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Difficulty: HardSettlement Dates, Trade Confirmations, and Corporate Actions

On Tuesday, May 12, a retail customer places a market order to buy 500 shares of ABC common stock. The executing broker-dealer fills the order by selling shares directly from its proprietary inventory account and discloses a mark-up on the trade confirmation. Under SEC rules, what is the regular-way settlement date for this transaction, and in what capacity did the broker-dealer act?

  1. Settlement occurs on Wednesday, May 13 (T+1T+1), and the broker-dealer acted as a principal.Answer
  2. B
    Settlement occurs on Thursday, May 14 (T+2T+2), and the broker-dealer acted as a principal.
  3. C
    Settlement occurs on Wednesday, May 13 (T+1T+1), and the broker-dealer acted as an agent.
  4. D
    Settlement occurs on Thursday, May 14 (T+2T+2), and the broker-dealer acted as an agent.

Answer

Settlement occurs on Wednesday, May 13 (T+1T+1), and the broker-dealer acted as a principal.
Under current SEC rules, standard regular-way settlement for corporate equity trades takes place on the first business day following the trade date (T+1T+1). Because the transaction occurred on Tuesday, May 12, regular-way settlement is Wednesday, May 13. In addition, when a broker-dealer satisfies a customer order directly from its own proprietary inventory account and charges a mark-up, the firm acts as a principal (dealer).

Step-by-Step Solution

1
Determine the regular-way settlement date for the corporate equity trade.
Regular-way settlement is T+1T+1 (Trade Date + 1 business day). Since the trade date is Tuesday, May 12, settlement occurs on Wednesday, May 13.
SEC rules mandate T+1T+1 regular-way settlement for corporate equities, corporate bonds, municipal bonds, and U.S. Treasuries.
2
Determine the capacity in which the broker-dealer acted from the transaction details.
The broker-dealer filled the order from its own inventory charging a mark-up, which defines a principal (dealer) capacity.
A broker-dealer acts as a principal (dealer) when trading for or from its own account for a mark-up or mark-down. It acts as an agent (broker) when executing trades between third parties for a commission.

Key Concept

Regular-Way Settlement (T+1T+1) and Broker-Dealer Capacity Disclosure
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions