SEC’s Proposed Rules for Expedited Settlement May Impact Long-Standing Exception for Firm Commitment Offerings
The SEC has agreed to propose rules that would shorten the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (also known as T+3 settlement) to two business days after the trade date (also known as T+2 settlement). Proponents of shortening the settlement period have consistently argued that such further acceleration of settlement will benefit investors, reduce counterparty risk, decrease capital requirements for clearing, and align global settlement practices with similar T+2 requirements already in use by the United Kingdom and various European countries. The Commission’s recent support for the proposed amendments to Rule 15c6-1 suggests that the SEC is taking the next logical step in facilitating these goals.
However, it remains unclear whether final rules amending Rule 15c6-1 of the Exchange Act will retain the current exceptions available for firm commitment offerings.
As currently formulated, Rule 15c6-1 provides an exception under Rule 15c6-1(c) for “firm commitment offerings registered under the Securities Act or the sale to an initial purchaser by a broker-dealer participating in such offering” which allows such offerings to rely on an extended T+4 settlement cycle instead of the standard T+3 settlement. The proposed rules, however, seek comment on whether the settlement cycle timeframe under Rule 15c6-1(c) should be similarly shortened to T+3 or T+2 in conjunction with the broader proposed change to Rule 15c6-1 and how such changes would impact “risk, costs or operations of retaining the current provision for firm commitment offerings but shortening the settlement cycle to T+2 for regular-way transactions, as proposed.”
The SEC’s 2004 concept release on the benefits and costs of shortening the settlement cycle provides a helpful perspective on how such changes could impact the existing exception for underwritten offerings. In particular, the 2004 concept release specifically highlights the “extensive due diligence between trade date and settlement date” underlying the exception and acknowledged that “[t]he current settlement cycle may be the shortest time frame within which customers may be provided with final prospectuses prior to or simultaneously with” required delivery of written confirmation of a purchase or sale of securities. The 2004 concept release also reflects concerns among industry participants that accelerated settlement could make it “extremely challenging to accurately complete necessary due diligence and satisfy the physical prospectus delivery requirements” and suggests possible solutions to the challenge of expedited prospectus delivery might include “eliminating the requirement that the final prospectus be delivered at the same time as the Rule 10b-10 confirmation” or adopting “an electronic access standard as a means to satisfy prospectus delivery.”