On Sept. 28, 2016, the Securities and Exchange Commission (the “SEC”) proposed an amendment to Rule 15c6-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to shorten the standard settlement cycle for most securities transactions from three business days after the trade date (T +3) to two business days after the trade date (T +2). The SEC is soliciting comments on the proposal, the deadline for the submission of which is Dec. 5, 2016. If the proposal is adopted, the effective date of the modified rule as proposed by the SEC would be Sept. 5, 2017.
Since its adoption on Oct. 13,1993, Rule 15c6-1 under the Exchange Act has prohibited broker-dealers from effecting or entering into a contract for the purchase or sale of a security (other than government securities, municipal securities, commercial paper, bankers' acceptances, commercial bills or exempted securities under the Exchange Act) that provides for the payment of funds and delivery of the security later than the third business day after the date of the contract unless otherwise expressly agreed to by the parties at the time of entering into the contract. (Prior to that time, the settlement cycle had been five business days (T +5).) Contracts for the sale of securities for cash that are priced after 4:30 p.m. (Eastern time) that are sold by an issuer to an underwriter pursuant to a firm commitment offering registered under the Securities Act of 1933, as amended (the “Securities Act''), or that are sold by a broker-dealer participating in such offering in initial resales are permitted to settle on the fourth business day after the trade date (T +4). In addition, in a firm commitment offering of securities for cash, if the managing underwriter and the issuer agree to a settlement date later than T +3 or T +4, as the case may be, all other parties to the offering are deemed to have expressly agreed to such later settlement date.
The SEC is proposing to shorten the standard settlement cycle from T +3 to T +2 because it believes it will result in a reduction of credit, market and liquidity risks, and as a result will reduce systemic risks for U.S. market participants. For example, the National Securities Clearing Corporation estimates that its average daily clearing fund requirements will be reduced by approximately $590 million and, in times of stress, by approximately $1.8 billion.
While the SEC is requesting comments regarding all aspects of the proposed amendment to Rule 15c6-1, it set forth in the proposing release 26 particular questions on which it seeks comment. One of those questions (number 7) asks whether the SEC should amend the settlement cycle timeframe for firm commitment offerings priced after 4:30 p.m. Eastern time from the current T +4 to T +3 or T +2.
If the proposed amendment is adopted (which appears likely), the impact on the execution of new issuance high-yield bond offerings, whether under Rule 144A or public offerings, is likely to be modest, as the SEC does not appear to be contemplating modifying the provisions of Rule 15c6-1 that allow the managing underwriter and the issuer to agree to a “long closing” that is then deemed to have been expressly agreed to by all other distribution parties. Nonetheless, in routine high-yield bond offerings, the shorter settlement cycle will necessitate an earlier preparation of definitive documents (i.e., the indenture and closing certificates and opinions).