Trading practices that violate industry regulations can lead to restrictions on your Vanguard Brokerage Account.
Trading violations and restrictions
Points to know
- We can place restrictions on your account for trading practices that violate industry regulations.
- Look for any potential trading violation warnings prior to submitting your trade.
- Frequent trading of mutual funds can adversely affect the funds' management. We watch for market-timing.
- A trading restriction does not prohibit all trades.
Avoid these common mistakes
We want your trades to proceed as smoothly and quickly as possible. But we can restrict trading in your accounts if your transactions violate industry regulations and the Vanguard Brokerage Account Agreement.
Here are some common mistakes investors make:
- Overspending the settlement fund balance.
- Buying and selling the same shares on the same day.
- Selling a security that was purchased utilizing an unsettled credit prior to the settlement of the initial sale occurring.
- Paying for a trade with the sale of another security on or after the settlement date.
More details about trading violations
Engaging in freeriding and trade liquidations will limit your flexibility to make new purchases, however you may continue to trade with fully settled, fully collected funds.
Here are the details of each violation.
Freeriding occurs when you buy and sell securities in a cash account without covering the initial purchase with fully settled funds.
Example A
You have $3,000 in your settlement fund. You purchase a stock for $4,000. You sell the stock for $4,500 without ever paying for the initial $4,000 purchase. In this instance you incur a freeride because you have funded the purchase of Stock X, in part, with proceeds from the sale of Stock X.
Example B
You have $3,000 in your settlement fund. You purchase Stock X for $3,000 and Stock Y for $1,000. Later that day, you sell Stock X shares you have purchased without bringing in additional cash. In this instance you incur a freeride since the total amount owed for purchases made that day ($4,000) exceeds the settled cash you had to begin the day and you sold one of the securities purchased that same day.
Example C
You have a zero balance in your settlement fund and no pending credits or sales proceeds. You sell stock A, then you buy stock B with the unsettled sales proceeds from stock A. On the same day you sell stock B. Because the sale of stock A hasn't yet settled, you paid for stock B with unsettled funds.
Restriction
Your account is restricted for 90 days. During this time, you must have settled funds available before you can buy anything. Any 3 restrictions in a rolling 52-week period will result in your account being restricted for one year.
This violation occurs when you buy a security without enough funds to cover the purchase and sell another, at a later date, in a cash account.
The settlement of the buy and the subsequent sell don't match, which is a violation. This is also known as a "late sale."
Example
On Monday, you buy stock X. To pay for stock X, you sell stock Y on Tuesday or later. Since each trade settles in 1 business day, you’ll be late paying for stock X, which was purchased on Monday.
Restriction
Any 3 violations in a rolling 52-week period trigger a 90-day funds-on-hand restriction. During this time, you must have settled funds available before you can buy anything. Any 3 restrictions in a rolling 52-week period will result in your account being restricted for one year.
Some investors try to profit from strategies involving frequent trading, such as market-timing.
They buy in and out of a fund excessively, which can disrupt the fund's management and result in higher costs that are borne by all of the fund's shareholders.
Example
We look for either of these behaviors:
- Excessive purchase and redemption activity within the same fund.
- Excessive exchange activity between 2 or more funds within a short time frame.
Restriction
Vanguard Brokerage and the fund families whose funds can be traded through Vanguard Brokerage reserve the right to decline a transaction if it appears you're engaging in frequent-trading practices, such as market-timing.
How to avoid trade restrictions
Here are some tips to help you avoid order delays or rejections:
- Maintain a sufficient settlement fund balance to cover the cost of all purchases, including commissions, fees, and potential market fluctuations of the security you're buying.
- Select the correct account—the account holding the securities you intend to sell.
- Check the correct settlement fund when verifying your balance before making a purchase.
- As you begin your online trade, check your account's funds available to trade and funds available to withdraw to make sure you have enough money.
- Don't sell securities that aren't yet held in your account.
- Consider margin investing for nonretirement accounts. Applying for margin will not remove trading violations that have already been assessed.
- Take note when buying a security using unsettled funds. You'll incur a restriction if you sell that security before the funds used to buy it settle.
- Review settlement dates of securities sales that have generated unsettled credits.
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