Corporate Actions for the SIE: Splits, Tender Offers, and Rights Offerings

Every guide explains what a stock split does to the shares you own. Almost none explain what it does to the orders you’ve placed but not yet filled — and that’s the part that gets tested.

FINRA Rule 5330 governs it, and it’s selective. Buy limit orders and sell stop orders sitting below the market get adjusted automatically when a stock goes ex-dividend or splits. Sell limits and buy stops don’t. And a reverse split doesn’t adjust anything — it cancels every pending order outright.

The logic is clean once you see it: the rule protects orders whose trigger sits below the market, because those are the ones a mechanical price drop would execute by accident.

The short answer

A corporate action is any event initiated by the issuer that changes its securities or what shareholders hold.

Stock split — more shares at a proportionally lower price. Total value unchanged. A reverse split does the opposite.

Stock dividend — additional shares instead of cash. Economically a small split. Total value unchanged.

Tender offer — an offer to buy shares directly from shareholders, usually at a premium, for a limited time. Must stay open at least 20 business days under SEC Rule 14e-1.

Rights offering — existing shareholders get the right to buy new shares, usually below market, before the public can. Short-lived, typically weeks.

Open orders (FINRA Rule 5330):

Order type	On ex-date for a cash dividend, split or stock dividend
Buy limit	Adjusted — price reduced
Sell stop	Adjusted — price reduced
Sell limit	Not covered by the rule
Buy stop	Not covered by the rule
Any order, reverse split	Cancelled

Memory aid: orders placed below the market get adjusted.

The full answer

Stock splits

A forward split increases the number of shares and reduces the price per share in the same proportion. Nothing about the company changes, and nothing about your total position value changes.

Split	You held	You now hold
2-for-1	100 shares at $80	200 shares at $40
3-for-1	100 shares at $90	300 shares at $30
3-for-2	100 shares at $60	150 shares at $40

The arithmetic for any split: multiply shares by the first number and divide by the second; do the reverse to the price.

Why companies split: to bring the share price into a range more investors find accessible, and sometimes to signal management confidence. There’s no change in value — a split cuts the same pie into more slices.

Tax treatment: none at the time of the split. Your total cost basis stays the same; basis per share falls in proportion.

Reverse splits

A 1-for-10 reverse split turns 1,000 shares at $2 into 100 shares at $20. Same total value, fewer shares.

Companies usually do this to lift the share price above an exchange’s minimum listing requirement. It’s often read as a warning sign, and the exam sometimes frames it that way.

Fractional shares created by a reverse split are typically cashed out rather than issued.

Stock dividends

Paying shareholders in additional shares rather than cash. A 10% stock dividend on 100 shares gives you 10 more.

The price adjusts down so that total value is unchanged. The company’s retained earnings are reclassified; no cash leaves.

It’s taxed the same way as a split: no tax at distribution, total basis unchanged, basis spread across the larger number of shares.

What happens to your open orders

This is the section most guides skip, and it’s where the exam finds points.

When a security goes ex-dividend or ex-distribution, its price drops by roughly the value of what’s being paid out. An open order resting on the books doesn’t know that. FINRA Rule 5330 exists so a mechanical, predictable price drop doesn’t trigger an order the customer never meant to fill.

Which orders are adjusted: the rule applies to open buy orders and open stop orders to sell. In practice, that means buy limits and sell stops — the orders whose trigger prices sit below the current market.

A buy limit below the market is waiting for the price to fall. A sell stop below the market is waiting for the price to fall. The ex-date drop is exactly the kind of fall that could set them off by accident. So those get adjusted.

Which orders aren’t: the rule’s adjustment provisions don’t apply to open sell orders (sell limits) or open stop orders to buy (buy stops). Their trigger prices sit above the market, and an ex-date drop moves the price away from them, not toward them.

Cash dividend adjustment. The order price is reduced by the dividend amount, then rounded down to the next minimum price increment.

A buy limit at $50.00, dividend of $0.42: the adjusted price is $49.58.

Split and stock dividend adjustment. The price is reduced and the share quantity increased, proportionally.

Order before	Event	Order after
Buy limit, 100 shares at $50	2-for-1 split	Buy limit, 200 shares at $25
Sell stop, 100 shares at $40	2-for-1 split	Sell stop, 200 shares at $20
Buy limit, 100 shares at $60	3-for-2 split	Buy limit, 150 shares at $40
Sell limit, 100 shares at $90	2-for-1 split	Not adjusted by Rule 5330

Share quantities round down to the nearest whole share.

Do Not Reduce and Do Not Increase. A customer can opt out:

• DNR (Do Not Reduce) — the order price is not reduced for a cash dividend
• DNI (Do Not Increase) — the share quantity is not increased for a stock dividend or split

Reverse splits cancel orders. The rule is explicit: when a pending order involves a security that is the subject of a reverse split, the order — buy or sell — is cancelled. Not adjusted. Gone. The customer has to re-enter it.

When value can’t be determined. If the value of a distribution can’t be determined, the firm may not adjust or execute the order without reconfirming it with the customer.

One scope note: Rule 5330 doesn’t apply to orders governed by an exchange’s own rules. For the SIE, learn the rule as stated — buy limits and sell stops adjusted, reverse splits cancel.

