The SEC’s new trade day plus one (T+1) business day settlement requirements shorten the amount of time companies have to perform all tax calculations, deliver shares to brokers, and disperse funds due for exercise costs or taxes.
With a compliance date of May 28, 2024, it’s important that organizations take time to assess their existing infrastructure and look for ways to condense the time needed to process a standard option exercise, restricted stock release, or an employee stock purchase plan (ESPP) purchase.
Below, you’ll find:
- An overview of the T+1 settlement
- How the requirements will impact your organization
- Technology solutions for compliance
- Next steps
What Is the T+1 Settlement?
The final rule amends Rule 15c6-1 of the Securities Exchange Act of 1934. It shortens the standard settlement cycle from two business days after the trade date—known as T+2—to one business day after the trade date, or T+1.
The final rule:
- Prohibits broker-dealers from the purchase or sale of a security that provides for payment of funds and delivery of securities later than the first business day after the date of the contract (T+1), unless otherwise expressly agreed to by the parties at the time of the transaction
- Adopts new Rule 15c6-2 of the Exchange Act to require broker-dealers engaging in the allocation, confirmation, or affirmation process with another party or parties to achieve settlement of a securities transaction subject to the T+1 settlement cycle
For the latter rule, broker-dealers are required to either:
- Enter into written agreements with the relevant parties to ensure completion of the processes as soon as technologically possible and no later than the end of the trade day
- Establish, maintain, and enforce written policies and procedures reasonably designed to ensure completion of the processes as soon as technologically possible and no later than the end of the trade day
These brokerage requirements help ensure sale transactions are settled by the end of the trade day plus one business day. However, the issuing company is responsible for confirming and authorizing all tax calculations and share deliveries to ensure timely settlement.
The effective-by date for the amended and updated SEC rules was May 5, 2023. The compliance date is May 28, 2024.
How Will T+1 Settlement Impact Your Operations?
The T+1 settlement requirements may impact your operations in multiple ways including:
- Lapse Processing. Lapse processing, the process that releases shares to the participant once all vesting criteria are met, might need to be reviewed to support a shorter timeframe. Companies might review their standard fair market value (FMV) definition to see if it can help support a shorter timeframe.
- Payroll. Payroll interactions should be reviewed to support a shorter timeframe. This can include brokerage data feeds, the types of information provided, the feeds to payroll, and any feedback from payroll back to the company or broker.
- Taxes. Tax calculations need to be completed much faster and with less human intervention for timely delivery to the broker where the transaction took place.
- Third-party vendors. Third-party tax calculation vendors will need to ensure timely and automated processing.
- Shares. Share delivery approvals need to be completed quickly so shares are delivered to the broker no later than T+1.
With compressed timelines, reconciliation that meets the new T+1 standard may be a challenge. However, technology solutions could help expedite the settlement.
Available technology solutions:
- Scripting languages
- Custom technology solutions
- Data science and analytics automation software, such as Alteryx
Scripting language solutions can help brokerages and issuing companies complete T+1 settlement processes more efficiently by automating the data entry and reconciliation processes. This allows for quicker entry of information into the brokerage’s and issuing companies system.
Scripts can also be used by companies to streamline interfaces between the various stakeholders and to automate the communication process between the broker and the clearinghouse.
Custom Technology Solutions
Custom technology solutions could help reduce manual steps by automating the reconciliation process, streamlining data entry, and utilizing electronic funds transfers to expedite settlement.
These solutions could also provide real-time data analysis capabilities, allowing issuing companies to identify opportunities to reduce settlement time. There’s also the added benefit of securely storing and transferring customer data to comply with regulations.
Brokerages can expedite the T+1 settlement by leveraging data integration and analytics capabilities with data science and analytics automation platforms, such as Alteryx.
The benefits of software like Alteryx:
- Faster analysis. Aggregates and transforms data from disparate sources.
- Risk mitigation. Identifies and assesses potential risks associated with the T+1 settlement process with predictive analytics capabilities.
There are a few steps you can take to help your organization comply with the SEC’s new requirement:
- Assess your current settlement process, linkages, and time challenges to determine if and what technology from the brokerage side can help
- Identify technology tools you can incorporate
- Explore short- and long-term solutions
We’re Here to Help
Contact your Moss Adams professional to learn more about how to prepare for and comply with the SEC’s new T+1 settlement requirements.