May 13, 2024
What happened?
On May 28, 2024, the settlement cycle for most transactions in US securities will shorten from two business days (‘T+2’) to one business day (‘T+1’). May 28, 2024, is also the compliance date for the new requirements of the industry when processing institutional trades and the new recordkeeping requirements of registered investment advisers (“RIAs”).
Recordkeeping
For RIAs, this means maintaining records of all written communications received and copies of all written communications sent by the adviser relating to:
The SEC staff believe that the timing of communicating allocations to the broker-dealer is a critical pre-requisite to help ensure that confirmations can be issued in a timely manner. Affirmation is the final step necessary for an adviser to acknowledge agreement on the terms of the trade or alert the broker-dealer of a discrepancy. The SEC goal is for these records to show that the obligations of the parties involved in the settlement process related to achieving a matched trade were met. The amendments to the books and records rule is also intended to reduce the risks of the transition to T+1 by improving affirmation rates.
Operations
Broker-dealers now face requirements to update their written agreements to be compliant or adopt policies and procedures reasonably designed to address the completion of allocations, confirmations and affirmations by the end of the trade date. This means existing trade policies and procedures of RIAs will need to adapt to the shortened time frame, such as meeting earlier instruction deadlines from custodians to allow for affirmations to be completed by the end of the trade date.
The SEC’s Division of Examinations published a Risk Alert that indicated future examinations and outreach will be used to assess whether registrants have taken steps to comply with the shortened securities transactions settlement cycle, including the new recordkeeping requirements. The Risk Alert contains an Appendix of sample requests for information from “Registrants” (broker-dealers, clearing agencies, and registered investment advisers), which included:
The SEC used “Registrant” in the list to refer to broker-dealers, clearing agencies, and registered investment advisers and indicated that production of information would vary depending on the obligations applicable to each type of registrant.
What does this mean for me?
Recordkeeping
Test your ability to capture allocations, confirmations and affirmations as required under the new rule. Can you get timestamps for affirmations? Affirmations can take one of two paths: (1) those supported by the custodian, and (2) direct affirmations where the adviser or a third party affirms the trade directly. RIAs can rely on third parties for these records, but the responsibility to maintain these records and to produce them during an SEC examination will rest on RIAs.
Operations
Like for recordkeeping, the best practice is to test trading for T+1 settlement. Your approved brokers may have new processes and technologies coming online, and your own policies and procedures may need to change too. Be sure to include the T+1 transition in your next review of best execution and/or trade practices. Whether in an exam or through outreach, the SEC is going to be asking how RIAs adapted to the transition and the requirements for records of allocations, confirmations, and affirmations.
According to the Risk Alert, the rule’s Adopting Release and the Small Entity Compliance Guide may provide useful guidance for understanding and complying with the rule.
If you have any questions, or if you would like to speak with one of our regulatory experts, let us know.
