On February 15, 2023, the Securities and Exchange Commission (“SEC”) adopted several amendments regarding Rule 15c6-1, which governs the settlement cycle for routine securities transactions effected by broker-dealers. Rule 15c6-1 applies to the issuance of new securities by publicly reporting companies in a transaction effected by a broker-dealer.
The SEC indicated that the purpose of the amendments is to benefit investors by reducing the credit, market and liquidity risks faced by investors in securities transactions.
We have summarized the amendments below and also provide information on when compliance must begin.
Rule 15c6-1 Amendments
T+1 Settlement Requirement
The amended rule will require most routine securities transactions effected by broker-dealers to settle one business day after the date of the transaction, known as “T+1”. This includes not only regular stock trades in the open market, but also applies to any issuance of securities by a publicly reporting company that involves a broker-dealer, and would cover initial public offerings, follow-on offerings and the like. Currently, such transactions must settle within two business days, or T+2. The shortened settlement period continues a trend begun by the SEC in 1993, when the settlement period was shortened from five days to three, and was subsequently shortened to two days in 2017.
In adopting the amendments, the SEC stated that the shorter settlement period can protect investors, reduce risk in the financial system and increase operational efficiency in the securities markets. The amendments were in large part driven by the “meme” stock events of 2021, such as AMC and GameStop, with investor interest spiking and then collapsing in a very short time, usually before many trades could be settled. This underscores that the main target of the shorter settlement period is retail and similar trades rather than financing activities.
In adopting the shorter settlement period, the SEC retained the Rule’s current provision that allows parties to a securities transaction to agree at the time of the transaction to a longer settlement period. This ability will allow issuers and their broker-dealers to accommodate elements of a financing transaction that might require more time to settle, such as the preparation of warrants. If a longer period is agreed to, disclosure of the settlement period should be made to investors.
Despite the shortened settlement period, the SEC also retained the current exemption for securities sold for cash and priced after 4:30 p.m. and that are sold by an issuer to an underwriter pursuant to a firm commitment underwritten offering. However, the current settlement period of 4 business days has been reduced to two. Currently, in most cases these underwritten offerings settle in three days rather than the allowed four. Acknowledging that some offerings will require more time than the two days to settle due to documentation and other needs, the SEC also retained the current ability of the parties to such an underwritten transaction to agree at the time they enter into the agreement for the transaction to adopt a longer settlement period. As with the exemption for other offerings discussed above, this exemption will allow time for preparation of necessary documentation and other elements of an offering that would demand more time to accomplish. As noted above, if a longer period is agreed to, disclosure of the settlement period should be made to investors.
In adopting the amendments, the SEC also retained its ability to create further exemptions by order.
Additional Rule Amendments
The SEC amendments also impact rules governing procedural requirements on broker-dealers relating to allocations, confirmations and affirmations of securities transactions, as well as record-keeping requirements for registered investment advisors.
The amendments, including the T+1 settlement rule, will become effective 60 days after publication in the Federal Register; however, compliance does not begin until May 28, 2024.
Further Shortening of Settlement Period?
In proposing the amendments as well as in the adopting release, the SEC noted that the transition to a T+1 settlement period can be a useful step in identifying paths to a T+0 settlement periods, in which trades settle on the same day as the parties reach agreement on the transaction terms. Given the SEC’s recognition of elements of a securities transaction that may require additional time, we would expect that the same exemptions discussed above would be retained should a T+0 settlement be approved in the future.
Alexander M. Donaldson is a member of the Capital Markets practice group of Wyrick Robbins, which represents public company clients across a broad range of industries in connection with their SEC reporting and corporate matters, and significant financing transactions. 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.