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Question

Difficulty: Very hardSettlement Dates, Trade Confirmations, and Corporate Actions

On Tuesday, October 13, a retail investor places a market order to purchase 1,000 shares of Apex Corporation common stock. Apex Corporation had previously declared a regular cash dividend payable to shareholders of record on Wednesday, October 14. The executing broker-dealer fills the customer's purchase order directly out of its existing inventory. Under current SEC and FINRA rules, which of the following correctly determines whether the buyer receives the dividend, the regular-way settlement date of the transaction, and the capacity disclosure required on the customer trade confirmation?

  1. The buyer is entitled to the dividend, regular-way settlement occurs on Wednesday, October 14, and the confirmation must disclose that the firm acted as a principal and include the markup.Answer
  2. B
    The buyer is not entitled to the dividend because regular-way settlement occurs on Thursday, October 15, and the confirmation must disclose that the firm acted as a principal and include the markup.
  3. C
    The buyer is entitled to the dividend, regular-way settlement occurs on Wednesday, October 14, and the confirmation must disclose that the firm acted as an agent and include the commission.
  4. D
    The buyer is not entitled to the dividend because trade clearance through the NSCC delays registered position transfer at the DTC until Thursday, October 15.

Answer

The buyer is entitled to the dividend, regular-way settlement occurs on Wednesday, October 14, and the confirmation must disclose that the firm acted as a principal and include the markup.
Under current T+1 regular-way settlement rules, equity purchases settle one business day after trade date. Purchasing on Tuesday, October 13 results in settlement on Wednesday, October 14. Because settlement takes place on the official Record Date (October 14), the purchaser is registered as the owner of record in time to receive the cash dividend. Furthermore, when a broker-dealer satisfies a customer order from its proprietary inventory, it acts as a principal (dealer). FINRA/SEC confirmation rules mandate that principal transactions disclose the firm's capacity as principal along with the markup or markdown.

Step-by-Step Solution

1
Determine the regular-way settlement date under current T+1 rules.
Trade Date (Tuesday, Oct 13) + 1 business day = Settlement Date (Wednesday, Oct 14).
Standard regular-way settlement for U.S. equities is T+1.
2
Determine dividend entitlement by comparing settlement date to the record date.
Settlement occurs on Wednesday, Oct 14, which is the record date; therefore, the buyer becomes the owner of record and receives the dividend.
Under T+1 rules, purchasing on the business day prior to the record date results in settlement on the record date, entitling the buyer to the declared dividend.
3
Identify the executing broker-dealer capacity and trade confirmation disclosure requirement.
The firm filled the trade from its own inventory, meaning it acted as a principal (dealer) and must disclose principal capacity and the markup charged.
When a broker-dealer trades with a customer out of its inventory, it acts as a principal rather than an agent charging a commission.

Key Concept

T+1 regular-way settlement timing, ex-dividend/record date mechanics, and broker-dealer principal capacity trade confirmation disclosures.
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions