On February 9, 2022, the Securities and Exchange Commission (the “SEC”) proposed rule changes seeking to reduce risks in the clearance and settlement of securities. The proposed rule would shorten the standard settlement cycle for most broker-dealer transactions in securities from two business days after the trade date (“T+2”) to one business day after the trade date (“T+1”). The rule would also eliminate the four business day settlement cycle (“T+4”) for firm commitment offerings priced after 4:30 PM ET, implement new requirements for broker-dealers and registered investment advisers intended to improve the rate of same-day affirmations (thereby improving the processing of institutional trades), and implement new requirements for clearing agencies that are central matching service providers by facilitating straight-through processing.
Citing two recent and notable episodes of market volatility – in March 2020 following the outbreak of COVID-19 and in early 2021 resulting from the interest in meme stocks (which prompted some retail brokers to restrict trading of the affected stocks) – the SEC believes that shortening the settlement cycle and improving the institutional trade processes can help mitigate future securities market vulnerabilities and avoid trading disruptions, resulting in cost savings and increased operational efficiency for market participants. The SEC acknowledged the technological and operational costs that would result from a move to a T+1 settlement cycle. However, the SEC expects the anticipated benefits, namely, a better functioning and more efficient securities market, will outweigh those costs. In addition, as is the case now and consistent with the proposed rule, the parties to a transaction can expressly agree to a longer settlement period.
The current rules permit firm commitment offerings priced after 4:30 PM ET to be treated as made on the next business day, with a three business day settlement cycle (“T+3”), and were intended to allow market participants ample time to print and deliver final prospectuses. The SEC believes that the expanded application of the “access equals delivery” standard supports removing the longer T+3 settlement cycle.
Issuers, underwriters, and their counsel should be cognizant of the burden this proposed rule would place on them and, in particular, the accelerated workload in advance of pricing. Given the potential for a time crunch, deal teams should work together to ensure the steps required to close are in place prior to pricing.
In addition to proposing and seeking comment on shortening the settlement cycle to T+1, the proposal also requests public comment on “potential pathways” to a same-day standard settlement cycle (“T+0”). However, the SEC has not formally proposed rules to require a T+0 settlement cycle at this time.
If the proposal is adopted, the T+1 settlement cycle would be implemented by March 31, 2024. The proposed rule is summarized in the SEC’s Fact Sheet. The public comment period will be until April 11, 2022.
We will monitor this proposal and provide updates as appropriate. In the interim, if you have any questions about this proposal, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group at 585.232.6500 or 716.853.1616.
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