Written by Blake Baron

On February 9, 2022, the U.S. Securities and Exchange Commission (SEC) unanimously voted to propose shortening the standard settlement cycle for securities transactions from two days to one. The full proposed rule can be found here and a fact sheet can be found here.

According to the fact sheet, the proposal, which aims to reduce risks in the clearance and settlement of securities, would specifically:

• Shorten the standard settlement cycle for securities transactions from two business days after trade date (T+2) to one (T+1);
• Eliminate the separate T+4 settlement cycle for firm commitment offerings priced after 4:30 p.m. (Eastern Time Zone);
• Improve the processing of institutional trades by proposing new requirements for broker-dealers and registered investment advisers intended to improve the rate of same-day affirmations; and
• Facilitate straight-through processing by proposing new requirements applicable to clearing agencies that are central matching service providers (CMSPs).

In a statement, Commissioner Allison Herren Lee wrote, “Today’s proposal represents a relatively simple calculus: reducing the time it takes for securities transactions to settle, generally reduces risks – credit risks, market risks, liquidity risks, and importantly, potential systemic risk.”

The SEC cites increased volume and size of securities transactions, increased volatility in the stock market, and technological and operational advancements as some of the forces driving the proposal. Recent examples of increased volatility include March 2020 following the onset of the COVID-19 pandemic and the “meme stock” trading frenzy early last year. As technology has improved, we have seen the settlement cycle incrementally shortened since 1993 from T+5 to the current T+2. In their proposal, the SEC also seeks comments on whether they should consider shortening the cycle further to same day settlement (T+0) in the future.

In our practice, we expect that issuers will welcome a reduction in the securities settlement period to facilitate faster offering closings; however, various service providers, including legal counsel, transfer agents and auditors, as well as the national securities exchanges, will need to adjust to a faster closing process.

The SEC is currently seeking comments on the proposed rule. According to the fact sheet, the public comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer. If the proposal is adopted, a T+1 cycle would be implemented by March 31, 2024.