Shortening the Securities Transaction Settlement Cycle

A Small Entity Compliance Guide[1]

Amendments to Rule 15c6-1 under the Securities Exchange Act of 1934 (“Exchange Act”)

The amendments to Rule 15c6-1(a) under the Exchange Act shorten the standard settlement cycle for most broker-dealer transactions from T+2 to T+1. Specifically, paragraph (a) of Rule 15c6-1, as amended, prohibits broker-dealers from effecting or entering into a contract for the purchase or sale of a security (other than certain securities subject to an exception) that provides for payment of funds and delivery of securities later than the first business day after the date of the contract, unless otherwise expressly agreed to by the parties at the time of the transaction.

Subject to the exceptions enumerated in the rule, the prohibition in paragraph (a) of Rule 15c6-1 applies to all securities. Rule 15c6-1(a) does not apply to a contract for an exempted security, government security, municipal security, commercial paper, bankers’ acceptances, or commercial bills. The Commission also amended paragraph (b) of Rule 15c6-1 to exclude security-based swaps from the requirements under paragraph (a) of the rule, and amended paragraph (c) of Rule 15c6-1 to shorten the standard settlement cycle for firm commitment offerings priced after 4:30 p.m. Eastern Time (“ET”) from four business days after the trade date (“T+4”) to T+2.

The Commission did not substantively amend the remaining paragraphs of the rule, which provide additional exceptions for: (i) contracts for the purchase and sale of limited partnership interests that are not listed on an exchange or for which quotations are not disseminated through an automated quotation system of a registered securities association; and (ii) contracts for the purchase and sale of securities that the Commission may from time to time, taking into account then existing market practices, exempt by order.

Certain broker-dealers, including those that are small entities, may need to make changes to their business operations and incur certain costs to operate in a T+1 environment. For example, conversion to a T+1 standard settlement cycle may require broker-dealers, including those that are small entities, to make changes to their business practices, as well as to their computer systems, and/or to deploy new technology solutions. In addition, broker-dealers, including small entities, may need to test changes to systems, operations, policies, and procedures to operate in a T+1 environment. Broker-dealers, including small entities, that serve retail customers may also need to educate their customers regarding the shorter standard settlement cycle that the amendment to Rule 15c6-1(a) establishes.

Separately, shortening the standard settlement cycle could have an ancillary impact on how market participants, including those that are small entities, comply with existing regulatory obligations that are related to the settlement cycle. For example, shortening the standard settlement cycle to T+1 reduces the time frames to effect the closeout of most types of fail-to-deliver positions under Rule 204 of Regulation SHO.  The applicable closeout date for a fail-to-deliver position can differ depending on its Rule 204 categorization, including whether it results from a short sale, a long sale, or bona fide market making activity.

In addition, shortening the standard settlement cycle to T+1 shortens the timeframe for broker-dealers, including those that are small entities, to comply with the requirement under Exchange Act Rule 10b-10 to give or send a written confirmation at or before completion of the transaction.  Specifically, Rule 10b-10 requires that a broker-dealer “give or send” the confirmation prior to settlement of a transaction; however, it does not require that the Rule 10b-10 confirmation be received prior to settlement.  In addition, the amendment to Rule 15c6-1(a) also will reduce the number of days that broker-dealers, including those that are small entities, will have to obtain possession of customer securities before being required to close out a customer transaction under Exchange Act Rule 15c3-3(m).

New Rule 15c6-2 under the Exchange Act

To promote the completion of allocations, confirmations, and affirmations by the end of trade date for transactions between broker-dealers and their institutional customers, new Rule 15c6-2 requires a broker-dealer to either enter into written agreements as specified in the rule or establish, maintain, and enforce written policies and procedures reasonably designed to address certain objectives related to completing allocations, confirmations, and affirmations as soon as technologically practicable and no later than the end of trade date.  Paragraph (a) of Rule 15c6-2 provides that a broker-dealer can take either of two approaches to comply with the rule.  A broker dealer can, pursuant to paragraph (a)(1) of the rule, enter into written agreements with the relevant parties (such as the customer, the customer’s investment adviser, the customer’s custodian, or any other agent acting (directly or indirectly) on behalf of the customer) to ensure completion of allocations, confirmations, and affirmations as soon as technologically practicable and no later than the end of the day on trade date; or pursuant to paragraph (a)(2) of the rule, establish, maintain, and enforce written policies and procedures reasonably designed to ensure completion of allocations, confirmations, and affirmations as soon as technologically practicable and no later than the end of the day on trade date.

In addition, paragraph (b) provides, for a broker-dealer that determines to establish, maintain, and enforce written policies and procedures pursuant to Rule 15c6-2(a), that such policies and procedures must:

• Identify and describe any technology systems, operations, and processes used to coordinate with other relevant parties to ensure completion of the allocation, confirmation, or affirmation process for the transaction;
• Set target time frames on trade date for completing the allocation, confirmation, and affirmation for the transaction;
• Describe procedures for communicating trade information promptly, investigating any discrepancies in trade information, and adjusting trade information to help ensure that the allocation, confirmation, and affirmation can be completed by the target time frames on trade date;
• Describe how the broker-dealer plans to identify and address delays if another party is not promptly completing the allocation or affirmation for the transaction, or if the broker-dealer experiences delays in promptly completing the confirmation; and
• Measure, monitor, and document the rates of allocations, confirmations, and affirmations completed as soon as technologically practicable and no later than the end of the day on trade date.

Rule 15c6-2 imposes recordkeeping requirements on broker-dealers that are small entities.  In addition, the rule may impact certain broker-dealers, including those that are small entities, to the extent that broker-dealers may need to make changes to their business operations and incur certain costs in order to implement the policies and procedures. These efforts may require broker-dealers, including those that are small entities, to make changes to their business practices, as well as to their computer systems, and/or to deploy new technology solutions.

Amendments to Rule 204-2 under the Investment Advisers Act of 1940 (“Advisers Act”)

The Commission also adopted amendments to Rule 204-2 under the Advisers Act that require all registered investment advisers, including some small entities, to make and keep certain records for any transaction that is subject to the requirements of Rule 15c6-2(a). Those records include each confirmation received, and any allocation and each affirmation sent or received, with a date and time stamp for each allocation and affirmation that indicates when the allocation and affirmation was sent or received. Each of these records will be required to be kept in the same manner, and for the same period of time, as other books and records required to be kept under Rule 204-2.

Compliance Date

The effective date of the amendments and new rules discussed above is May 5, 2023.  The compliance date is May 28, 2024.

Other Resources

The adopting release can be found on the Commission’s website at https://www.sec.gov/rules/final/2023/34-96930.pdf.

Contacting the Commission

The Commission’s Division of Trading and Markets is available to assist small entities with questions regarding these amendments and new rules. Questions may be directed to the Division of Trading and Markets by email at tradingandmarkets@sec.gov or by telephone at (202) 551-5777.