The SEC recently amended Exchange Act Rule 15c6 1(a) to shorten the standard settlement cycle for most broker dealer securities transactions from “T+3” to “T+2.” In plain English, the old rule provided that any trade of securities must settle within three business days following the trade date, or T, meaning the buyer must have the security in its brokerage account and the seller must have the cash by that date. Under the amended rule, trades must settle within two business days after the trade date. For most companies, the back office mechanics of the settlement cycle are not a big concern. There are, however, a couple of distinct instances where this rule may be relevant. The first instance, a primary offering by an issuer, is not bound by the rule, and the parties can expressly agree to a different settlement cycle. Time will tell if deals shift to a T+2 settlement cycle or continue to use T+3. The second instance relates to sales of shares that are “restricted securities,” which usually bear a legend restricting transfer. Restricted securities include shares purchased before the company went public or in a private placement, and typically the stockholder must take additional steps to obtain an opinion of company counsel in order to remove the legend before the shares can be delivered to the purchaser. The legend removal process is often not initiated by the broker until a trade has been made, and the shortened settlement cycle will put additional pressure on company counsel to quickly process requests for transfer opinions. What is the “trade date” for this purpose? The day that the contract for sale made is “T,” unless the contract is made after 4:30 pm Eastern time, in which case T is the next business day. So a contract made at 3:30 pm Eastern time on Monday must settle no later than Wednesday, but a contract made at 4:45 pm Eastern time on Monday can settle on Thursday. The new “T+2” settlement cycle will apply to all applicable securities transactions occurring on or after September 5, 2017.
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