On March 27, 2024, the staff of the SEC’s Division of Examinations issued a risk alert highlighting its intent to focus during examinations and outreach on market participants’ preparations for the shortening of the standard settlement cycle for most broker-dealer transactions from two business days (T+2) to one business day (T+1) after the trade date, with compliance required by May 28, 2024.  The risk alert follows the February 15, 2023 SEC adoption of final rules to shorten the standard settlement cycle, as summarized by attorneys in Vedder Price’s Investment Services group here.

The staff noted that the transition to T+1 settlement will impact various market participants, requiring changes to their business practices, computer systems and technology solutions, as well as potential changes to how participants comply with existing regulatory requirements, and emphasized that market participants must prepare for and understand these impacts in order to successfully manage the transition.  The staff also highlighted the impacts of other new rules and rule amendments designed to facilitate T+1 settlement, which will also require compliance by May 28, 2024, including changes to institutional trade processing by broker-dealers and certain clearing agencies, as well as adviser recordkeeping.

T+1: Amendments to Rule 15c6-1 under the Securities Exchange Act of 1934

Subject to certain exceptions, the amendments to Rule 15c6-1 under the Exchange Act will prohibit broker-dealers from effecting security purchase or sale transactions that provide for payment of funds and delivery of securities (i.e., settlement) later than T+1, unless otherwise expressly agreed to by the parties at the time of the transaction.

Institutional Trade Processing: New Exchange Act Rules 15c6-2 and 17Ad-27

To facilitate T+1 settlement, new Rule 15c6-2 under the Exchange Act will require broker-dealers either to enter into written agreements with the relevant parties or to establish, maintain and enforce written policies and procedures reasonably designed to ensure completion of allocations, confirmations and affirmations (ACAs) for institutional securities transactions as soon as technologically practicable and no later than the end of trade date.  Additionally, new Rule 17Ad-27 under the Exchange Act will require clearing agencies that are central matching service providers (CMSPs) (as defined in the Exchange Act) to establish, implement, maintain and enforce written policies and procedures reasonably designed to facilitate straight-through processing (STP) of securities transactions (i.e., automated securities transaction processing) and to file an annual report regarding their progress in facilitating STP.

Recordkeeping: Amendments to Rule 204-2 under the Investment Advisers Act of 1940

The SEC also adopted amendments to the recordkeeping requirements under Rule 204-2 under the Advisers Act to require advisers to “make and keep records of the allocations, confirmations, and affirmations for securities transactions subject to the requirements of Rule 15c6-2.”

Examinations and Outreach

The staff noted that in reviewing and assessing preparations for T+1 settlement through examinations and outreach, it may review, among other things:

• whether and how market participants have evaluated the potential impact of the final rules on their business activities, operations and risk assessments, services, and customers, clients and/or other relevant parties;
• preparations related to clearance and settlement, custodial or prime brokerage services, securities lending recall activities and payment activities, trade allocation and trade fail management, and custodian communication;
• preparations related to operational readiness (e.g., changes to systems, policies or processes, and information related to any testing events);
• disclosures, representations and/or communications to customers, clients and/or vendors regarding changes related to T+1 settlement; and
• preparations related to the ACA process and any changes to written agreements or processes, policies and procedures designed to facilitate STP, and new recordkeeping and reporting requirements.

The risk alert also includes in an appendix the types of information and documents that may be reviewed in examinations and outreach.  The staff encourages market participants to review the February 15, 2023 adopting release and related guidance in preparation for the transition to T+1 settlement.

The risk alert is available here and the related announcement is available here.