On February 9, 2022, the Securities and Exchange Commission (the “Commission") announced a proposed rule to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date (“T+2") to one business day after the trade date (“T+1"), while soliciting comments regarding challenges and possible approaches to achieving settlement by the end of trade date (“T+0"). To facilitate a T+1 settlement process, the Commission is proposing new requirements designed to protect investors, reduce risk between a transaction and its completion, and increase operational efficiency. The proposed rules and rule amendments would establish a compliance date of March 31, 2024.
With settlement for securities offerings to be accelerated to the trading day after pricing, issuers, underwriters and their counsel should be aware that more work should be done in advance of pricing an offering. This is of particular importance where parties are located across time zones or settlement includes additional steps (e.g., obtaining medallion guarantees).
Despite this shortened standard settlement cycle, parties would still be permitted to explicitly agree to a different settlement cycle at the time of the transaction – though it should be noted that transactions priced after 4:30 pm Eastern time will no longer automatically gain an extra day to settle.
The proposed rule would amend Rule 15c6-1 of the Securities Exchange Act of 1934 to establish a standard settlement cycle of T+1 for most broker-dealer transactions. In addition, the Commission also proposed three additional rules applicable to broker-dealers, investment advisers and central matching service providers (“CMSPs") which would improve the processing of institutional trades by accelerating the confirmation and affirmation of such trades between broker-dealers and their institutional customers. Below is a summary of the proposed rules and amendments:
- unless expressly agreed by the parties, brokers and dealers would not be able to enter into a contract for the purchase or sale of securities (with certain exceptions) that provides for settlement later than T+1 (see amendment to Rule 15c6-1(a));
- parties could still expressly agree to a later settlement when necessary (see Rule 15c6-1(d));
- the proposal would remove the T+4 settlement cycle for certain firm commitment offerings (see deletion of Rule 15c6-1(c));
- in allocation, confirmation or affirmation processes, brokers and dealers would be required to have a written agreement with customers requiring these processes to be completed as soon as technologically practicable and no later than the end of the trade date (see proposed Rule 15c6-2);
- if an adviser is party to a contract under Rule 15c6-2, the adviser would be required to keep true, accurate and current records of confirmations received and allocations and affirmations sent under such contract, with time and date stamps (see amendment Rule 204-2 of the Investment Advisers Act of 1940); and
- CMSPs would be required to implement automatic processing of the entire trade process from execution through settlement for transactions involving broker-dealers and their customers, eliminating the need for manual intervention (see proposed Rule 17Ad-27).
The Commission's goal is to ultimately accelerate to a T+0 settlement cycle (or a netted settlement at the end of the trade date rather than real-time or “rolling" settlement). Accordingly, the Commission is soliciting comments on challenges and potential pathways to achieving a T+0 settlement cycle, and has proposed several possible approaches. Commissioner Hester M. Peirce also noted that the benefits of same-day settlement may not outweigh its potential costs.
For the full statements of the Commissioners, please see the following links:
The proposal will have a 60-day public comment period following its publication on the SEC's website or 30 days following its publication in the Federal Register, whichever period is longer. Comments may be submitted: (1) using the SEC's comment form at https://www.sec.gov/rules/submitcomments.htm; (2) via e-mail to email@example.com (with “File Number S7-05-22" on the subject line); or (3) via mail to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-05-22.
We would like to thank Rodrigo Surcan and Thomas Canny in our New York office and Harrison Tucker and Justine Robinson in our Houston office for their work on this article.