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

On Tuesday, September 15, a retail investor purchases 400 shares of Apex Technology Corp. common stock at $50 per share through a firm that fills the order directly from its proprietary trading inventory. Apex Technology Corp. had previously declared a 25% stock dividend payable on Friday, September 25, to shareholders of record on Wednesday, September 16. Which of the following statements correctly identifies the regular-way settlement date, the broker-dealer capacity and compensation disclosure required on the trade confirmation, and the investor's entitlement to the stock dividend?

  1. The trade settles on Wednesday, September 16; the firm acted as a principal and must disclose a mark-up on the confirmation; and the investor is entitled to receive 100 additional shares on the payable date.Answer
  2. B
    The trade settles on Thursday, September 17; the firm acted as a principal and must disclose a commission on the confirmation; and the seller retains the stock dividend because trade settlement occurred after the record date.
  3. C
    The trade settles on Wednesday, September 16; the firm acted as an agent (broker) and must disclose a commission on the confirmation; and the investor must submit a due-bill to claim the stock dividend.
  4. D
    The trade settles on Wednesday, September 16; the firm acted as a principal and must disclose a mark-up on the confirmation; but preferred shareholders automatically receive priority rights to all stock splits and dividends over common stock buyers.

Answer

The trade settles on Wednesday, September 16 (T+1); the broker-dealer acted in a principal capacity requiring mark-up disclosure on the confirmation; and the investor receives 100 additional shares on the payable date.
The correct response accurately synthesizes all three regulatory requirements: regular-way equity settlement takes place on T+1 (Wednesday, September 16); selling from inventory dictates that the firm acted as a principal, requiring the mark-up to be disclosed on the trade confirmation; and because the trade settles on the record date, the buyer is entitled to the 25% stock dividend of 100 additional shares payable on September 25.

Step-by-Step Solution

1
Determine the regular-way trade settlement date.
Trade Date (TT) = Tuesday, September 15. Regular-way settlement for equities is T+1T+1, so Settlement Date = Wednesday, September 16.
Under SEC Rule 15c6-1, regular-way settlement for corporate stock trades occurs one business day after the trade date.
2
Determine broker-dealer capacity and trade confirmation disclosure rules.
Capacity = Principal (Dealer); Required Confirmation Disclosure = Mark-up.
When a broker-dealer executes a customer trade out of its own inventory, it acts as a principal for its own account and receives compensation through a mark-up or mark-down, which must be explicitly stated on the written trade confirmation.
3
Analyze corporate action eligibility and share distribution count.
Investor is shareholder of record on Wednesday, September 16, and receives 400×0.25=100400 \times 0.25 = 100 additional shares on September 25.
Because settlement occurs on the record date, the purchasing investor becomes the registered holder on record date and receives the declared 25% stock dividend directly from the issuer's transfer agent.

Key Concept

T+1 Settlement Cycle, Principal Broker-Dealer Capacity Disclosures, and Stock Dividend Eligibility
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions