On September 5, 2017, an amendment to SEC Rule 15c6-1 went into effect. The amendment shortened the standard settlement cycle from three business days after the trade date (“T+3”) to two business days after the trade date (“T+2”). The T+3 standard settlement timeline had been in place since 1995.
Why did the SEC change the rule?
The SEC believes that shortening the standard settlement cycle to T+2 will reduce credit, market, and liquidity risk and, ultimately, reduce systemic risk for all U.S. market participants. Canada is also changing to a T+2 settlement cycle. Most European Union members adopted a T+2 settlement cycle in 2014.
What does the rule actually say?
Rule 15c6-1 applies to brokers or dealers. The amended rule says that a broker or dealer may not effect or enter into a contract for the purchase or sale of a security that provides for payment of funds and delivery of securities later than the second business day after the date of the contract. The rule formerly required that settlement occur not later than the third business day after the date of the contract.
There are some exceptions to the T+2 settlement requirement. The parties to a transaction may agree to a different settlement cycle. In addition, the rule does not apply to certain securities, such as government securities, municipal securities, commercial paper, bankers’ acceptances, and commercial bills.
Most notably, the shortened settlement cycle does not apply to securities sold in cash-only firm commitment underwritings.
My company is thinking about raising capital—how does this affect me?
If your company is working with an underwriter for a firm commitment offering of securities for cash, the most important thing will be for deal teams to clarify the expected settlement cycle early in the process so that all parties are prepared and closing documents are ready at the appropriate time. Although the amended rule does not require that firm commitment offerings close on the T+2 schedule, underwriters may choose to settle on a T+2 basis to align with the settlement cycle for subsequent secondary trades.
Special Note for Banks. On September 1, 2017, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a notice of proposed rulemaking to shorten the standard settlement cycle for securities purchased or sold by national banks, federal savings associations, and FDIC-supervised depository institutions to T+2.
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Jonathan A. Greene, Alexander M. Donaldson, and Donald R. Reynolds are members of the Capital Markets practice group of Wyrick Robbins, which represents clients across a broad range of industries in connection with their significant financing transactions and advises public companies on SEC and stock exchange rules, securities law compliance, disclosure and corporate governance matters. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.