Just when you thought the Securities and Exchange Commission was taking a breather from proposing rules that affect advisors, the securities regulator is at it again. This time, the SEC is revisiting the controversial issue of next-day settlement of trades, or T+1.
Yes, shortening the current settlement cycle from three days (T+3) to one is rearing its ugly head again. There hasn't been much talk about T+1 for a couple years, but the SEC issued a concept release (it's at www.sec.gov/rules/concept/33-8398.htm) in March asking for comments about next-day settlement and the regulator's new same-day affirmation proposal. Most people in the industry opposed T+1 when it was first floated by former SEC Chairman Arthur Levitt in the late 1990s. And by looking at some of the comment letters the SEC has received recently, most people in the investment industry remain opposed to the idea.
David Tittsworth, executive director of the Investment Counsel Association of America (ICAA) in Washington, told the SEC in June that "a regulatory mandate requiring same-day affirmation or shortening the current T+3 settlement cycle is not warranted by any objective cost/benefit analysis, and that such regulations would be ill advised, counterproductive, costly, and difficult to implement and monitor." Tittsworth told the SEC that "there's no evidence that the current settlement and confirm/affirm processes and the accompanying regulatory framework are broken." The better approach, he says, "is to encourage the development of market-driven initiatives to promote advances in straight-through-processing that ultimately will be embraced by the vast majority of market participants."
Like Tittsworth, most industry officials think the SEC is sticking its regulatory fingers where they don't belong. The critics include Tim Lind, senior analyst with the investment management practice at TowerGroup in Needham, Massa- chusetts. Lind recently authored a research paper, "The Sequel to T+1: Will the SEC Mandate Operational Efficiency?" I chatted recently with Lind about the SEC's concept release on T+1, and what effect any SEC rulemaking would have on advisors.
What does the SEC's concept release on securities transaction settlement mean for investment advisors? The most obvious concern is whether [RIAs, broker/dealers, and money managers] will be subject to additional [SEC regulatory] oversight in operational areas. A rulemaking on the timing of the affirmation is the most likely. We don't really believe that the SEC will move aggressively forward on a shortening settlement cycle mandate. We think most of the comments the SEC receives will suggest that the infrastructure is not in place to support next-day settlement, or T+1. By infrastructure, I mean the communications infrastructure between asset managers–the collective money management community–and their universe of broker/dealers, as well as with their connections to custodians. The applications on both sides, both the money management and broker/dealer side, are not in place to achieve next-day settlement, so [these firms] will recommend the SEC stand down at this time on specific rules changing from T+3 to T+1.
The SEC will move ahead with the same-day affirmation rule? For RIAs, I think the greater probability is that the SEC will potentially move forward with a same-day affirmation rule, which is the new part of this [SEC concept release]. The [investment] community has been talking about T+1 since Levitt brought it up in 1998 or 1999. It was a big deal in 2000 and 2001 until it went off the table in 2002. What we're really talking about now is "How do we achieve the same risk benefits without shortening the settlement cycle?" Most have latched on to this notion of same-day affirmation. Most of the people you talk to [about T+1 and same-day affirmation] talk about the mechanics of compliance, rather than answering the question, "What risk is involved?" I find that somewhat frustrating. If the government tells me I have to wear a helmet each day, please tell me what risk you're trying to protect me from. So we have to come to a consensus on the nature of the risk in this area of securities settlement.
