Starting May 28, 2024, the settlement cycle for most transactions in U.S. securities will shorten from T+2 to T+1 as a result of rule amendments adopted by the Securities and Exchange Commission (SEC).¹ The SEC also adopted a new rule regarding the processing of institutional trades by broker-dealers and amended the recordkeeping requirements applicable to investment advisers. The compliance date for the amendments and new rule is also May 28, 2024.

As discussed below, the amendments and new rule will have implications for many investment advisers. Advisers should therefore review their settlement practices, compliance policies and procedures (including their recordkeeping policies) and related Form ADV disclosures, and coordinate with their broker-dealer counterparties in connection with the new requirements regarding same-day affirmation.

T+1 Settlement Cycle

The SEC adopted amendments to Rule 15c6-1 under the Securities Exchange Act of 1934 (Exchange Act) to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date (T+2) to one business day after the trade date (T+1).²

Same-Day Affirmation

The SEC adopted new Rule 15c6-2 under the Exchange Act, which imposes on broker-dealers requirements designed to promote the completion of allocations, confirmations and affirmations³ by the end of the trade date (known as “same-day affirmation”) for transactions between broker-dealers and their institutional customers. 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.

Although the Rule 15c6-2 requirements are imposed on broker-dealers, advisers are likely to be impacted. Where a broker-dealer uses a written agreement, an adviser will generally be a party to the agreement and therefore subject to contractual obligations. Where a broker-dealer uses policies and procedures, an adviser will generally be expected or required to comply with the policies and procedures (e.g., with respect to affirmation cut-off times). Accordingly, advisers should consider the approach used by each of their broker-dealer counterparties and evaluate whether their settlement practices will meet the broker-dealer’s expectations regarding Rule 15c6-2 compliance.⁴

Given the compressed timeframe of the T+1 settlement cycle and the new same-day affirmation requirements, advisers may encounter operational challenges in completing the affirmation process in accordance with the requirements of their broker-dealer counterparties. For example, under the current T+2 framework, an adviser that completes an aggregated order over the course of a trading day can complete the settlement process by affirming all trades by the cut-off time of 11:30 a.m. ET the next day, whereas under the new T+1 framework, the adviser will be required to affirm trades (including the allocations thereof) by the cut-off time of 9:00 p.m. ET on the trade date. Earlier cut-off times imposed by broker-dealers would further compress such timing and may require an adviser to adjust its trade allocation practices and policies to accommodate the new required cut-off times.

Adviser Recordkeeping Requirements

The SEC amended Rule 204-2 under the Investment Advisers Act of 1940 to require advisers to make and keep, for any transaction that is subject to the requirements of Rule 15c6-2:

1. each confirmation received; and
2. any allocation and each affirmation sent or received, with a date and time stamp⁵ for each allocation and affirmation that indicates when the allocation and affirmation was sent or received.

Many advisers already make and keep originals and/or electronic copies of allocations, confirmations and affirmations in their internal systems or in third-party portfolio management or order management systems. However, advisers should review their processes to determine whether all confirmations, allocations and affirmations are retained and whether allocations and affirmations are appropriately date- and time-stamped. Advisers should also update their written policies to reflect the amended Rule 204-2.

Seward & Kissel has updated its model compliance manual to reflect the new recordkeeping requirements.

Risk Alert from SEC Staff

The SEC’s Division of Examinations (Division) published a Risk Alert regarding T+1 settlement, same-day affirmation and related recordkeeping requirements.⁶ The Risk Alert highlights the importance of preparing for the new requirements and states that the Division will continue to conduct examinations and engage in outreach to review and assess firms’ preparedness. The Risk Alert also includes an appendix providing a sample list of information that the Division may request during examinations, including information regarding changes to policies and procedures reflecting the new requirements.

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If you have any questions regarding the foregoing, please contact your Investment Management Group attorney at Seward & Kissel LLP.