SEC Launches Industry Sweep on T+1 Settlement Compliance for Investment Advisors

The Case

The US Securities and Exchange Commission (SEC) has initiated a sweep examination targeting registered investment advisors (RIAs) to assess their compliance with the new T+1 settlement cycle rules. Over the past week, multiple RIAs have received examination letters from both the SEC’s national office in Washington, DC, and at least one regional office. These letters request detailed information on their firms' policies, procedures, and practices related to the new settlement requirements, suggesting a coordinated and widespread regulatory review effort.

The T+1 settlement rule, which shortened the settlement cycle for most securities transactions to one business day after the trade date, took effect in May 2024. 

This change was implemented to reduce risk in the settlement process, align with global standards, and enhance operational efficiency. Under the new rule, broker-dealers must settle securities transactions by T+1 and adopt procedures to facilitate the allocation, confirmation, and affirmation process (the ACA Process) on the trade date itself. For RIAs, the SEC also revised recordkeeping requirements, mandating that certain communications related to the ACA Process be retained.

Regulatory Implications

The SEC’s recent examination letters appear to be part of a broader effort to evaluate how RIAs are managing the transition to T+1 and whether they have adopted the necessary procedures to comply with the new requirements. Specifically, the SEC is requesting RIAs to produce documents related to their trade affirmation process and associated recordkeeping requirements.

The examination requests have included the following:

1. Written Compliance and Operational Policies: Documents detailing processes or protocols impacted by the ACA Process or the general securities transaction settlement cycle.
   
   

2. Assessments or Tests Conducted: Information on any internal assessments, tests, or risk analyses the RIA has conducted concerning the ACA Process, including identified risks and conflicts related to trading activities.
   
   

3. Compliance Testing and Tools: Records of any compliance testing or automated tools used in relation to the ACA Process.
   
   

4. Compliance Training: Details of any training provided to staff regarding the ACA Process.
   
   

5. Compliance Exceptions: Information on any exceptions or issues identified concerning the ACA Process.
   
   

6. Client Communications: Copies of any communications sent to or received from clients regarding the ACA Process.

The SEC's letters have also requested additional documents unrelated to the T+1 transition, such as listings of potential litigation, private investments, and client custodians, suggesting a comprehensive review of RIAs' overall compliance landscape.

Practical Guidance for Firms

Investment advisors who have received these examination letters should be prepared to provide the requested information promptly. However, they must consider several critical factors when preparing a response to the SEC. Key steps to consider include:

1. Review Examination Requests Thoroughly: Evaluate the scope of the SEC’s requests to determine which documents and information must be produced. Some requests may go beyond what is specifically required under the T+1 rules and could involve sensitive or privileged communications.
   
   

2. Clarify Ambiguities and Scope: Since some requests span back to February 15, 2023—the adoption date of the T+1 rules—while others begin from the May 2024 compliance date, firms should clarify any ambiguities with their SEC contact and determine the relevance and necessity of each requested item.
   
   

3. Consult with Legal and Compliance Experts: Given the potential complexities and sensitivities involved—particularly around privileged communications and internal assessments—firms should consult with their legal and compliance teams to appropriately navigate the SEC’s requests. 

InnReg has over a decade of experience helping investment advisors navigate complex regulatory requirements, including SEC examinations and compliance with evolving rules such as T+1. Our expert team assists firms in developing and enhancing compliance frameworks, performing gap analyses, and managing regulatory responses effectively.