almost entirely.

Risks, Limitations, and Exceptions

Exact violation thresholds (such as the common three-good-faith-violation figure) and restriction lengths can vary by broker; always confirm your own broker's specific policy rather than assuming the figures in this guide apply universally.
A FINRA or exchange waiver of the 90-day restriction is possible in cases of demonstrated exceptional circumstances and good-faith conduct, but it is not routine, automatic, or guaranteed, and requesting one does not pause the restriction while it's being reviewed.
This guide describes the general Reg T cash-account framework as of mid-2026; specific broker implementations, monitoring systems, and grace periods can differ in timing and detail.
Settlement timing referenced here (T+1) applies to standard U.S. equity trades; other asset classes and account types can have different settlement cycles not covered in this guide.
This is educational content about how these violations work mechanically, not personalized trading, investment, or legal advice; consult your broker's own account agreement and disclosures for the rules that actually govern your account.

Frequently Asked Questions

What is a good-faith violation in simple terms?

A good-faith violation happens in a cash account when you sell a security before the funds you used to buy it have fully settled. You bought in good faith intending to pay for the trade, but you sold before that payment actually cleared, which Reg T treats as if you never really paid for the purchase at all.

What is a freeriding violation and how is it different from a good-faith violation?

Freeriding happens when you buy a security and sell it again without ever having settled cash in the account to cover the purchase at all, effectively paying for the trade using the sale proceeds instead of your own money. A good-faith violation still involves real funds that simply haven't settled yet; freeriding involves no settled funds behind the purchase at any point, which is why regulators treat it as more serious.

How many good-faith violations does it take to get restricted?

Most brokers restrict a cash account after three good-faith violations within a rolling 12-month period, applying a 90-calendar-day settled-cash-only restriction. Some brokers apply stricter internal thresholds, so check your own broker's disclosures rather than assuming the three-violation figure applies everywhere.

Does a single freeriding violation trigger a restriction?

Yes. Unlike good-faith violations, which typically allow a small number before any restriction applies, a single freeriding violation commonly triggers an immediate 90-day settled-cash-only restriction on the account, reflecting how much more seriously regulators and brokers treat trading with no settled funds behind it at all.

What happens to my account during the 90-day restriction?

You can still sell positions you already own, but every new purchase must be fully covered by settled cash already sitting in the account before you place the order. Buying with proceeds from a same-day or recent unsettled sale is not allowed during the restriction period, so trading effectively slows to the pace of your settled cash balance.

Does T+1 settlement make these violations more or less likely?

T+1 settlement shortened the standard settlement window from two business days to one, which reduces how long funds stay unsettled, but it does not eliminate the trap. A trader who buys and sells within the same settlement window, even a shorter one, can still trigger a good-faith or freeriding violation; the underlying rule is about the order of settled cash versus trades, not the specific number of days involved.

Can I avoid these violations just by day-trading less often?

Reducing trade frequency lowers your exposure but doesn't guarantee avoidance on its own, since a single sell-then-buy-then-sell sequence within one settlement cycle is enough to trigger a violation. Tracking which portion of your cash balance is actually settled before entering a new trade is the more reliable habit, alongside using a margin account with sufficient buying power if your broker and risk tolerance support it.

Will a good-faith or freeriding violation appear on my credit report or a regulatory record?

No. These are account-level trading restrictions enforced by your broker under Regulation T and FINRA/exchange rules, not a credit event or a mark on a personal regulatory record like a securities license disciplinary action. The consequence is a temporary 90-day trading restriction on that specific account, not an entry on your credit history.

Sources and Methodology

This guide describes the general Regulation T cash-account framework governing good-faith and freeriding violations, based on publicly available regulatory guidance as of mid-2026. Key sources include:

U.S. Securities and Exchange Commission, Investor.gov: The SEC's investor bulletin on trading in cash accounts describes the mechanics of good-faith and freeriding violations and the resulting account restrictions, forming the regulatory basis for this guide.
Federal Reserve Board, Regulation T (12 CFR Part 220): Reg T's credit-extension provisions, particularly the cash account provisions, establish the underlying requirement that purchases be paid for with settled funds.
FINRA: FINRA member-firm rules and investor education materials describe how brokers commonly apply the three-good-faith-violation threshold and the 90-day restriction period, including the possibility of a waiver for exceptional circumstances.

The worked example in this guide uses hypothetical dollar amounts and a hypothetical trader for illustrative purposes and does not describe a specific real account or brokerage's exact internal processing timeline.

This content was reviewed by the Swoopr Editorial Team in August 2026 and reflects publicly available information at that time. Broker-specific thresholds and settlement mechanics can change; treat this guide as a general framework rather than a substitute for your own broker's current account agreement.

Conclusion

Good-faith and freeriding violations aren't about trading too aggressively or too often — they're about a mismatch between when a trade executes and when the cash behind it actually settles, a mismatch built into how the T+1 settlement cycle works for every U.S. equity trade. A good-faith violation happens when you sell a security bought with funds that hadn't settled yet; freeriding happens when you never had settled funds behind the purchase at all, and it's treated as serious enough to trigger a 90-day settled-cash-only restriction on the very first occurrence. Understanding the difference between your account's displayed balance and its settled cash is the single habit that prevents both.