This is quoted from our reading material:
Most of the time, the test will focus on the ex-dividend date with regular-way settlement. However, you might see a question regarding cash settlement trades, which settle the same day. Remember, all that is required to receive the dividend is to be a settled owner on the record date. If an investor does a cash settlement trade on the record date, they’ll settle the same day and receive the dividend. Therefore, the ex-dividend date for a cash settlement transaction is the business day after the record date.
The ex-date for cash settlement is definitely the business day after the record date. This is reflected in both the reading material and the practice questions. Remember, the ex-date is the first date an investor purchasing the security wouldn’t get the dividend. If an investor purchases the stock and settles same day, that means they can buy it on the record date and settle in time to receive the dividend (the transfer agent looks at the book of shareholders at the end of the record date). If they buy it the next business day through cash settlement, they settle one business day after the record date and will not get the dividend.
Let’s use a specific example assuming this:
Record date: Wednesday, August 5th
If an investor purchases the stock through cash settlement on Wednesday, the trade will settle on Wednesday, and they will get the dividend. They’ll be on the shareholder list by the end of the day when this occurs, and the transfer agent will earmark them for the dividend.
If an investor purchases the stock on Thursday, August 6th, they will settle on Thursday. This is one day later than when the transfer agent looks at the shareholder list, which means they will not get the dividend. Thursday is the ex-date.
For the second part of your post, the ex-date is built around settlement. The reason the ex-date is one business day prior to the record date for regular-way settlement, or the business day after the record date for cash settlement, both relate to how long it takes a security transaction to settle (T+2 for regular way, same day for cash settlement). It all goes back to one thing - who is on the stockholder list on the record date (another way of saying “who’s a settled owner of this stock on the record date”)?
Settlement times for stock are set and determined by FINRA or the NYSE. Therefore, the BOD for a stock does not determine the ex-date. An issuer of stock has no choice over settlement timeframes - this is 100% decided by FINRA (for OTC stocks) or the NYSE (for NYSE-listed stocks).
You may have noticed we didn’t discuss settlement for mutual funds. In most cases, settlement will take place same day, in 1 business day, or in 3 business days. However, there is no set standard other than redemptions (sales of mutual fund shares) must be paid out within 7 days. Because mutual funds are redeemable and do not trade in the open markets, the issuer (the investment company / BOD of the mutual fund) determines their settlement timeframes. If they want it to be 1 business day (or any other timeframe), they can make it so.
That’s why the BOD sets the ex-date for mutual funds. It’s because they set their own settlement, so they technically control when the ex-date is. If stock issuers could determine their own settlement timeframes (which they can’t), then the BOD for common stock issuers would also determine their own ex-dates.
I hope this helps! Please respond with any further questions or clarifications.