SEC Releases Materials on T+1 Settlement Cycle Adoption in Advance of May Compliance Date

Who may be interested: Registered-Investment Companies; Investment Advisers; Broker-Dealers

Quick Take: In May 2023, the SEC adopted several Rules and Rule amendments which, among other things, shorten the standard settlement cycle for the majority of securities transactions from within two business days of their trade date (“T+2”) to within one business day of their trade date (“T+1”); and require broker-dealers to make same-day affirmations for securities transactions subject to the shortened settlement cycle. The SEC’s Rule amendments adopting the T+1 settlement cycle generally prohibit broker-dealers from effecting or entering into contracts for the purchase or sale of a security (other than exempted securities and security-based swaps) that provide for payment of funds and delivery of securities later than T+1. In advance of the May 28, 2024 compliance date for the T+1 settlement cycle, the SEC staff released Frequently Asked Questions (“FAQs”), an Investor Bulletin, and a Risk Alert discussing the impacts that the shortened settlement cycle will have.

I. FAQs

The FAQs currently address seven questions, including, among other topics, how market participants located outside the U.S. can assess whether their securities transactions will be subject to the shortened settlement cycle; and whether the same-day-affirmation requirements will apply to transactions where parties have agreed to extend settlement pursuant to Rule 15c6-1 of the Exchange Act. The FAQs also specify that an investment adviser’s obligation to maintain records under Rule 204-2(a)(7)(iii) (communications relating to transactions) of the Advisers Act does not vary based on the source or form of the allocation, confirmation or affirmation, or on whether the allocation, confirmation or affirmation is sent or received by a particular deadline.

II. Investor Bulletin

The Investor Bulletin is written for retail investors, and explains what the settlement process is and how it will change with a settlement cycle of T+1 beginning on May 28th. The Investor Bulletin also explains that if investors have securities certificates, they may need to deliver their certificates to their broker-dealer earlier or through different means than they did previously, and if investors hold their securities with their broker-dealer, their broker-dealer will deliver the securities one day earlier. The Investor Bulletin also states that the T+1 settlement cycle may impact certain provisions of investors’ margin agreements.

III. Risk Alert

The Risk Alert, issued by the Staff of the SEC’s Division of Examinations (“Exams”), provides broker-dealers, clearing agencies and investment advisers (“Registrants”) with information about the scope and content of examinations and outreach Exams will be conducting to assess Registrants preparedness for the shortening of the settlement cycle and other changes made in response to the SEC’s final rules. The Risk Alert highlights four specific areas for Registrants, including:

1. amended Rule 15c6-1(a) under the Exchange Act, setting the T+1 settlement cycle;

2. new Rule 15c6-2 under the Exchange Act requiring same day allocations, confirmations and affirmations for transactions between broker-dealers and their institutional clients;

3. new Rule 17Ad-27 under the Exchange Act requiring clearing agencies that are central matching service providers to adopt and implement policies and procedures reasonably designed to facilitate straight-through processing; and

4. amendments to Rule 204-2 under the Advisers Act that require all registered investment advisers to make and keep certain records (including any confirmation received, and any allocation and each affirmation sent or received, with a date and time stamp for each allocation and affirmation) for any transaction that is subject to the requirements of Rule 15c6-2.

The Risk Alert specifies that Exams will review how Registrants have evaluated the potential impact of the final rules on their: (i) business activities; (ii) operations and risk assessments; (iii) services; and (iv) customers, clients, and/or other relevant parties. Specifically, Exams expects to focus on operational readiness, activities in clearance and settlement, and disclosures and communications to customers, clients, and vendors. Objects of examination will include changes to written agreements or processes made in preparation for the final rule, changes to policies and procedures with respect to straight-through processing, and new recordkeeping and reporting requirements.

The SEC’s FAQs are available here; the Investor Bulletin is available here; and the Risk Alert is available here.