Ex-Dividend and Ex-Rights Dates
With settlement cycles established, you need to understand how they affect dividend entitlement. The ex-dividend date determines who receives a declared dividend, and under T+1 settlement, this date has shifted significantly.
Ex-Dividend Date Under T+1 Settlement
Under T+1 settlement, the ex-dividend date equals the record date for regular cash dividends. This is a major change from T+2, where the ex-date was one business day before the record date.
- A buyer must purchase the stock before the ex-date to receive the dividend
- On the ex-date, the stock opens trading with the price reduced by the dividend amount
- FINRA Rule 11140 governs ex-dates for dividends, rights, and warrants
Key point: To receive the dividend, you must buy the stock before the ex-date. Buying on or after the ex-date means you do NOT receive the dividend.
Exam Tip: Gotchas
- Under T+1, the ex-date and record date are the SAME day. Under the old T+2 rules, the ex-date was one business day before the record date.
Key Date Sequence
| Date | Definition |
|---|---|
| Declaration date | Board of directors announces the dividend |
| Ex-dividend date | First day the stock trades WITHOUT the dividend (same as record date under T+1) |
| Record date | Date on which shareholders of record are entitled to the dividend |
| Payment (payable) date | Date the dividend is actually paid |
The flow: Declaration -> Ex-date/Record date (same day under T+1) -> Payment date
Ex-Rights and Ex-Warrants
- Same concept as ex-dividend: on the ex-date, the stock trades without the right or warrant attached
- FINRA Rule 11140 governs ex-dates for rights and warrants (same rule as dividends)
- A buyer purchasing before the ex-date receives the rights or warrants
- A buyer purchasing on or after the ex-date does NOT receive them
Due Bills
A due bill is a document attached to a security certifying that the seller owes the buyer a pending distribution (dividend, rights, or interest).
- Used when a trade settles after the record date but was executed before the ex-date
- Due bills ensure the buyer receives the distribution to which they are entitled
- Due bill checks: the actual payment instrument used to transfer a cash dividend owed via a due bill
When due bills are needed: Trade executed before ex-date -> Trade settles after record date -> Seller receives the distribution but buyer is entitled to it -> Due bill transfers the distribution to the rightful owner
Adjustment of Orders: FINRA Rule 5330
Open orders must be adjusted on the ex-dividend date to reflect the reduced value of the stock. The key rule is: orders below the market are reduced; orders above the market are not.
Cash Dividend Adjustments
- Open orders below the market must be reduced by the dividend amount on the ex-date
- Applies to cash dividends of $0.01 or more
- Orders marked "Do Not Reduce" (DNR) are exempt from automatic adjustment
Which Orders Are Reduced?
| Order Type | Position Relative to Market | Reduced? |
|---|---|---|
| Buy limit | Below the market | Yes |
| Sell stop | Below the market | Yes |
| Buy stop | Above the market | No |
| Sell limit | Above the market | No |
Memory Aid: "Reduce below" - only orders placed BELOW the current market price are reduced on the ex-date.
Stock Dividends and Splits
- Open order prices are adjusted and share quantities are adjusted proportionally
- For a 2-for-1 split: price is halved, shares are doubled
Reverse Splits
- All open orders are cancelled (not adjusted)
- Customers must reenter their orders after a reverse split
Exam Tip: Gotchas
- Only orders BELOW the market are reduced on the ex-dividend date. Buy limit and sell stop are reduced; buy stop and sell limit are NOT. Remember: "reduce below."
- DNR orders skip the price adjustment for cash dividends but are still adjusted for share quantity on stock dividends.
- Reverse splits cancel all open orders entirely. Customers must reenter them.