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Question

Difficulty: MediumSettlement Dates, Trade Confirmations, and Corporate Actions

A retail customer receives a trade confirmation after purchasing 500500 shares of a NASDAQ-listed corporate stock. The confirmation shows that the broker-dealer filled the order out of its own inventory and charged a net price including a mark-up. In what capacity did the broker-dealer act in this transaction, and what is the standard regular-way settlement timeframe for this trade?

  1. The firm acted in a principal (dealer) capacity, and regular-way settlement occurs on T+1T+1 (one business day after the trade date).Answer
  2. B
    The firm acted in an agency (broker) capacity, and regular-way settlement occurs on T+1T+1 (one business day after the trade date).
  3. C
    The firm acted in a principal (dealer) capacity, and regular-way settlement occurs on T+2T+2 (two business days after the trade date).
  4. D
    The firm acted in an agency (broker) capacity, and trade clearing is executed by the Depository Trust Company (DTC) rather than the NSCC.

Answer

The broker-dealer acted in a principal (dealer) capacity because it filled the trade from its own inventory (charging a mark-up), and the regular-way settlement timeframe for corporate equity securities is T+1T+1 (one business day after the trade date).
When a broker-dealer buys or sells securities for its own account (inventory), it acts as a principal (dealer) and discloses a mark-up or mark-down on the trade confirmation. Under current FINRA and SEC rules, regular-way settlement for corporate equity securities takes place on T+1T+1 (one business day after the trade date).

Step-by-Step Solution

1
Determine broker-dealer capacity and remuneration
Trading out of proprietary inventory indicates a principal (dealer) transaction with a mark-up or mark-down.
When a broker-dealer sells securities to a customer from its own account, it acts as a principal/dealer. Conversely, acting as a middleman between two parties is an agency/broker transaction compensated via commission.
2
Determine the regular-way settlement cycle for equity transactions
Regular-way settlement is T+1T+1 (Trade date plus one business day).
SEC Rule 15c6-1 establishes regular-way settlement for corporate equities, municipal bonds, and corporate bonds as one business day following the trade date (T+1T+1).

Key Concept

Broker-Dealer Capacity Disclosures and Regular-Way Settlement Cycles
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions