On March 22, 2017, the Securities and Exchange Commission (the “SEC”) adopted an amendment to Rule 15c6-1 under the Securities Exchange Act of 1934, as amended (the “New Settlement Rule”), to shorten the standard settlement cycle for most broker-dealer securities transactions to T+2 (trade date plus two business days). Most securities transactions currently settle on a T+3 settlement cycle, which means the payment of the purchase price and the delivery of securities occur on the third business day following the date the trade is executed. Under the new rule, securities transactions will generally be required to settle on the second business day following the date the trade is executed. For example, if an investor buys shares of a particular stock on Monday, the transaction would settle on Wednesday.
What does this mean for securities offerings?
Although certain exceptions to the New Settlement Rule are available, issuers and underwriters typically settle (or close) underwritten securities offerings on the same settlement cycle as broker-dealer securities transactions in the secondary market. As a result, participants in a securities offering should coordinate with their counsel and other representatives to ensure that all closing deliverables will be ready on the new, accelerated schedule. In particular, participants in firm commitment offerings for more conventional securities, such as common equity or unsecured debt, may elect to settle on the new T+2 schedule.
Notwithstanding the foregoing, the SEC retained the current exception under Rule 15c6-1(c), which permits firm commitment underwritten offerings that price after 4:30 p.m. Eastern to use a T+3 or T+4 settlement cycle. No express agreement providing for such extended settlement date is required in these situations.
Additionally, under the New Settlement Rule, the issuer and the managing underwriter may still expressly agree to a settlement cycle other than T+2. However, such agreement must be made at the time of the transaction (i.e., at pricing) and the disclosure document for the offering should include disclosure for purchasers that an alternative settlement cycle is being used. If the issuer and managing underwriter agree to modify the settlement schedule, purchasers in the offering who wish to trade the securities in the secondary market on the date of pricing or the next succeeding business day will be required, by virtue of the fact that they will not receive the securities until a date later than the second business day, to specify an alternate settlement cycle at the time of any such trade in order to prevent a failed settlement.
Why shorten the settlement cycle?
The SEC’s press release announcing the proposal of the New Settlement Rule stated that the SEC believes that shortening the standard settlement cycle from T+3 to T+2 will significantly benefit U.S. market participants by decreasing the number of unsettled trades that exists at any point in time, which should, in turn, correspond to a reduction in market participants’ exposure to credit, market, liquidity and systemic risks arising from such unsettled trades. According to the SEC, the reduction of these risks should improve the stability of the U.S. markets and ultimately enhance investor protection. The New Settlement Rule also brings the U.S. standard settlement cycle more in line with non-U.S. markets, such as those in the European Union and certain Asian-Pacific markets that have already moved to a T+2 cycle.
“As technology improves, new products emerge, and trading volumes grow, it is increasingly obvious that the outdated T+3 settlement cycle is no longer serving the best interests of the American people,” said SEC Acting Chairman Michael Piwowar. “The SEC remains committed to ensuring that U.S. securities regulation is reflective of modern times, and in shortening the settlement cycle by one day we aim to increase efficiency and reduce risk for market participants.”
The effective date for the new rule is September 5, 2017. A copy of the SEC’s adopting release can be found here.