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Difficulty: MediumSettlement Dates, Trade Confirmations, and Corporate Actions

An investor purchases shares of a corporate common stock in a standard regular-way transaction on Tuesday, June 9. The issuing corporation's board of directors declared a cash dividend payable to stockholders of record on Wednesday, June 10. Under standard T+1 regular-way settlement rules, which of the following statements correctly describes the investor's entitlement to the dividend and the timing of settlement?

  1. The investor will receive the dividend because the trade settles on Wednesday, June 10 (T+1T+1), making the investor a holder of record on the record date.Answer
  2. B
    The investor will not receive the dividend because regular-way settlement requires two business days (T+2T+2), causing the trade to settle on Thursday, June 11.
  3. C
    The investor will receive the dividend only if the executing broker-dealer acted in a principal (dealer) capacity rather than an agency (broker) capacity.
  4. D
    The investor will not receive the dividend because common stockholders only have dividend rights if preferred stockholders vote to approve the distribution.

Answer

The investor will receive the dividend because the trade settles on Wednesday, June 10 (T+1T+1), making the investor a holder of record on the record date.
Under standard regular-way settlement rules (T+1T+1), equity transactions settle one business day after the trade date. A transaction executed on Tuesday, June 9 settles on Wednesday, June 10. Because the purchaser becomes the shareholder of record on the settlement date, they are listed on the company's books on the declared record date (Wednesday, June 10) and are entitled to receive the dividend.

Step-by-Step Solution

1
Calculate the trade settlement date under standard regular-way rules.
Trade Date = Tuesday, June 9 →\rightarrow Settlement Date = Wednesday, June 10 (T+1T+1).
Regular-way settlement for U.S. corporate equities occurs one business day after trade execution (T+1T+1).
2
Compare the settlement date with the corporate dividend record date.
Settlement occurs on Wednesday, June 10, which matches the record date of Wednesday, June 10.
An investor becomes the official owner of record on the settlement date of the transaction.
3
Determine dividend entitlement.
The purchaser is eligible to receive the cash dividend.
To receive a declared corporate dividend, an investor must be settled as a shareholder of record on or before the record date.

Key Concept

T+1 Regular-Way Settlement and Dividend Record Date Eligibility
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions