Settlement and good delivery
Settlement, the actual exchanging of securities for value, takes two main forms: regular-way settlement and cash settlement. Most things will settle regular-way settlement unless stated otherwise. This includes mutual fund shares bought or sold through a broker-dealer, which generally settle T+1 like other securities, not the same day.
Cash settlement
Cash settlement means the trade settles the same day it’s executed. It’s less common than regular-way settlement, so unless a question states otherwise, assume regular-way settlement applies.
Don’t confuse this with mutual fund pricing: a mutual fund order is priced at the next NAV calculated after the order is received (forward pricing), but that is the price, not the settlement, and a mutual fund trade through a broker-dealer generally settles T+1.
Seller’s option settlement
Seller’s option allows the seller to set the timeline for delivery of the securities, agreed with the purchaser at the time of the trade. Delivery is due on the date the option expires. Under FINRA Rule 11320(c), as updated for T+1 settlement in 2024, the seller may deliver earlier, on any business day after the first business day following the trade, by giving the buyer written notice of intention to deliver on a business day before the delivery date.
When-issued, WI (when, as, and if issued along with when as and if distributed)
When-issued (WI) means that the actual security has not been issued or distributed yet. When the securities are actually issued and/or distribution begins, if nothing important has changed, FINRA will set the settlement and the transaction commences. If the final form is substantially different, all orders are canceled.
Regular-way settlement
Regular-way settlement for corporate equity and options is T+1 (the next business day) under SEC Rule 15c6-1, which moved most securities to T+1 effective May 28, 2024. Municipal securities moved to T+1 the same day under MSRB Rules G-12 and G-15, since Rule 15c6-1 excludes municipal securities. Government securities also settle T+1, but through their own Fedwire-based settlement arrangements rather than under Rule 15c6-1.
Regular-way settlement defining dividend dates
The regular-way settlement cycle determines which dates govern whether an investor receives an upcoming dividend.
Declaration date is simply when the board of directors meet and declare the dividend. At that meeting, the board of directors also decides when the dividend will be paid, which is the Payment date. Those are both set by the board of directors on the declaration date. They also set the Record date, the date the shareholder must own the shares, and be a “shareholder of record” on that date, in order to get the upcoming dividend.
The ex-dividend date, or ex-date, is the first day if you purchase the shares, you will not get the upcoming dividend. If you purchase the shares before the ex-date, you will get the dividend. If you buy on or after the ex-date, you will not get the upcoming dividend.
Good delivery
Good delivery is simply the idea that the securities being transacted are in the “proper form”. If they are not delivered in the correct form, the buyer is allowed to refuse the delivery.
Certificates that have been stained, ripped, torn, or otherwise damaged would be considered mutilated certificates; obviously are not in good delivery form without being properly authenticated, which could take time. Often, if securities get damaged, the owner can reach out the issuer, explain the situation, submit the damaged certificates to them for authentication and checking, and they will reissue undamaged certificates.
Partial deliveries of transactions are allowed, provided that each of the separate deliveries are individually in good delivery, following the rules below, and they do not leave odd lots, or left overs that are not in good delivery form.
For stocks, FINRA Rule 11361 sets the units of delivery: certificates for 100 shares, or certificates that can be grouped into exact 100-share units, plus the odd-lot remainder when the trade size isn’t a multiple of 100. Certificates for 30, 40, and 30 shares make one 100-share unit. For a 200-share trade, eight 25-share certificates are good delivery (four make each 100-share unit), but two 75-share certificates and one 50-share certificate are not, because no group of them adds up to exactly 100. For a 150-share trade, one 100-share unit plus 50 shares is good delivery, and the 50-share odd lot can be one certificate or smaller ones that add up to 50. A trade for fewer than 100 shares, such as 20 shares, is delivered in that exact amount, in one certificate or smaller ones that add up to it.
For bonds, FINRA Rule 11362 requires the denominations must be $1,000 or multiples of it. There is a maximum of $100,000 face, but if there is more, they can just be broken up into more. 3 $100,000 face bonds for example. Smaller-denominated bonds can be combined, provided the individual smaller bonds are in $100 increments, and they are combined into $1000 combinations. 5 $200 bond could be combined, but 8 $125 bonds could not be, even though 8x125 is 1000, $125 is not a $100 increment.
Stock power or written stock power, is a separate legal document that can be used for the transfer of ownership of physical stock certificates, also referred to as assignment, or assigning, from one owner to the next. The owner can sign the assignment on the certificate itself instead, and either way is good delivery. This is rarely to never dealt with in electronically held accounts. This document must have the exact same name as the account name, and must be backed by the member firm or a commercial bank, that is assisting the trade. Securities registered to 2 or more persons, must have all persons registered sign the stock power. The transfer agent is the company an issuer uses, usually a bank or trust company, to record changes of ownership, keep its list of security holders, cancel and issue certificates, and pay dividends. If the stock power is not properly signed and executed, the transfer agent will not accept it, and it is not considered good delivery.
A general power of attorney is not a stock power. It authorizes another person (the agent, or attorney-in-fact) to act for an owner, such as placing trades in the owner’s account, and the firm must know the authority of anyone acting for a customer (FINRA Rule 2090). It does not assign a certificate.
A proxy is not a stock power. It is a shareholder’s authorization for another person to vote their shares at a shareholder meeting, and it transfers nothing. When a firm carries a customer’s stock registered in a name other than the customer’s, such as street name, it must promptly forward the issuer’s proxy material to the customer, the beneficial owner (FINRA Rule 2251).
For persons personally holding physical certificates and wants to sell them, they will need to sign the certificates or the stock power, and that likely would need to be guaranteed. The signature guarantee has to come from a Medallion Signature Guarantee (MSG) program participant, usually a bank, broker dealer, or similar. Think notary public, but higher standards for more protection. Notaries are for general legal documents, MSG is for securities.
Fiduciary signatures, i.e., executors, guardians, etc, are acceptable without needing additional signatures. Signatures of deceased individuals will never be acceptable. For deceased individuals, an executor’s signature is required.
When a security is registered to a corporate entity, the signature must be identical, although words like “and” and “company” can be written out and not using “&” or “Co”. A corporation can’t sign for itself, so an authorized person signs on its behalf, and the broker-dealer won’t accept a signature from anyone it doesn’t believe the company’s board of directors has properly authorized to conduct securities business. The authorized person or persons can be given each time a transaction is needed, or are usually included in the corporate documents submitted when the account was opened.
When a physical security is being sold, as mentioned earlier, the customer generally would sign the back of the certificate and then send it to the broker-dealer. The problem of course, is that is basically a blank check of sorts, and if it was intercepted, bad things could happen. One way of preventing this is using the previously mentioned stock power. Send the certificate in 1 envelope, the stock power in a second envelope, and since without both nothing can happen, if either one is lost, nothing bad can happen in the account. They could also send registered mail, but there are of course risks with that too. They could also enter a specified third party, often a bank or the broker-dealer, and therefore it can only be transferred to them, and they would complete the transaction.
Sometimes clients use a firm as an agent, often a bank. These are most often institutional or high-net-worth clients. This lets them centralize their bookkeeping and accounting if they are executing transactions through multiple member firms. Each brokerage sends the trade details to the agent bank. The agent bank either pays the broker-dealer for their client’s purchases, or provides the brokerage with the securities for them to sell for the client. This is delivery versus payment (DVP) or receive vs payment (RVP).
DVP is when the broker-dealer gives securities to the agent bank, and then the agent bank gives them the cash. This is the same as a COD, a cash-on-delivery order. FINRA Rule 11860 sets the conditions for accepting these orders: the firm gets the name and address of the customer’s agent and the account details before or when it accepts the order, marks the order as COD (or POD), sends a confirmation by the end of the trade date, and settles through a clearing agency. The payment deadline is a separate rule. Under the Federal Reserve’s Regulation T, if delivery of the securities in a DVP trade is delayed by the mechanics of the transaction, and not by the customer’s willingness or ability to pay, the broker-dealer can take up to 35 calendar days to obtain payment.
RVP is when the broker-dealer gets securities from the agent bank and then makes a cash payment to the bank for the client.
Under FINRA and MSRB rules, a member firm may not accept DVP or RVP orders unless the member firm obtains the name and address of the agent at the time of order acceptance and has assurances that the name and account number of the end customer are on file with the agent. If accepted, the order will be marked DVP or RVP.