Securities Regulation and Corporate Governance

​​As previously reported on our Securities Regulation and Corporate Governance Monitor (available here and here), on May 28, 2024, the standard settlement cycle for most broker-dealer transactions will be shortened from “T+2" to “T+1," subject to certain exceptions.  The SEC approved this change in its rule amendments to Rule 15c6-1(a) under the Exchange Act adopted on February 15, 2023.  SEC Chair Gary Gensler today issued a statement (available here) noting that the amendments will “make our market plumbing more resilient, timely, and orderly."  Similar amendments have been approved by the Canadian Securities Administrators and will come into effect in Canada on May 27, 2024. 

What is T+1?

• Under the new “T+1" settlement cycle, all applicable securities transactions from U.S. financial institutions will settle within one business day of their transaction date. 
• For example, trades subject to the “T+2" settlement cycle made on Friday, May 24, 2024 and the “T+1" settlement cycle made on Tuesday, May 28, 2024 will both settle on Wednesday, May 29, 2024.

What Securities Will This Impact?

• The “T+1" settlement cycle will apply to the same securities transactions currently covered by the “T+2" settlement cycle prior to the amendments. 
  
• These include transactions for stocks, bonds, exchange-traded funds, certain mutual funds and limited partnerships that trade on an exchange.

Certain Exceptions

• For a firm commitment underwritten registered offering priced after 4:30 p.m. Eastern Time, the standard settlement cycle will be “T+2," unless the parties agree to a longer settlement cycle (Rule 15c6-1(c)).  For example, a trade subject to this exception made on Tuesday, May 28, 2024 after 4:30 p.m. Eastern Time will settle on Thursday, May 30, 2024.
• The issuer and the managing underwriter in a firm commitment offering may expressly agree to an alternate date for settlement (Rule 15c6-1(d)).
  
• Additional exceptions include exempted securities, government securities, municipal securities, commercial paper, bankers' acceptances, commercial bills, contracts to purchase limited partnership interests that are not listed on an exchange and security-based swaps.

Additional Considerations

• Parties in fixed-income or other complex transactions, including those listed below, may still opt for extended settlement under Rule 15c6-1(d):
• offerings of fixed-income securities (other than equity-linked securities), especially debt refinancings with a concurrent redemption or tender offer;
• overnight block trades or bought deals;
• offshore transactions involving a non-U.S. issuer and/or foreign currencies;
• offerings of restricted, certificated, margined, or pledged securities; and
• transactions with additional parties involved, such as selling shareholders.
• It is advisable to review and negotiate all closing documents in advance and, if applicable, communicate an election to extend the settlement cycle in reliance on Rule 15c6-1(d) to the parties early in the transaction and disclose the extended settlement cycle in the applicable offering documents.

In addition, effective May 28, 2024, the SEC has adopted new Rule 15c6-2 under the Exchange Act, which requires a broker-dealer to either (a) enter into written agreements with the relevant parties to ensure completion of the allocation, confirmation, affirmation or any combination thereof, for the transactions no later than the end of the day on trade date, as specified in the rule, or (b) establish, maintain and enforce written policies and procedures reasonably designed to ensure such completion of allocations, confirmations and affirmations no later than the end of the day on trade date.

The amendments discussed above reflect the SEC's longstanding objective to promote timely, orderly and efficient settlement of securities transactions.  The SEC believes that a shortened settlement cycle can protect investors, reduce risk in the financial system and increase operational and capital efficiency in the capital markets.  For additional information provided by the SEC, please see a risk alert, responses to frequently asked questions and an Investor Bulletin on this topic, each issued on March 27, 2024.

Thank you to Lawrence Lee and Rodrigo Surcan for their work on this article.