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Question

Difficulty: HardSettlement Dates, Trade Confirmations, and Corporate Actions

On Thursday, October 15, a retail customer places an order to buy 500500 shares of a corporate equity security. The registered broker-dealer executes the order by selling the shares directly to the customer out of the firm's own market-making inventory. The issuer of the security previously declared a regular cash dividend payable to shareholders of record as of Friday, October 16. Under current SEC and FINRA rules governing settlement cycles, trade confirmation disclosures, and clearing operations, which of the following statements correctly identifies the settlement outcome and required confirmation disclosure for this trade?

  1. The trade settles regular-way on Friday, October 16 (T+1), qualifying the investor as a shareholder of record entitled to receive the dividend, and the confirmation must disclose that the broker-dealer acted as a principal and include the mark-up.Answer
  2. B
    The trade settles regular-way on Monday, October 19 (T+2), meaning the transaction settles after the record date and the investor is not entitled to receive the cash dividend from the issuer.
  3. C
    The trade settles regular-way on Friday, October 16 (T+1), but because the order was filled directly by the broker-dealer, the firm is legally defined as acting in an agency capacity and must disclose a commission on the confirmation.
  4. D
    The trade settles regular-way on Friday, October 16 (T+1), but custody transfer and shareholder recordkeeping for dividend entitlement are performed directly by the National Securities Clearing Corporation (NSCC).

Answer

The trade settles regular-way on Friday, October 16 (T+1), qualifying the investor as a shareholder of record entitled to receive the dividend, and the confirmation must disclose that the broker-dealer acted as a principal and include the mark-up.
Under current FINRA and SEC rules, corporate equity transactions settle on a regular-way basis on T+1 (one business day after the trade date). Because the trade occurred on Thursday, October 15, it settles on Friday, October 16. As settlement occurs on the record date, the investor becomes a shareholder of record in time to receive the cash dividend. Additionally, because the firm executed the order by selling shares from its own inventory, it acted as a principal (dealer) and is required to disclose its principal capacity and the amount of mark-up on the customer trade confirmation.

Step-by-Step Solution

1
Determine the regular-way settlement date under current SEC/FINRA rules.
Trade Date = Thursday, October 15. Regular-way settlement for corporate equities is T+1T+1 (1 business day), so Settlement Date = Friday, October 16.
Current SEC Rule 15c6-1 mandates T+1T+1 regular-way settlement for corporate equities, bonds, municipal securities, and Treasuries.
2
Evaluate dividend entitlement based on the settlement date relative to the record date.
Since settlement occurs on Friday, October 16, the investor becomes a shareholder of record on the exact record date (Friday, October 16) and is entitled to the dividend.
To receive a declared corporate dividend, an investor's transaction must settle on or before the record date.
3
Identify broker-dealer capacity and required trade confirmation disclosures.
Filling an order from proprietary inventory means the broker-dealer acted as a principal (dealer). The confirmation statement must disclose principal capacity and the mark-up added to the trade price.
FINRA Rule 2232 and SEC Rule 10b-10 require written confirmation specifying capacity (agent vs. principal) and the associated compensation (commission for agency, mark-up/mark-down for principal market maker trades).

Key Concept

T+1 Settlement Cycle, Dividend Entitlement, Broker-Dealer Capacity Disclosures, and DTC vs. NSCC Clearing Roles
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions