SEC to review registrants’ preparation for next-day trade settlements

In a risk alert published Wednesday, the SEC noted the reduction of the settlement cycle, which takes effect May 28, will place additional recordkeeping requirements on registered investment advisers.

The move to a T+1 settlement cycle for all trades will require registered entities to make changes to their business practices, computer systems, and technology solutions.

“In addition, shortening the standard settlement cycle could have an impact on how registrants and other market participants comply with other existing regulatory obligations,” the alert said.

The SEC adopted the T+1 rule in February 2023 and explained its impact in an investor bulletin also issued Wednesday.

Among areas of concern for the SEC is that registrants will have less time to close out fail-to-deliver positions under Regulation SHO; give or send a written confirmation at or before completion of a transaction, as required by the Exchange Act; and obtain possession of customer securities before being required to close out a customer transaction, also an Exchange Act requirement for broker-dealers.

As May 28 nears, it is “critical that registrants and other market participants prepare for the shortened settlement cycle and understand the impacts of T+1 and the final rules to identify necessary changes and critical dependencies in order to successfully manage this transition,” the alert said.

The SEC said trade data indicates firms still reconciling transactions manually are “providing affirmations at a significantly lower rate on trade date than prime brokers or investment managers that use central matching tools.” Agency examiners will want to know how those firms are preparing to comply with next-day trade settlements.

Examiners will be asking all registered entities how they intend to prepare for the shortened settlement cycle and will focus on:

• Activities in clearance and settlement, including clearing services provided to institutional clients, retail customers, or other broker-dealers; custodial or prime brokerage services; securities lending recall activities and payment activities that support clearance and settlement; trade allocation and fail management processes; and custodian communication;
• Operational readiness, including any implementation of, or enhancements or modifications to, systems, controls, policies, or processes associated with the shortened settlement cycle, along with information related to any testing events;
• Disclosures, representations, and/or communications to customers, clients, and/or vendors regarding changes that will occur;
• Settlements, including the allocations, confirmations, and affirmations process, and any changes to written agreements or processes;
• Policies and procedures reasonably designed to facilitate straight-through processing; and
• New recordkeeping and reporting requirements.

The SEC’s Examinations Division encouraged registrants to review the adopting release, as well as the small entity compliance guide, in transitioning to the shortened settlement cycle and related changes.