Cash Substitution Call (Good Faith Violation)

Cause: A Cash Substitution call is issued when an account purchases a position with unsettled funds, and sells the position before the settlement date of the sale that generated the proceeds.

Meeting the Call: Cash Substitution violations cannot be met. If an account receives five GF violations in any rolling one year period, the account will be restricted to closing only status for 90 days past the issuance of the fifth violation.

A Cash Substitution violation remains on an account for a 12 month rolling period.

When an account is issued its fourth Cash Substitution violation within a 12 month rolling period, the account is restricted to cash only status for 90 days from the due date of the fourth Cash Substitution violation. If a fifth Cash Substitution violation is not issued during this 90 day restricted period the four Cash Substitution violations are closed.

When five Cash Substitution violations are issued within a 12 month rolling period, it will cause an account to be restricted to closing positions only for 90 days from the trade date of the fifth Cash Substitution violation.

Example of a Cash Substitution Violation:
On Monday, February 2, a customer sells 100 shares of settled shares of XYZ which generates proceeds of $5,000. This trade will settle on T+3, which is Thursday, February 5. He uses the funds to purchase shares of ABC.

On Wednesday, February 4, the customer sells the shares of ABC. The customer will be issued a Cash Substitution Violation because he did not hold the purchase made with the proceeds until the XYZ stock had settled.