What's the Difference Between a Freeriding Violation and a Good Faith Violation?

Good faith violation: unsettled funds, but the money was real

A good faith violation happens when you buy a security using funds from a sale that hasn't settled yet, then sell that new security before the original sale actually settles. Stock trades settle on a T+1 basis (one business day after the trade date) as of the current settlement cycle. The "good faith" in the name refers to the fact that you were, in good faith, expecting those funds to settle, they just hadn't yet when you sold. You did eventually have real money behind the trade. Brokers don't report GFVs to FINRA or the SEC; they're tracked and enforced entirely at the broker level, and policies vary. Most brokers restrict an account to settled-cash-only trading for 90 days after the third GFV in a rolling 12-month window, though some act sooner.

Freeriding: the funds were never actually deposited

Freeriding is what happens when you buy a security in a cash account and then sell it before ever paying for the purchase, using the sale proceeds themselves to cover the original buy. Under the Federal Reserve Board's Regulation T, this isn't permitted, and a single freeriding violation (not three, like GFVs) requires your broker to freeze the cash account for 90 days. During that freeze, you can still place trades, but every purchase must be fully paid for in cash on the trade date itself; you lose the ability to use unsettled proceeds at all, even temporarily.

Side by side

Why this matters if you trade a cash account

• Both violations come from the same root cause, spending money that hasn't settled yet, so the same habit (tracking what's actually settled versus what's just showing as buying power) prevents both.
• Freeriding is the more severe version of the same mistake: a GFV means you eventually paid, freeriding means you never did. That distinction, not the dollar amount involved, is what determines which violation you get.
• A 90-day restriction on either violation type effectively caps how actively you can trade a small cash account for a full quarter, since you're limited to money that has actually cleared.