T+1 Sweep Exams
Main Contributor: Gretchen Sturdivan, CSCP, Compliance Manager & Creative Director
Background
The T+1 requirement had a compliance date of May 28th 2024 which in turn impacted RIAs directly with amendments to Rule 204-2 of the Advisers Act (Books and Records Rule). RIAs subject to this type of trading are required to maintain records of each confirmation received, and of any allocation and each affirmation sent or received, with a date and time stamp for each indicating when it was sent or received. Read through the Fact Sheet for more information.
The rule includes all securities with the exception of a contract for an exempted security, government security, municipal securities, commercial paper, bankers’ acceptances, or commercial paper. Advisers are able to rely on the custodian for the required records (as long as you are aware of what you are relying on) but must maintain the records in their system in line with their policies and procedures. We have now seen a sweep exam from the SEC, requiring RIAs to produce a slew of books and records. We don’t have all of the answers, but we do want to make RIAs aware of the information we do have.
Focus of the T+1 Sweep Exam
The sweep examination is “broadly focusing on the Adviser’s policies, procedures, and practices associated with securities trade order processing or the trade life cycle, including some work that pre-dates the Examination Period.”
This includes the Adviser’s work related to, or impacted by (previously, currently, or anticipatory), the ACA Process or the securities transaction settlement cycle (generally) and T+1 settlement (specifically). Such “work” includes:
the positions, roles, functions, committees, and/or processes within the Adviser,
its compliance and/or operational policies and procedures,
books and records,
Service Provider activities,
preparatory work leading up to the T+1 compliance date, and
engagement of consultants or other third parties to assist with T+1-related activities.
T+1-Specific Sweep Exam Definitions
There are terms used in the initial request list that are specific to this sweep and are as follows:
“ACA Process”
This stands for the Allocation, Confirmation, and Affirmation process of institutional trades subject to Rule 15c6-2 under the Securities Exchange Act of 1934 (“Exchange Act”).
Allocation: refers to the process by which an institutional investor (often an investment adviser) allocates a large trade among various Client accounts or determines how to apportion securities trades ordered contemporaneously on behalf of multiple funds or non-fund Clients.
Confirmation: refers to the operational message that includes trade details provided by the broker-dealer to the customer to verify trade information so that a trade can be prepared for settlement on the timeline established in Exchange Act Rule 15c6-1(a). This relates to the institutional trade processing message or verification (it is not referencing the disclosure required under Exchange Act Rule 10b-10).
Affirmation: involves the trade counterparties responding to the broker-dealer’s trade Confirmation by affirming that the specifics of the trade are verified so that the transaction can be prepared for settlement (i.e., the full trade verification process is complete).
T+1-Specific Sweep Exam Request Items
Supervised Persons: include any role that is involved with establishing and/or maintaining broker-dealer relationships, trading, or assessing, measuring, monitoring, and documenting the ACA Process.
Vendors and Service Providers: The names and location of all Affiliated and unaffiliated Service Providers that are involved in, or impacted by, the ACA process or securities transaction settlement cycle. Include a description of the nature of the related service(s) and impact(s) related to the ACA process or securities transaction settlement cycle.
Client List: Within the client list, the adviser must list whether they participated in the ACA process for any trades or the client and whether the adviser outsources the ACA process for any trades of the client to a vendor/service provider. If yes, include the outsourced entity type (e.g., custodian, administrator, sub-adviser, TAMP, program sponsor).
Compliance Policies and Procedures: address processes or operational protocols affected by the ACA Process or securities transaction settlement cycle and/or the T+1 settlement that were in effect during the examination period.
Include any policies, procedures, and protocols expressly adopted by the Adviser that are designed to ensure the timely completion of Allocations, Confirmations, and/or Affirmations for institutional trades subject to Exchange Act Rule 15c6-1a.
Monitoring, Assessments, or Tests regarding ACA Process: Any assessments or tests performed regarding measuring, monitoring, and documenting the timeliness for processing or completing the ACA Process (e.g., analysis of individual transaction processing times, aggregate percentage of institutional trades that are affirmed by T+1, delayed, or failed trades).
Books and Records controls: Include any control procedures or practices established to comply with Advisers Act Rule 204-2(a)(7)(iii) for creating and maintaining accurate books and records related to the Allocation, Confirmation, Affirmation, or any combination thereof for any institutional transactions subject to T+1 settlement (Exchange Act Rule 15c6-1a).
