SEC Examinations Division to Evaluate Firms’ Readiness for T+1

The U.S. Securities and Exchange Commission's (SEC's) Examinations Division issued a Risk Alert reminding registered broker-dealers, clearing agencies, and investment advisers of their new obligations in connection with the transition to T+1 settlement of certain securities transactions and noted that it will be examining registrants’ preparedness.

The transition is scheduled for May 28, 2024, the Tuesday following Memorial Day weekend.

Investment Advisers

The Alert reminds registered investment advisers that amended Rule 204-2(a)(7) requires that they date and time stamp each allocation and affirmation they send or receive, and keep records of each confirmation they receive, and allocations and affirmations they send or receive. The Alert also highlights the difficulties advisers that manually affirm their trades may experience during the transition.

The Commission’s explanation of these amendments also helps advisers anticipate likely areas of focus in examinations:

[T]he timing of communicating allocations to the broker or dealer is a critical pre-requisite to help ensure that confirmations can be issued in a timely manner, and affirmation is the final step necessary for an adviser to acknowledge agreement on the terms of the trade or alert the broker or dealer of a discrepancy. The Commission believes the recordkeeping requirements for investment advisers should help establish that obligations of the various parties involved in the settlement process related to achieving a matched trade have been met. Moreover, the amendments to Rule 204-2 are intended to reduce risk following the transition to T+1 by improving affirmation rates.

Broker-dealers

The Alert reminds registered broker-dealers that amended Rule 15c6-1(a) will prohibit them from effecting or entering into trades that settle later than T+1, unless the parties expressly agree otherwise at the time of the transaction. The Alert also highlights the difficulties broker-dealers that manually affirm their trades may experience during the transition.

The types of securities that will not be subject to Rule 15c6-1(a) are also summarized in the Alert. It further notes that paragraph (c) of amended Rule 15c6-1 shortens the standard settlement cycle for firm commitment offerings priced after 4:30 p.m. ET from four business days after the trade date (T+4) to T+2.

The amended Rule 15c6-2 will also require broker-dealers to complete all allocations, confirmations, and affirmations by the end of the trade date for all transactions with institutional customers, and to adopt the necessary contractual changes and amend associated policies and procedures, as appropriate to effect and support that change.

Our recommendations

The Alert provides a detailed road map for the questions and testing that examiners will conduct to test firms’ preparedness for T+1 and appends sample requests for information that you may receive.

Registered investment advisers and broker-dealers should update their policies and procedures accordingly to conform to the new regulatory requirements.

To help prepare for regulatory exams, broker-dealers and investment advisers should concentrate on Section III of the Alert and Appendix A. It is important these firm types are ready to address the questions, alongside the ability to access the mentioned documents and data in the Alert.

How we help

Investment advisers and broker-dealers have a number of obligations for the SEC, FINRA, and other regulators. ACA Signature can help.

ACA Signature is a scalable solution curated to suit your firm’s unique compliance needs. We combine compliance advisory, innovative technology, managed services, and cybersecurity to effectively address regulatory commitments and day-to-day responsibilities.

Reach out to your ACA consultant to learn how to establish and scale your GRC programs as your business evolves. Or contact us directly to learn how we help you launch, grow, and protect your firm. 

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This post was originally issued on April 24, 2024. We've updated this article to highlight changes that will impact investment advisers.