On February 15, 2023, the Securities and Exchange Commission (the “Commission”) adopted final rule amendments to shorten the standard settlement cycle for securities broker-dealer transactions from two business days after the trade date (T+2) to one business day after the trade date (T+1) with required compliance of the new rules beginning on May 28, 2024.  The Commission’s goal through the amendments is to promote investor protection, reduce risk and increase operational and capital efficiency.

Amendments to Rule 15c6-1

As amended, Rule 15c6-1(a) now prohibits broker-dealers from entering into a contract for the purchase or sale of a security that provides for payment of funds or delivery of securities later than the first business day after the date of the contract, unless otherwise agreed to by the parties. This prohibition does not apply to exempted securities, government securities, municipal securities, commercial paper, banker’s acceptances, commercial bills, or security-based swaps.

The amendments to Rule 15c6-1(c) also shorten the settlement cycle for firm commitment offerings for securities that are priced after 4:30 p.m. ET from T+4 to T+2, unless the parties agree to a later date at the time of the transaction, as the Commission does not believe that a T+1 settlement is long enough to prevent firm commitment offerings priced after 4:30 p.m. ET from failing to settle on time. The Commission noted that under the current T+4 settlement cycle, most firm commitment offerings settle in T+2.

Rule 15c6-1(d) enables underwriters and the parties to a transaction to agree, in advance of the transaction, to a settlement cycle other than the standard settlement cycle as specified in Rules 15c6-1(a) and (c). Significantly, the Commission did not amend this provision of the rule, noting that all existing exemptive orders issued pursuant to Rule 15c6-1 will remain in effect.

Allocations, Confirmations and Affirmations

The final rules also include new Rule 15c6-2 for broker-dealers to establish and maintain policies and procedures reasonably designed to ensure completion of allocations, confirmations and affirmations as soon as technologically possible. Specifically, Rule 15c6-2 will require a broker-dealer to either (i) enter into written agreements or (ii) establish, maintain and enforce written policies and procedures, in either case with the goal of ensuring the completion of allocations, confirmations and affirmations as soon as technologically practicable and no later than the end of the trade date.

Looking Ahead

The aforementioned amendments may have an effect on entities’ operational costs in order to achieve T+1 settlements.  Smaller entities and broker-dealers may have to implement changes to their business practices, as well as to their computer systems that would require new technology solutions to operate in a T+1 environment. Shortening the standard settlement cycle to T+1 can also have an additional impact on how market participants, including those that are small entities, comply with existing regulatory obligations that are related to the settlement cycle including shortening timeframes to effect the closeout of most types of fail-to-deliver positions under Rule 204 of Regulation SHO and written confirmation to be provided at or before completion of a transaction under the Exchange Act Rule 10b-10.

If you have any questions regarding the foregoing, please contact either of the partners listed below or your primary Seward & Kissel attorney.