T+1 SEC Examination Sweep

July 23, 2024

What happened?

SEC registered advisers are beginning to see examination requests targeting recordkeeping, policies and procedures, training, and third-party agreements related to the shortened settlement cycle that came into effect on May 28, 2024, requiring many transactions to settle in one business day (T+1).  This should come as no surprise since the SEC outlined sample questions in a Risk Alert prior to the compliance deadline. The rule and the risk alert point to efforts needed from broker-dealers, clearing agencies, and registered investment advisers (RIAs).

When it comes to RIAs, the rule requires maintaining records of allocations, confirmations and affirmations, along with requiring a date and timestamp for each allocation or affirmation sent or received by the RIA. Expect SEC questions to zero in on this data, how it is maintained, and what your third-party agreements with broker-dealers and service providers describe as the process for sending and receiving this data with the necessary timestamps.

Like sweep exams in the past, the SEC is likely select a range of advisors to get an idea of how the industry has done with the initial roll-out of this new rule.  Expect them to ask what changes to policies and procedures were made to accommodate T+1, to assess compliance with the recordkeeping requirements, and to seek any issues with other parties and systems relied upon to execute these transactions.

What does this mean for me?

The SEC staff believe that the timing of communicating allocations to the broker-dealer is a critical prerequisite 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. Review your settlement process and determine if your firm has experienced any issues with this communication and the timestamped records evidencing it took place within one business day.

For further insight, look to the appendix from the SEC Risk Alert and make sure you could respond to the sample requests for information given by the SEC. These include:

1. Information regarding Registrant’s activities in clearance and settlement.
2. Information regarding how Registrant is preparing for the movement to T+1, including whether any specific group, person, or third party was tasked with implementing changes.
3. Information regarding changes to policies and procedures to comply with the new rule.
4. Information regarding changes to operational risk management, technology systems, and processes to comply with the new rule.
5. Information regarding any testing Registrant participated in (e.g., with DTCC, its clients, its vendors, their broker-dealers), as well as any identified issues or resulting changes as a result of the testing.
6. Information regarding any changes made to written agreements for completing the requirements in a timely manner.
7. Information regarding how Registrant measures, monitors, and documents allocation, confirmation and allocation (“ACA”) rates, as well as any identified issues with the timeliness of the ACA or any changes implemented to address late ACA.
8. Information regarding how Registrant will handle ACA for end of the day transactions.

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.

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.