Series 99 Corporate Actions & Reorganizations 2 — Questions and Answers
Question 1: What is the primary purpose of a 'due bill' in the processing of corporate actions?
- To document the terms of a tender offer for regulatory filing
- To ensure a buyer of a security receives a pending corporate action benefit when settlement occurs after the record date (Correct answer)
- To notify the issuer of a change in beneficial ownership
- To authorize dividend reinvestment on behalf of a client
Correct answer: To ensure a buyer of a security receives a pending corporate action benefit when settlement occurs after the record date
A due bill is attached to a security sold before the record date but settling after it, obligating the seller to pass through the corporate action benefit (e.g., dividend) to the buyer.
Question 2: In processing a tender offer, the operations department must primarily ensure:
- The acquiring company files the required SEC disclosures on time
- Client shares are tendered and received by the depositary before the offer's expiration deadline (Correct answer)
- The company's board of directors approves the offer terms
- The tender offer price is set above the current market price
Correct answer: Client shares are tendered and received by the depositary before the offer's expiration deadline
Operations is responsible for ensuring that client elections are submitted and shares are delivered to the depositary agent before the tender offer's expiration deadline to secure the premium price.
Question 3: What happens to fractional shares that result from a corporate action?
- They are converted into additional whole shares at no cost to the shareholder
- They are held in suspense indefinitely until the shareholder requests delivery
- They are typically settled in cash based on the market value of the fraction (Correct answer)
- They are automatically donated to a charitable fund designated by the company
Correct answer: They are typically settled in cash based on the market value of the fraction
Fractional share entitlements arising from stock splits, mergers, or other corporate actions are typically paid out in cash to the shareholder rather than issued as partial shares.
Question 4: During a rights offering, what is the 'subscription period'?
- The period during which the company accepts proposals from investment banks
- The window of time in which shareholders may exercise their rights to purchase additional shares (Correct answer)
- The time between the announcement and the record date for the offering
- The period after settlement during which shares may be returned
Correct answer: The window of time in which shareholders may exercise their rights to purchase additional shares
The subscription period is the designated timeframe, typically several weeks, during which eligible shareholders can exercise their subscription rights at the specified offering price.
Question 5: What is the role of the Depository Trust Company (DTC) in corporate actions processing?
- DTC sets the terms and pricing for all corporate actions on behalf of issuers
- DTC acts as a central record-keeper and distributes corporate action entitlements to participant firms (Correct answer)
- DTC approves or rejects shareholder elections submitted during voluntary events
- DTC insures shareholders against losses from unfavorable corporate actions
Correct answer: DTC acts as a central record-keeper and distributes corporate action entitlements to participant firms
DTC serves as the central clearinghouse that receives corporate action announcements from issuers and distributes entitlements (cash, shares, rights) to its participant member firms on behalf of beneficial owners.
Question 6: In a merger transaction where the acquiring company offers stock consideration, the operations department must:
- File a proxy statement with the SEC on behalf of target shareholders
- Surrender target company shares and credit acquirer shares to client accounts upon settlement (Correct answer)
- Negotiate the exchange ratio between the two companies' investment banks
- Determine the tax treatment of the exchange for each individual client
Correct answer: Surrender target company shares and credit acquirer shares to client accounts upon settlement
Operations must process the exchange by removing the target company's shares from client accounts and crediting the appropriate number of acquirer shares based on the merger exchange ratio upon closing.
Question 7: What is a dividend reinvestment plan (DRIP) and how does it affect operations processing?
- A DRIP requires operations to short-sell shares each quarter to fund dividend payments
- A DRIP automatically uses cash dividends to purchase additional shares for enrolled clients, requiring operations to track fractional share positions (Correct answer)
- A DRIP delays dividend payments by 30 days so the company can invest the funds temporarily
- A DRIP converts preferred dividends into common stock on a fixed quarterly schedule
Correct answer: A DRIP automatically uses cash dividends to purchase additional shares for enrolled clients, requiring operations to track fractional share positions
A DRIP automatically reinvests cash dividends to purchase additional shares (including fractions) for enrolled participants, requiring operations to maintain fractional share records and process periodic purchases.
Series 99 Corporate Actions & Reorganizations 2
What is the primary purpose of a 'due bill' in the processing of corporate actions?