Risks & Conflicts: A current list of conflicts and other compliance factors relevant to the Adviser’s particular operations regarding trading and execution that create risk exposure for the Adviser and its Clients and form the basis for the Adviser’s compliance policies and procedures. Please note any changes made to this list during the Examination Period and the dates of the changes.
Reporting: Any written reports or findings issued by an auditor or compliance consultant resulting from any engagement that specifically included the Adviser’s activities associated with trading, the trade settlement lifecycle, and other aspects of the Adviser’s trade decision, execution, Allocation, Confirmation, Affirmation, and other trade-related compliance policies and procedures, operations, or the Adviser’s books and records.
Testing: In reference to the compliance oversight and testing conducted by the Adviser or by a third-party on behalf of the Adviser, provide a list of all activities associated with trading, the trade settlement lifecycle, and other aspects of the Adviser’s trade decision, execution, Allocation, Confirmation, Affirmation, and other trade-related compliance testing performed, internal control analyses, and/or forensic and transactional tests performed for measuring, monitoring, and documenting the rates of processing or completing the ACA Process for any institutional transactions subject to T+1 settlement, and the dates and/or frequency of such testing.
Automated Compliance Tools: A list and description of any automated systems or tools used to carry out compliance-related oversight functions and/or reporting obligations associated with trading, the trade settlement lifecycle, and other aspects of the Adviser’s trade decision, execution, Allocation, Confirmation, Affirmation, and other trade-related compliance and regulatory reporting.
Compliance Exception Reporting: In reference to the compliance oversight and testing conducted by the Adviser or by a third-party on behalf of the Adviser, provide a record of any non-compliance with the compliance policies and procedures related to the same-day Allocation, Confirmation, and Affirmation for any institutional transactions subject to T+1 settlement by the Adviser’s Supervised Persons, including: the date of the non-compliance, a description of the matter, any action taken as a result of such non-compliance, and the resolution date.
Compliance Exceptions: A record of any non-compliance with activities associated with trading, the trade settlement lifecycle, and other aspects of the Adviser’s trade decision, execution, Allocation, Confirmation, Affirmation, and other trade-related compliance policies and procedures, contractual agreements, or other arrangements by the Adviser or its Supervised Persons. Include for each: the date of the non-compliance, a description of the matter, any action taken as a result of such non-compliance, and the resolution date.
Compliance Training Regarding Trading: Written guidance the Adviser provided to its Employees regarding the compliance program and documents evidencing Employee compliance training regarding Adviser trade and execution practices during the examination period, including those for compliance with Exchange Act Rule 15c6-2 and related broker-dealer contractual and other obligations.
Communications Related to the Adviser’s Role in the ACA Process: any written Communications sent to or received from Clients, broker-dealers, or other entities, such as custodians, regarding implications of T+1 on the Adviser and the Adviser’s or other entities’ associated role in the Allocation, Confirmation, and Affirmation of institutional trades subject to Exchange Act Rule 15c6-2
(e.g., discussions with broker-dealers regarding ACA Process-related agreements and policies and procedures, including resulting failed trades and Adviser practices that are otherwise non-conforming).
Written Agreements between Adviser and Broker-Dealers or Third Parties Regarding T+1-Related Trades, including for the Completion of Allocation, Confirmation, or Affirmation: Any written agreements between Adviser and broker-dealers or any third parties associated with trading, the trade settlement lifecycle, and other aspects of the Adviser’s trade decision, execution, Allocation, Confirmation, Affirmation, and other trade-related contractual agreements
(e.g., written agreements to facilitate the completion of the ACA Processes by certain specified timelines).
Conclusion
Ultimately, it appears the SEC is wanting to see this rule implemented throughout RIA’s compliance programs. What felt like a light lift in the midst of the private fund rule and DOL rule changes, seems now to be something of a full range application. SCS suggests going through the 15 request items above and see how your firm would respond to each item. If there is something your firm has not yet implemented or addressed, make the changes sooner rather than later to ensure adherence with the rule. Policies and procedures above all will be critical. Ensure that you incorporate the requirements you are responsible for within the ACA process and how you are testing or reviewing for adherence. Ensure you train employees and update your books and records matrix as well as your risk assessment.