On March 22, 2017, the United States Securities and Exchange Commission (SEC) adopted an amendment to shorten by one business day the standard settlement cycle for most broker-dealer securities transactions from three business days after the trade date, known as T+3, to two business days, T+2. The amendment may reduce the credit, market and liquidity risk arising from unsettled transactions.
The amended Rule 15c6-1(a) prohibits a broker-dealer from effecting or entering into a contract for the purchase or sale of a security (other than certain exempted securities) that provides for payment of funds and delivery of securities later than T+2, unless otherwise expressly agreed to by the parties at the time of the transaction. Accordingly, in firm commitment underwritten offerings for cash, the issuer and the managing underwriters may continue to use the standard T+3 settlement cycle. In addition, the new rule will not affect the rule allowing most firm commitment underwritten securities offerings for cash that price after 4:30 p.m. ET to use a T+3 or T+4 settlement cycle without express agreement.
Nonetheless, underwriters may prefer using T+2 settlement for underwritten offerings so that purchasers do not need to alter the settlement cycle for secondary trades. In such case, all parties involved in the offering settling on T+2 must adjust to having less time to prepare for closing.
In contrast, cross-border U.S.-Canada public offerings may continue settling on T+4 or T+5, consistent with current practice. Under Canadian law, investors have two business days from receiving a final prospectus to withdraw from the transaction; as such, transactions do not close until after expiration of the withdrawal period.
Broker-dealers will be required to comply with the amended rule beginning on September 5, 2017.
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