The SEC has adopted an amendment to Rule 15c6-1(a) of the Exchange Act (the Settlement Cycle Rule) shortening the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (“T+3”) to two business days after the trade date (“T+2”). The compliance date for the amendment is September 5, 2017. The new requirement will prohibit broker-dealers from effecting or entering into a contract for the purchase or sale of a security (other than exempted securities, government securities, municipal securities, commercial paper, bankers’ acceptances, and commercial bills) that provides for payment of funds and delivery of securities later than the second business day after the date of the contract, unless otherwise expressly agreed to by the parties at the time of the transaction.
Since 1993, T+3 has been the standard settlement cycle for broker-dealer transactions. Advancements in technology, the desire to reduce market and credit risk from unsettled trades and the transition of certain international markets to a two day settlement cycle led the SEC to make the move from T+3 to T+2. The parties to a trade will retain the ability to utilize a longer settlement cycle by expressly agreeing to do so at the time of the trade.
While the new T+2 settlement cycle is likely achievable for routine capital markets transactions like the issuance of common stock or investment grade debt by repeat issuers, more complex offerings may be difficult to close on this timetable. As has been the case under the T+3 cycle, issuers will be able to opt into a longer, alternative settlement cycle by clearly disclosing that they intend to settle on a longer cycle. In such instances, initial purchasers who wish to trade such securities prior to two business days before the closing of the initial trade will be required to specify an alternative settlement cycle at the time of any such secondary trade to prevent a failed settlement.
One area where this change may have an unexpected impact is the settlement time for payment in tender offers. Rule 14e-1(c) of the Exchange Act requires a bidder to promptly pay the consideration offered upon termination (i.e., expiration) of the tender offer. While “promptly” is undefined in the rule, the SEC has stated that “this standard may be determined by the practices of the financial community, including current settlement practices.” In most cases, the payment of funds and delivery of securities occurs by the third business day after the transaction date. In light of the new T+2 settlement cycle, it is quite possible the SEC Staff will begin to take the position that the “prompt payment” obligation requires a bidder to pay the consideration offered no later than the second business day after an offer expires.
Special thanks to John McDonnell for preparing this post.