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Difficulty: HardSettlement Dates, Trade Confirmations, and Corporate Actions

On Thursday, May 14, a retail investor executes a regular-way purchase of 500 shares of XYZ Corporation common stock at $40 per share in a cash account. The broker-dealer executes the order as a principal from its proprietary inventory. Following the transaction, XYZ Corporation undergoes a 1-for-4 reverse stock split. Which of the following correctly identifies the regular-way settlement date for this transaction and the investor's adjusted position immediately following the reverse stock split?

  1. Settlement occurs on Friday, May 15; the adjusted position is 125 shares at $160 per share.Answer
  2. B
    Settlement occurs on Monday, May 18; the adjusted position is 125 shares at $160 per share.
  3. C
    Settlement occurs on Friday, May 15; the adjusted position is 2,000 shares at $10 per share.
  4. D
    Settlement occurs on Monday, May 18; the adjusted position is 2,000 shares at $10 per share.

Answer

The regular-way settlement date is Friday, May 15, and the post-split position is 125 shares at $160 per share.
Under FINRA and SEC rules governing corporate securities, regular-way settlement follows a T+1 schedule (trade date plus one business day). A purchase made on Thursday, May 14 reaches settlement on Friday, May 15. Furthermore, when a corporation enacts a 1-for-4 reverse stock split, the investor's total share count is divided by 4 (500/4=125500 / 4 = 125 shares) while the price per share is multiplied by 4 ($40×4=$160\$40 \times 4 = \$160). The overall total value of the investment remains unchanged at $20,000\$20,000.

Step-by-Step Solution

1
Determine the regular-way settlement date under current FINRA/SEC rules.
Regular-way settlement for corporate equity securities is T+1 (trade date plus one business day). For a trade executed on Thursday, May 14, settlement occurs on Friday, May 15.
Standard industry settlement rules mandate regular-way transactions in corporate securities settle on the next business day following the trade date.
2
Calculate the adjusted share quantity following the 1-for-4 reverse stock split.
500 original shares / 4 = 125 adjusted shares.
A reverse stock split consolidates existing shares, reducing the total number of outstanding shares proportionally based on the split ratio.
3
Calculate the adjusted per-share market price following the 1-for-4 reverse stock split.
40originalprice∗4=40 original price * 4 = 160 adjusted price per share.
To ensure total position value remains unchanged ($20,000 total market value), the price per share increases proportionally to the reduction in share quantity.

Key Concept

Regular-Way Settlement (T+1) and Reverse Stock Split Adjustments
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions