The Securities and Exchange Commission on Wednesday finalized a rule to shorten the U.S. securities settlement cycle.
In a 3-2 vote, with the commission's two Republicans dissenting over concerns about the compliance timeline, the SEC agreed to accelerate the settlement cycle to T+1 — settling a trade one business day after it is executed — from T+2, or two business days.
At a meeting Wednesday, the SEC staff said the rule, which was initially proposed in February 2022, is designed to benefit investors and reduce the credit, market and liquidity risks in securities transactions faced by market participants.
"I support this rule-making because it will reduce latency, lower risk, and promote efficiency as well as greater liquidity in the markets," SEC Chairman Gary Gensler said in a statement. "Today's adoption addresses one of the four areas the staff recommended the commission address in response to the meme stock events of 2021. Taken together, these amendments will make our market plumbing more resilient, timely, orderly and efficient."
In its final rule, the SEC pushed back the compliance date to May 28, 2024, from the date outlined in the proposal — March 31, 2024.
Several industry groups and stakeholders who submitted comments to the SEC requested that the implementation date be delayed until Sept. 3, 2024, which is the Tuesday after Labor Day weekend.
Commissioner Mark T. Uyeda, a Republican, said he supports the move to T+1 but voted against the final rule because of the May 2024 implementation date. "In my view, we are in an imprudent rush away from a sensible transition date and, for that reason, I am unable to support the final rule," Mr. Uyeda said.
Investment Company Institute President and CEO Eric Pan welcomed the final rule in a statement but said he was disappointed the SEC did not select the September 2024 implementation date.
"Not only would September 2024 greatly reduce the risk of any difficulties to the industry — especially smaller firms — in making the transition, it would also ensure that the United States will make the transition in coordination with Canada, which has already announced a compliance date of September 2024," Mr. Pan said. "In our opinion, an extra three months would be a small price to pay for a smooth transition."
Kenneth E. Bentsen Jr., president and CEO of the Securities Industry and Financial Markets Association, had a similar thought. "As we have repeatedly stated for the past two years, the industry needs ample time to execute the transition and doing so following the Labor Day weekend 2024 in coordination with Canada is the optimal date," Mr. Bentsen said in a statement. "It is the industry, and not the regulators, who will do the work to shorten the cycle and rushing the implementation for no apparent reason will only add risk when the underlying goal is to mitigate risk."
ICI, SIFMA and the Depository Trust & Clearing Corp. in August published an "industry implementation playbook" on shortening the settlement cycle to T+1.
The settlement cycle in the U.S. was last shortened in 2017 when it went to T+2 from T+3 in 2017.
Separately, the SEC on Wednesday voted 4-1 to propose a rule that would amend its custody rule by expanding the scope of assets registered investment advisers must hold using a qualified custodian.
Under the proposal, the current investment adviser custody rule would be broadened beyond client funds and securities to include any client assets in an investment adviser's possession or when an investment adviser has authority to obtain possession of client assets. It would also require that advisers and qualified custodians enter into written agreements with each other that help guarantee the custodian's protections.
The proposal would specifically cover cryptocurrency assets, Mr. Gensler noted. While some crypto trading and lending platforms claim to custody investors' crypto assets, that does not mean they are qualified custodians, he added. "Rather than properly segregating investors' crypto, these platforms have commingled those assets with their own crypto or other investors' crypto," Mr. Gensler said. "When these platforms go bankrupt — something we've seen time and again recently — investors' assets often have become property of the failed company, leaving investors in line at the bankruptcy court."
The proposal's comment period will remain open for 60 days following publication in the Federal Register.
