On February 9, 2022, the Securities and Exchange Commission (the “Commission”) announced several proposed rule changes, including to shorten the standard settlement period for most broker-dealer transactions from the current two business day settlement period (T+2) to one business day (T+1).  To facilitate the implementation of the T+1 settlement period, the proposed rule changes would eliminate the separate T+4 settlement period for firm commitment offerings priced after 4:30 p.m. ET, impose restrictions on broker-dealers and investment advisors with respect to their allocation, confirmation and affirmation processes of certain trade information, including requiring “same-day affirmation” for broker‑dealer transactions with institutional customers, and require clearing agencies that are central matching service providers (“CMSPs”) to implement policies and procedures to facilitate straight-through (i.e. fully-automated) processing. 

The Commission has been working to reduce the settlement period for decades, as it believes the timely delivery of securities will promote investor protection, risk reduction and increase operational efficiency.  The proposed rule changes are another step towards the Commissions ultimate goal of generally requiring same day settlement.  While the shortened settlement period will result in faster closings and receipt of proceeds for issuers, it will require legal counsel, auditors and other service providers to adjust to the shortened timeline. 

If adopted, the Commission would require compliance with the proposed rule by March 31, 2024. Each of the proposals is discussed below in further detail.

Reducing the Standard Settlement Period

Currently, Rule 15c6-1(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), generally prohibits broker-dealers from entering into contracts that provide for the payment of funds and delivery of securities later than the second business day following the date of the contract (i.e., T+2). Rule 15c6-1(c) of the Exchange Act provides for a settlement period of T+4 for firm commitment offerings that are priced after 4:30 pm ET. In each case, the parties have the ability to contractually agree to an alternative settlement period.

The proposed rule would delete Rule 15c6-1(c), thus eliminating the T+4 settlement period for firm commitment offerings commenced after 4:30 pm ET, and amend Rule 15c6-1(a) to require the clearance and settlement of securities (including for a firm commitment offering) within one business day of the trade date (T+1) by prohibiting broker-dealers from entering into a contract providing for the payment of funds and delivery of securities after the second business day following the trade date.  Under the proposed rule, parties will retain the ability to contract for an alternative settlement period at the time of the transaction; however, the Commission was quick to emphasize that use of the override provision should be limited to “unusual cases to ensure that the settlement period set by Rule 15c6-1(a) is in fact the standard settlement period,”^[1] and with respect to firm commitment offerings, can be utilized “when needed to manage obligations associated with the firm commitment offering.”^[2]

Tightening up the Allocation, Confirmation and Affirmation Cycle

The Commission is also proposing the following rules and amendments to improve the rate of same-day affirmations and to facilitate straight-through processing.

Processes Completed No Later Than End of Trade Date

Proposed Rule 15c6-2, would prohibit broker-dealers from engaging in allocation, confirmation or affirmation processes without a written agreement in place with the applicable customer that requires such processes to be completed as soon as “technologically practicable” and no later than the end of the trade date.  The Commission believes that this new rule may facilitate the use of automated methods for trade processes, thus reducing reliance on manual processes, and that it would reduce the number of errors that occur during institutional trade processing (which impacts settlement timing), thus facilitating compliance with the shortened timeframe proposed under Rule 15c6-1.

Record Keeping Rule of Investment Advisors

The proposed amendment to Rule 204-2 of the Advisers Act would impose record-keeping obligations on investment advisors with respect to allocations, confirmations and affirmations for contracts to which they are a party under Rule 15c6-2.  The amendment would require investment advisers to maintain records of all confirmations received from broker-dealers and allocations and affirmations sent by the investment adviser to a broker-dealer, which allocations and affirmations would have to be date and time stamped to indicate when it was sent to the broker-dealer.

New Requirements for Central Matching Service Providers

CMSPs coordinate among broker-dealers, investment advisers, institutional investors and custodians to facilitate the confirmation of trade details (i.e., the allocation, confirmation and affirmation process and the matching of institutional trades) and are able to streamline the process, when utilized.  Proposed Rule 17Ad-27 would require CMSPs to establish, implement, maintain and enforce policies and procedures to facilitate straight-through processing of broker-dealer transactions.  The Commission believes that reducing the use of tools requiring manual processing will facilitate the development of more efficient, automated systems for the clearance and settlement of securities transactions.  

CMSPs would also be required to submit, via the Commission’s Electronic Data Gathering, Analysis and Retrieval system (EDGAR), annual reports to the Commission describing their existing policies and procedures for facilitating automatic processing, their progress with respect to same, and any future plans to facilitate and promote automatic processing during the following 12-month period.