In a cash account, an investor must pay for the purchase of a security (meaning, the trade must settle) prior to selling that security. If an investor buys a security and then sells that same security without paying for the security in full by settlement date, the trade is considered a Good Faith Violation (GFV). Accounts that commit 3 GFVs within 180 days will be restricted for 90 days, during which time the account can only purchase securities using settled funds.
Examples that would be considered a violation
1) On T, the account has settled cash of $10,000
2) On T, the account buys ABC for $10,000
3) On T+1, the account sells ABC and buys $10,000 of XYZ
4) The customer sells the XYZ shares without depositing sufficient funds to pay for the purchase of XYZ in full
1) On T, the account has fully paid for stock in ABC and no excess cash
2) On T, the account sells $10,000 of ABC
3) On T, the account buys $10,000 of XYZ
4) On T+1, the account sells the XYZ shares without depositing sufficient funds to pay for the purchase of XYZ in full
The end of day surveillance process would consider both of these scenarios to be GFVs, which would restrict the account to only purchase using settled funds for 90 days.