United States: SEC Adopts Final Rules To Shorten The Time For Settling Securities Transactions

On February 15, 2023, the U.S. Securities and Exchange Commission (the "SEC") adopted final rules under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to shorten the standard settlement cycle for settling securities transactions in order to benefit investors and reduce the credit, market and liquidity risks in securities transactions faced by market participants. Transaction parties should be aware that the final rules reduce the settlement cycle to "T+1" as the new default for broker-dealer securities transactions but maintain the flexibility for parties to agree to a longer (or shorter) settlement period to accommodate transaction timelines.

Highlights of the Final Rules

The final rules amend Rule 15c6-1 under the Exchange Act to shorten the standard settlement cycle for most broker-dealer securities transactions from two business days after the trade date (T+2) to one business day after the trade date (T+1), unless the parties agree to an alternate settlement date at the time of the transaction. In addition, amended Rule 15c6-1 shortens the standard settlement cycle for firm commitment offerings priced after 4:30 p.m. Eastern Time from four business days after the trade date (T+4) to two business days after the trade date (T+2), unless the parties agree to an alternate settlement date at the time of the transaction.

The SEC also adopted a new Rule 15c6-2 under the Exchange Act that requires broker-dealers to either enter into written agreements or establish, maintain and enforce written policies and procedures reasonably designed to ensure allocations, confirmations and affirmations are completed as soon as technologically practicable, but no later than the end of the trade date. In light of the new T+1 environment, the SEC indicated such "same-day affirmation" would facilitate improvements in settlement processing and error reduction. In addition, the final rules amend Rule 204-2 under the Investment Advisers Act of 1940 to require registered investment advisers to make and keep records of the allocations, confirmations and affirmations for securities transactions subject to Rule 15c6-2.

Further, the SEC adopted a new Rule 17Ad-27 under the Exchange Act and amended Regulation S-T to require clearing agencies that provide central matching services to establish, implement, maintain and enforce policies and procedures reasonably designed to facilitate straight-through processing and to submit an annual report to the SEC via EDGAR relating to the progress of such straight-through processing.

This rulemaking comes on the heels of market volatility associated with the COVID-19 pandemic and the heightened interest in certain "meme" stocks in 2021. In the SEC's press release announcing the final rules, SEC Chair Gary Gensler stated that the rules will "reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets."

Next Steps

The final rules will become effective 60 days after publication in the Federal Register, and the compliance date for the final rules is May 28, 2024.

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