Tender offers

A tender offer is an offer to buy securities directly from shareholders, typically at a premium to the market price, for a limited period. The bidder may be the issuer itself (an issuer tender offer, a form of buyback) or a third party seeking control.

Rules worth knowing, all under the Securities Exchange Act of 1934:

Minimum offer period — SEC Rule 14e-1. A tender offer must remain open for at least 20 business days from commencement. If the offer price or the percentage of shares sought changes, it must stay open at least 10 business days after that change.

All-holders, best-price — SEC Rule 14d-10. The offer must be open to all holders of the class, and every tendering holder must be paid the highest price paid to any other holder.

Proration. If more shares are tendered than the bidder wants, it buys pro rata from everyone who tendered. You may tender 1,000 shares and have only 600 accepted.

Short tendering is prohibited — SEC Rule 14e-4. You may only tender shares you’re net long. Tendering borrowed shares or more than your net position — hoping to capture proration on shares you don’t really own — is a violation. This is the rule the exam usually reaches for.

Withdrawal rights. Shareholders who tender can generally withdraw tendered shares while the offer remains open.

Rights offerings

A rights offering lets existing shareholders buy newly issued shares before the public, usually at a subscription price below the current market.

It exists to protect preemptive rights — the right to maintain your proportional ownership when a company issues new shares. Without it, a new issue dilutes existing holders’ percentage stake.

Mechanics:

• Shareholders typically receive one right per share owned
• A set number of rights plus the subscription price buys one new share
• Rights are short-term, usually expiring within weeks
• Rights have value, because they let you buy below market — so they trade separately

A shareholder has three choices: exercise the rights and buy shares, sell the rights in the market, or let them expire and lose their value. Letting them expire is the one wrong answer, since the rights have value either exercised or sold.

Standby underwriting. Some shareholders won’t exercise. To make sure the full issue is placed, an underwriter may agree in advance to buy whatever shares aren’t subscribed — a standby commitment. Structurally that’s a firm commitment, because the underwriter ends up owning shares.

Rights versus warrants

The pair the exam tests constantly:

	Rights	Warrants
Term	Short — weeks	Long — years, sometimes perpetual
Exercise price at issuance	Below market	Above market
Usually issued	To existing shareholders	Attached to bonds or preferred as a sweetener
Purpose	Protect preemptive rights; raise capital from existing holders	Make another security more attractive
Trade separately	Yes	Yes, often detachable

Short and cheap: rights. Long and above market: warrants.

Other corporate actions in brief

Mergers and acquisitions. Shareholders may receive cash, shares of the acquirer, or a mix. Approval usually requires a shareholder vote.

Spin-offs. A company distributes shares of a subsidiary to its own shareholders, creating a separate public company. Shareholders end up holding both.

Share buybacks. The issuer repurchases its own shares, on the open market or via an issuer tender offer. Repurchased shares become treasury stock — they carry no voting rights and receive no dividends.

Common misconceptions

“A stock split makes my position more valuable.” Total value is unchanged. More shares, lower price, same pie.

“All open orders are adjusted on the ex-date.” Rule 5330 adjusts open buy orders and sell stops — the orders below the market. Sell limits and buy stops aren’t covered.

“A reverse split adjusts open orders too.” It cancels them. Pending buy and sell orders are cancelled and must be re-entered.

“A cash dividend adjustment rounds to the nearest cent.” It rounds down to the next minimum increment.

“A customer can’t stop the adjustment.” Marking an order DNR prevents the price reduction for a cash dividend; DNI prevents the quantity increase for a split or stock dividend.

“Stock dividends are taxable when received.” No tax at distribution. Total basis stays the same and spreads across more shares.

“Tender offers can close in a week.” At least 20 business days, plus at least 10 more after a change in price or percentage sought.

“I can tender borrowed shares to improve my proration.” Short tendering is prohibited under Rule 14e-4. You can only tender shares you’re net long.

“Rights and warrants are the same thing.” Rights are short-term and priced below market. Warrants are long-term and priced above market at issuance.

“If I don’t want new shares, I should let the rights expire.” Sell them. Unexercised rights expiring worthless is lost value.

What to do with this info

1. Learn the below-the-market rule. Buy limits and sell stops sit below the market and get adjusted. That one picture answers most Rule 5330 questions.
2. Memorise “reverse split cancels.” It’s the exception that makes a question easy to get wrong.
3. Practise the split arithmetic — multiply shares by the first number, divide by the second, inverse for price. 3-for-2 is the one that trips people up.
4. Hold the tender offer numbers: 20 business days minimum, 10 after a change, net long only.
5. Pair rights and warrants on term and price. Short and below market versus long and above.
6. Connect splits to basis. Total basis unchanged, per-share basis falls — the same rule as stock dividends.

Related resources

• Order types: market, limit, stop and stop-limit — where buy limits and sell stops sit relative to the market
• Common vs preferred stock — preemptive rights and the rights-versus-warrants distinction
• Dividend dates: the DERP method — the ex-date that triggers order adjustments
• Taxation basics for the SIE — how splits and stock dividends change cost basis
• Underwriting: firm commitment, best efforts, and syndicates — standby commitments in rights offerings
• Free SIE practice exam — a domain-scored diagnostic