CLS Blue Sky Blog

Davis Polk Discusses SEC Adoption of T+1 Settlement, Effective May 2024

The SEC adopted a final rule to shorten the standard settlement cycle for most securities transactions from two business days (T+2) to one business day following the trade date (T+1). Many market participants had favored a September 3, 2024 compliance date (falling on the Tuesday after Labor Day) to provide more time to prepare for the transition to the shortened cycle, but the SEC adopted a May 28, 2024 compliance date (the Tuesday after the Memorial Day weekend), an extension of two months from the proposed rule.

The final rule is intended to benefit investors by reducing the credit, market, and liquidity risks arising from unsettled securities transactions. In connection with the shortened settlement timeline, the final rule also adds procedural requirements on broker-dealers relating to allocations, confirmations and affirmations, as well as record-keeping requirements for registered investment advisers.

Shortened settlement cycle

Rule 15c6-1 currently requires that most broker-dealer transactions settle by T+2, and this requirement has been gradually shortened from T+5 over the last several decades. Transactions involving certain securities—such as government bonds, commercial paper, and some limited partnership interests—are exempt from the rule. For firm commitment offerings that are priced after 4:30 p.m. Eastern Time, the current rules default settlement to a T+4 cycle, although in practice most equity and equity-linked offerings settle on T+3.

We expect securities transactions that settle on a longer than T+1 cycle to continue to include disclosure alerting investors to that fact in offering documents as is currently the practice. All parties involved in the closing process for securities offerings that settle on a T+1 standard settlement cycle (or T+2 for firm commitment offerings that are priced after-market) will also face a shorter time period to prepare for closing.

The SEC indicated it would continue to consider the feasibility of a move to T+0 settlement (i.e., settlement by end of trade day) in the future and seek to address the associated challenges with market participants.

Same-day allocations and affirmations

Investment managers that effect block trades for the accounts of several customers simultaneously need to provide post-trade underlying account allocation instructions to the broker or custodian before these transactions can settle. Similarly, certain transactions, primarily involving institutional trades, require post-trade exchange of confirmations and affirmations, in order for the parties to compare trade details and facilitate settlement with third-party custodians. These processes are often, but not always, completed on the trade date.

In order to facilitate T+1 settlement, the final rule requires a broker-dealer to either (i) enter into written agreements, or (ii) establish, maintain, and enforce written policies and procedures reasonably designed, in either case to ensure completion of allocations, confirmations, and affirmations as soon as practicable and no later than the end of trade date.

The final rule also amends Rule 204-2 under the Investment Advisers Act of 1940 to require investment advisers to make and keep records of confirmations and time- and date-stamped allocations and affirmations, with respect to transactions that are subject to the requirements of Rule 15c6-2(a).

Impact on other rules

Reducing the standard settlement cycle to T+1 will have follow-on effects on various other rules or market practices that are themselves tied to the standard settlement cycle, closing or the settlement date, typically reducing those time frames by one day. These include:

While the SEC considered certain of these follow-on effects, it determined not to adopt any related rule changes, reasoning in part that the period running to the compliance date provides sufficient time for market participants to adapt to the shortened settlement cycle.

This post comes to us from Davis, Polk & Wardwell LLP. It is based on the firm’s memorandum, “SEC adopts T+1 settlement effective May 2024,” dated February 17, 2023, and available here.

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