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Difficulty: HardSettlement Dates, Trade Confirmations, and Corporate Actions

On Wednesday, October 14, a retail client purchases 500 shares of a NASDAQ-listed common stock through a registered broker-dealer. The broker-dealer executed the order from its own inventory as a dealer. Which of the following statements accurately describes the settlement timeline and mandatory trade confirmation disclosures for this transaction under current industry rules?

  1. The transaction settles on Thursday, October 15, and the trade confirmation must disclose that the broker-dealer acted as principal and state the mark-up charged on the trade.Answer
  2. B
    The transaction settles on Friday, October 16, and the trade confirmation must disclose that the broker-dealer acted as agent and state the commission charged on the trade.
  3. C
    The transaction settles on Thursday, October 15, and the trade confirmation must disclose that the broker-dealer acted as an agent while reporting a commission rather than a mark-up.
  4. D
    The transaction settles on Friday, October 16, and trade clearing and netting must be performed directly by the Depository Trust Company (DTC) prior to delivery.

Answer

The transaction settles on Thursday, October 15 (T+1 regular-way settlement), and the trade confirmation must disclose that the broker-dealer acted in a principal capacity and reveal the mark-up applied to the transaction.
Under current SEC rules, regular-way settlement for equity securities occurs on the business day following the trade date (T+1). A trade executed on Wednesday, October 14 settles on Thursday, October 15. Furthermore, when a broker-dealer executes a transaction using its own inventory, it acts as a dealer (principal) and must explicitly disclose this capacity on the customer trade confirmation along with the dollar amount of the mark-up charged.

Step-by-Step Solution

1
Determine the regular-way settlement date under SEC Rule 15c6-1.
Regular-way settlement for corporate equity securities is T+1 (one business day following the trade date). Trading on Wednesday, October 14 results in a settlement date of Thursday, October 15.
Current U.S. market structure enforces a T+1 settlement cycle for corporate bonds, municipal securities, and equities.
2
Identify the broker-dealer capacity and corresponding fee disclosure on the trade confirmation.
Because the firm sold the shares directly from its own inventory, it acted as a principal (dealer) and charged a mark-up.
FINRA rules mandate that trade confirmations disclose whether the firm acted as agent (broker) or principal (dealer), along with the commission for agency trades or the mark-up/mark-down for principal retail trades.

Key Concept

Regular-way settlement cycles (T+1) and trade confirmation capacity/remuneration disclosures under FINRA/SEC rules.
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions