July 2, 1993
TO: BOARD OF GOVERNORS NO. 60-93
OPERATIONS COMMITTEE NO. 22-93
SEC RULES COMMITTEE NO. 59-93
TRANSFER AGENT ADVISORY COMMITTEE NO. 37-93
UNIT INVESTMENT TRUST COMMITTEE NO. 28-93
T+3 SETTLEMENT TASK FORCE
RE: INSTITUTE COMMENT LETTER ON T+3 SETTLEMENT PROPOSAL
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The Institute has filed the attached comment letter with the Securities and
Exchange Commission concerning the Commission's proposal to shorten the standard
settlement period for most securities transactions involving a broker-dealer from
five business days to three business days ("T+3").
The Commission's proposing release indicated that securities issued by
investment companies would be covered by proposed Rule 15c6-1 under the
Securities Exchange Act, and requested comment on difficulties that might result
if the rule is applied to securities issued by mutual funds. The Institute's
letter expresses support for the rule's general goal of reducing risks in the
U.S. clearance and settlement system, but suggests that the Commission exclude
securities issued by mutual funds (and unit investment trusts) from the rule for
the present time in view of certain issues that arise.
The letter notes that because mutual funds issue redeemable securities, the
imposition of a T+3 settlement requirement could have unintended consequences.
For example, problems could occur because certain fund portfolio securities, such
as municipal securities, would be exempted from the shorter settlement
requirement. If a T+3 requirement applies to fund shares, municipal bond funds
could be obligated to pay redemption proceeds to shareholders within three
business days, while the funds might not be able to receive cash upon disposing
of portfolio securities for five business days.
The letter also points out that the proposal may be inconsistent with the
NASD's prompt payment rule, which generally requires brokers to transmit payments
for mutual fund shares to the fund by the later of the fifth business day
following receipt of the order and the business day that the broker actually
receives money from the customer. If the proposed rule overrides the prompt
payment rule, thus requiring brokers to transmit payment to a mutual fund within
three business days regardless of whether they have received money from the
customer, brokers could be forced to extend credit to customers that purchase
shares through them. Such extensions of credit may violate Section 11(d)(1) of
the Securities Exchange Act.
In addition to identifying these issues, the letter asserts that
transactions in securities issued by mutual funds present less clearing
corporation and other systemic risk than transactions in other types of
securities, so that application of the rule to these securities at this time is
not necessary to achieve the goals of the proposal. The letter therefore
recommends that the Commission move forward in implementing the proposed rule,
but exclude securities issued by mutual funds (and by unit investment trusts,
because they present many of the same issues) from its scope until the problems
noted above can be resolved.
Frances M. Stadler
Assistant Counsel
Attachment