[co-author: Elizabeth Atkins - law clerk]

Proposed rule to shorten settlement period from T+3 to T+2

On September 28, 2016, the U.S. Securities and Exchange Commission (SEC) proposed an amendment to shorten the standard settlement cycle for broker-dealer securities transactions from T+3 to T+2. The proposal is part of the SEC’s ongoing effort to reduce systemic risk to the U.S. financial system by reducing the credit, market, and liquidity risks that market participants face during settlement periods. More specifically, the proposed amendment is consistent with the SEC’s efforts to promote clearing and settlement efficiency and to enhance the resilience of important financial market utilities and central counterparties, policy goals that formed the basis of the 2010 Clearing Supervision Act.

The proposed amendment would impact Rule 15c6-1(a) of the Exchange Act. The SEC is seeking comments for 60 days following the publication of the proposal in the Federal Register. The SEC is considering a compliance date of September 5, 2017.

Effects of the proposed amendment on market participants

The proposed amendment would prohibit a broker-dealer from effecting or entering into a contract for the purchase or sale of a security that provides for payment or delivery of the security more than two business days after the date of the contract—unless the parties explicitly agree to a longer settlement period at the time of the transaction.

The rule may also affect market participants’ obligations under:

• Regulation SHO: The proposed amendment would reduce the time frames for closeout under Rule 204 from T+4 to T+3 and may affect whether a seller is deemed to own a security for purposes of marking it long under Rule 200(c).
• financial responsibility rules under Exchange Act Rules 15c3-3 and 17a-5: The proposed rule may shorten the period during which broker-dealers must comply with SEC rules on financial responsibility, including transmitting funds an delivering securities.
• Exchange Act Rule 10b-10: The proposed amendment may shorten the period during which customers of broker-dealers must send confirmation of their transaction.

The SEC is soliciting comments on each of these potential effects.

The following contracts are exempt from the rule:

• government securities
• municipal securities
• commercial paper
• bankers’ acceptances
• commercial bills
• securities that do not generally trade in the United States
• securities issued or sold by an insurance company and funded by, or participating in, a “separate account”
• certain other exempt securities

Furthermore, the SEC notes that many of the securities subject to the amendment (e.g., options and certain mutual funds) already settle in a period shorter than three business days. In trades of securities that are-legally and practically-affected by the new rule, the SEC predicts that a shortened settlement period will result in significant cost savings for central counterparties and clearinghouses due to decreased demands on their liquidity.

Financial policy goals

The proposed amendment limiting securities trading to a T+2 settlement cycle serves several overlapping policy goals:

• harmonize regulation with foreign financial markets, including the EU, which operates on a T+2 cycle, and China, which operates on a T+1 cycle; additionally, Canada is likely to transition to a T+2 cycle when the United States does
• reduce costs of clearing and settlement for U.S. market participants
• take advantage of technological advancements to increase speed, safety, and efficiency of clearing and settlement
• reduce systemic risk in the U.S. financial system.

Tandy language no longer required

Companies responding to SEC comment letters on their SEC filing reviews no longer need to include affirmative representations that they will not raise the SEC review process and acceleration of effectiveness as a defense in any legal proceeding.

The SEC announced the change on October 5, 2016, explaining that it has required such affirmative disclosures, known as “Tandy” language, since the mid-1970s. Practitioners note that the change is a move toward efficiencies, shifting the burden of stating Tandy language from individual companies to the SEC staff. The SEC noted in its press release that companies are still responsible for the accuracy and adequacy of the disclosure in their filings, and they will include reminder language to such effect.