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

On Wednesday, November 18, a retail customer places a market order to purchase 1,000 shares of a Nasdaq-listed stock, which executes that day at 45.00pershare.Theexecutingbroker−dealerfillstheorderoutofitsowninventory,assessinga45.00 per share. The executing broker-dealer fills the order out of its own inventory, assessing a 0.15 per share mark-up. The issuing corporation had previously declared a 0.50persharecashdividendpayableonFriday,December11,toshareholdersofrecordonWednesday,November18.Assumingstandardregular−waysettlement(0.50 per share cash dividend payable on Friday, December 11, to shareholders of record on Wednesday, November 18. Assuming standard regular-way settlement ( T+1$), which of the following correctly describes the customer's entitlement to the dividend and the required disclosure on the trade confirmation?

  1. The customer is not entitled to the dividend because settlement occurs on Thursday, November 19, and the trade confirmation must disclose that the firm acted as a principal and state the mark-up.Answer
  2. B
    The customer is entitled to the dividend because the order was executed on the record date, and the trade confirmation must disclose that the firm acted as an agent and charged a commission.
  3. C
    The customer is not entitled to the dividend because settlement occurs after the record date, but the trade confirmation must disclose the transaction as an agency trade with a commission.
  4. D
    The customer is entitled to the dividend because DTCC automatically adjusts settlement dates for dividend distributions, and the confirmation must state that the firm acted as a principal.

Answer

The customer is not entitled to the dividend because settlement occurs on Thursday, November 19 (after the record date), and the trade confirmation must disclose that the broker-dealer acted in a principal capacity and report the mark-up.
Under standard regular-way T+1T+1 settlement rules, a transaction executed on Wednesday, November 18 settles one business day later on Thursday, November 19. Because the issuer's record date is Wednesday, November 18, a regular-way purchase on November 18 settles after the record date, making November 18 the ex-dividend date; thus, the seller remains the owner of record and receives the dividend. Additionally, because the executing broker-dealer filled the customer's order out of its own inventory, the firm operated in a principal (dealer) capacity. SEC Rule 10b-10 and FINRA disclosure rules mandate that trade confirmations state whether the firm acted as a principal and explicitly disclose the mark-up assessed.

Step-by-Step Solution

1
Determine the trade settlement date under standard regular-way settlement (T+1T+1).
The trade date (TT) is Wednesday, November 18. Regular-way settlement (T+1T+1) occurs on Thursday, November 19.
Under current FINRA and SEC rules, regular-way settlement for corporate equities is one business day after the trade date.
2
Determine customer entitlement to the cash dividend.
The record date is Wednesday, November 18. To receive the dividend, the purchaser must settle on or before the record date. Since the trade settles on Thursday, November 19, the buyer is not an owner of record on November 18 and does not receive the dividend. Wednesday, November 18 is the ex-dividend date.
Under T+1T+1 settlement rules, the ex-dividend date for regular-way transactions is fixed on the record date.
3
Determine the required capacity and pricing disclosures for the trade confirmation under SEC Rule 10b-10 and FINRA rules.
Because the broker-dealer executed the order from its own inventory, it acted as a principal (dealer) and charged a mark-up. The confirmation must disclose principal capacity and the mark-up amount.
Firms trading for their own account act as dealers/principals (charging mark-ups/mark-downs), whereas firms acting as brokers/agents charge commissions.

Key Concept

Regular-way T+1T+1 settlement dividend ex-date mechanics and broker-dealer principal capacity disclosures on trade confirmations.
Estimated Time:2m 0s
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions