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Question

Difficulty: HardSettlement Dates, Trade Confirmations, and Corporate Actions

On Thursday, October 15, a retail customer places an unsolicited market order with a broker-dealer to purchase 1,000 shares of an exchange-listed corporate stock. The broker-dealer executes the order by filling it directly from its own inventory at 45.00pershareandincludesa45.00 per share and includes a 0.50 per share mark-up. Regarding the broker-dealer's capacity disclosure on the trade confirmation and the regular-way settlement date for this transaction, which of the following statements is correct?

  1. The firm acted in a principal capacity and must disclose the mark-up on the trade confirmation, with regular-way settlement occurring on Friday, October 16.Answer
  2. B
    The firm acted in a principal capacity and must disclose the mark-up on the trade confirmation, with regular-way settlement occurring on Monday, October 19.
  3. C
    The firm acted in an agency capacity and must disclose a commission on the trade confirmation, with regular-way settlement occurring on Friday, October 16.
  4. D
    The firm acted as a clearing depository, transferring safekeeping duties to NSCC, with regular-way settlement occurring on Monday, October 19.

Answer

The firm acted in a principal capacity and must disclose the mark-up on the trade confirmation, with regular-way settlement occurring on Friday, October 16.
The statement specifying that the firm acted in a principal capacity, must disclose the mark-up on the trade confirmation, and settles on Friday, October 16 is correct. When a broker-dealer satisfies a customer order from its own inventory, it acts as a principal/dealer and charges a mark-up (or mark-down). SEC Rule 10b-10 and FINRA rules require written confirmation detailing the firm's capacity and mark-up amount at or before trade completion. Furthermore, regular-way settlement for equity transactions occurs on the next business day (T+1), making Friday, October 16 the correct settlement date.

Step-by-Step Solution

1
Determine the broker-dealer's capacity and fee structure
Since the firm filled the customer's order directly out of its own inventory, it acted as a principal (dealer) rather than an agent (broker).
Trading from proprietary inventory defines a principal transaction, which requires charging a mark-up or mark-down rather than a commission.
2
Identify trade confirmation disclosure requirements
The trade confirmation must explicitly disclose that the firm acted as a principal and state the mark-up amount charged.
FINRA Rule 2232 and SEC Rule 10b-10 mandate written disclosure of firm capacity and transaction remuneration (mark-up/mark-down) on or before completion of the transaction.
3
Calculate regular-way settlement date
Trade Date (Thursday, October 15) + 1 business day (T+1) = Friday, October 16.
Standard regular-way settlement for corporate equity securities is T+1 (one business day after the trade date).

Key Concept

Broker-dealer capacity (principal vs. agency) disclosure on trade confirmations and regular-way T+1 settlement cycles.
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions