SEC Adopts T+2 Settlement Cycle and Hyperlink Requirement for Exhibits

by Shearman & Sterling LLP

The SEC recently adopted rule amendments to:

  • shorten the standard settlement cycle for most broker-dealer securities transactions to two business days following the trade date, or T+2; and

  • require registrants to include a hyperlink to each exhibit listed in the exhibit index of a periodic report, current report or registration statement.

The amended rules take effect in September 2017.

T+2 Settlement Cycle

On March 22, 2017, the SEC adopted a rule amendment to shorten the standard settlement cycle for most broker-dealer securities transactions to T+2, from the current standard settlement cycle of three business days following the trade date, or T+3. The final rule prohibits a broker-dealer from effecting or entering into a contract for the purchase or sale of a security (other than an exempted security, government security, municipal security, commercial paper, bankers’ acceptances or commercial bills) that provides for payment of funds and delivery of securities later than the second business day after the date of the contract, unless otherwise expressly agreed to by the parties at the time of the transaction. The compliance date for the new T+2 settlement cycle is September 5, 2017.

The purpose behind shortening the standard settlement cycle is to reduce credit, market and liquidity risk by reducing the total number and market value of unsettled trades outstanding at any one point in time. The SEC also believes that shortening the standard settlement cycle will promote technological innovation and changes in market infrastructures and operations that will incentivize market participants to further pursue more operationally and technologically efficient processes. According to the SEC, these may lead to further shortening of the standard settlement cycle in the future. Moreover, implementing the T+2 settlement cycle harmonizes the U.S. market with most European and certain Asian-Pacific markets that have already moved to a T+2 settlement cycle.

Parties to a transaction will continue to be able to vary the standard settlement cycle by express agreement. In firm commitment underwritten offerings for cash, the parties will continue to be deemed to have agreed to an alternate settlement date if that date was agreed between the issuer and the managing underwriter for all securities sold in the offering. The new T+2 settlement cycle also does not affect the rule permitting most firm commitment underwritten securities offerings that price after 4:30 p.m. ET to use a T+3 or T+4 settlement cycle without express agreement. Indeed, the adopting release notes that “market participants involved in offerings that currently settle by the fourth business day under Rule 15c6-1(c) will likely continue to settle by T+4.”

Nevertheless, underwriters may prefer moving to T+2 settlement also for underwritten offerings so that purchasers in the offering do not need to alter the settlement cycle for secondary trades. All parties involved in securities offerings that do settle on the new T+2 settlement cycle will need to adjust to having less time to prepare for closing.

Hyperlink Requirement for Exhibits

On March 1, 2017, the SEC adopted rule amendments to require registrants to include a hyperlink to each exhibit listed in the exhibit index of a periodic report, current report or registration statement, whether filed therewith or incorporated by reference, unless the exhibit is filed in paper under a temporary or continuing hardship exemption. The amendments also require registrants to submit all such filings in HTML format to enable the inclusion of hyperlinks (as opposed to ASCII format, which does not support hyperlink capabilities).

The final rules take effect on September 1, 2017, except that non-accelerated filers and smaller reporting companies that currently file in ASCII format are not required to comply until September 1, 2018. Delayed compliance dates will also apply to certain ABS issuer exhibit filings.

The purpose behind the new hyperlink requirement is to make it easier and faster for interested parties to find and access exhibits. Under the current system without hyperlinks, someone seeking to retrieve and access an exhibit that has been incorporated by reference must first review the exhibit index to determine the filing in which the exhibit is included and then search through the registrant’s filings to locate the relevant filing.
The exhibit hyperlink requirement applies to nearly all forms under the Securities Act or Exchange Act that are required to include exhibits pursuant to Item 601 of Regulation S-K, including both initial and effective registration statements, and all pre-effective amendments thereto, as well as Forms F-10 and 20-F for foreign private issuers. The requirement does not apply to exhibits filed with Form 6-K or other forms under the multijurisdictional disclosure system or to XBRL exhibits. Registrants may also continue to file in ASCII format any schedules or forms not subject to the exhibit filing requirements under Item 601, such as proxy statements.

The rule amendments require registrants to correct a non-functioning or incorrect exhibit hyperlink. In the case of a pre-effective registration statement, the correction is made by the filing of a pre-effective amendment, and for an effective registration statement, the correction is made either in a post-effective amendment or in the subsequent Exchange Act periodic report that requires or includes an exhibit. Likewise, a registrant must correct a non-functioning or incorrect exhibit hyperlink in an Exchange Act report in the next Exchange Act periodic report that requires or includes an exhibit, or in the case of a foreign private issuer, in the next Form 20-F or Form F-10.

The adopting release clarified that inaccurate exhibit hyperlinks alone would not render a filing materially deficient or affect a registrant’s Form S-3 eligibility.  However, it did not specifically address whether effectiveness of a registration statement may be delayed solely due to a non-functioning or incorrect exhibit hyperlink, which we believe remains within the SEC’s discretion.


Written by:

Shearman & Sterling LLP

Shearman & Sterling LLP on:

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