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Question

Difficulty: HardSettlement Dates, Trade Confirmations, and Corporate Actions

On Thursday, October 22, a retail investor purchases 500 shares of a corporate bond ETF directly from a broker-dealer's inventory. The firm executes the order by selling shares out of its own account. Under SEC and FINRA rules governing settlement and trade confirmations, on which date does regular-way settlement occur, and what specific remuneration detail must be disclosed on the customer confirmation?

  1. Friday, October 23, along with the mark-up charged on the transaction.Answer
  2. B
    Friday, October 23, along with the commission charged on the transaction.
  3. C
    Monday, October 26, along with the mark-up charged on the transaction.
  4. D
    Monday, October 26, along with the commission charged on the transaction.

Answer

Regular-way settlement occurs on Friday, October 23 (T+1), and the confirmation must disclose the mark-up charged because the firm acted as a principal.
Under current SEC rules, regular-way settlement for corporate stock and ETF trades is T+1T+1 (one business day after trade date). Since the transaction occurred on Thursday, October 22, settlement takes place on Friday, October 23. Furthermore, because the firm filled the customer's order by selling out of its own inventory, it acted as a principal (dealer) and is required to disclose the mark-up on the trade confirmation.

Step-by-Step Solution

1
Determine the settlement date using standard regular-way rules.
Under current SEC rules, regular-way settlement for equities and ETFs is T+1T+1 (Trade date plus one business day). For a trade executed on Thursday, October 22, settlement occurs on Friday, October 23.
Standard settlement timelines changed from T+2T+2 to T+1T+1 for U.S. equities, corporate securities, and municipal bonds.
2
Identify the capacity of the broker-dealer firm.
Selling shares out of inventory means the firm is acting as a Principal (Dealer) for its own account.
When a firm acts as a dealer/principal, it trades from inventory rather than matching buyers and sellers as a middleman.
3
Determine required trade confirmation disclosures based on firm capacity.
A principal transaction requires the disclosure of the mark-up or mark-down on the trade confirmation.
Commissions are disclosed when acting as an Agent (Broker); mark-ups/mark-downs are disclosed when acting as a Principal (Dealer).

Key Concept

T+1 Settlement Cycle and Broker-Dealer Capacity Disclosures
Estimated Time:1m 30s
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions