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About Settling Trades
In Three Days: Introducing T+3
(Source: U.S. Securities and Exchange
Beginning on June 7, 1995,
investors must settle their security transactions in three business days
rather than five. This shortened settlement cycle is known as "T+3"
- shorthand for "trade date plus three days."
This new rule means that
when you buy securities, your payment must be received by your
brokerage firm no later than three business days after the trade is executed.
And if you sell securities, your brokerage firm must receive your
securities certificate no later than three business days after you authorized
The U.S. Securities and Exchange
Commission developed this brochure to address frequently asked questions
about why the settlement cycle was shortened and to highlight issues you
should consider in preparing for three-day settlement.
Unsettled trades pose risks to our financial markets, especially when
market prices plunge and trading volumes soar. This happened when the
stock market fell by over 500 points on October 19, 1987. In the hours
and days following this drop, our financial markets were threatened by
doubts about whether securities firms and investors hit by sizable losses
would be able to pay for their transactions. By reducing the settlement
cycle from five to three business days, the SEC has lessened the amount
of money that needs to be collected at any one time, and strengthened
our financial markets for times of stress.
security transactions are covered?"
Most security transactions, including stocks, bonds, municipal securities,
mutual funds traded through a broker, and limited partnerships that trade
on an exchange, must settle in three days. Government securities and options
will continue to settle as they have in the past - one day following a
purchase or sale.
Getting Your Money In
I buy a security, how do I make sure my payment reaches my broker in three
You should talk with your broker or banker about options for paying your
broker on time. Here are a few commonly available options:
Prompt Mailing of
If you live close to your brokerage firm or know from experience that
mail is usually delivered to your broker within three business days,
you may want to rely on the U.S. Postal Service. There are a number
of delivery services that promise delivery within one or two days.
Wire and Electronic
Transfer of Payments
You can arrange for your bank or savings institution to wire or electronically
transfer money from your account to a brokerage firm. Wire transfers
are available for a fee from most banks and savings institutions.
Another type of transfer
is available at most banks or savings institutions through the Automated
Clearing House system. Generally, these electronic transfers are considerably
less expensive than wire transfers.
Also, this system allows
an investor up to sixty days to reverse a transaction and receive
payment back if the trade was not authorized by the investor and the
investor signs a sworn statement or affidavit.
Maintain An "Asset
Management" Account With Your Broker
Most brokerage firms offer accounts from which they can deduct payments
automatically on the settlement date. Although not insured by the
FDIC, these accounts often offer interest on cash balances, as well
as check writing privileges and credit or debit cards.
ASK YOUR BROKER:
"What are my options for paying you?"
"When is my payment due?"
do I calculate when the three-day settlement cycle begins and ends?"
The first day of the three-day settlement cycle starts on the business
day following the day you purchased or sold a security. For example, let's
say you bought a stock on Friday at anytime during the day. Saturday and
Sunday are not considered business days, so the three-day clock doesn't
start running until Monday. Your payment or check must arrive at your
broker's office by the close of business on Wednesday.
Generally, those days when
the stock exchanges are open are considered business days. Always check
with your broker to make sure that you understand when your payment or
securities are due.
there be a penalty if my payment does not arrive at the brokerage firm
within three days?"
Some brokerage firms may charge investors fees or interest if their payments
or checks do not arrive by the third day. Since firms are responsible
for settling transactions if their investors do not pay, firms may decide
to sell a security, charging the investor for any losses caused by a drop
in the market value of the security and additional fees.
Ask your broker or brokerage
firm what they plan to do if your check or payment does not arrive within
three days, and what fees or charges will apply.
ASK YOUR BROKER:
"What happens if you don't receive payment on time?"
"When will I get my sale proceeds?
I sell or buy a security, will I receive funds or my security certificate
from my brokerage firm within three days?"
While brokerage firms are required to send funds or certificates "promptly"
to customers following the settlement of a trade, there are no deadlines
imposed by federal law or regulations. Brokerage firms will credit your
account with sale proceeds as soon as your trade settles. Some brokerage
firms may immediately "sweep" your money into an account that
earns interest. You should ask your broker about how you can assure that
all funds and securities are delivered to you promptly.
Confirming Your Trade
I be able to review a confirmation slip before I pay for my purchase?"
Although confirmation slips were never intended to serve as a bill, as
a precaution some investors examine confirmation slips before they send
payments to make sure that their orders have been executed correctly.
If this has been your practice
in the past, you should talk with your broker about how you can receive
the assurances you need in time to meet the new three day deadline for
You'll buy 100 shares of ABC Corp at 25 1/2"
Investor: "Let me write that down. You said ABC Corp. is large
and well-established, but its stock is underpriced given its earning
potential. The downside - stock is risky because ABC Corp.'s earnings
could drop. I should consider this a long-term investment. I'll buy
100 shares at 25 1/2 per share. What will my total be? When is my payment
should I do if my confirmation slip or account statement reflects purchases
or sales that I did not authorize or at a price I did not agree to?"
To be safe, you should always review confirmations or account statements
when they arrive. If these records contain surprises or mistakes _ securities
have been bought or sold without your approval or on terms that you have
not authorized _ you should immediately alert your broker and the firm's
branch manager in writing. Investors have important legal rights and remedies
if their brokers have engaged in "unauthorized trading," or
misrepresented the risks, character or price of a security.
You should routinely write
down what your broker tells you about why you should make a purchase and
the terms of a purchase or sale. These notes can help establish what was
said if a dispute arises.
If your problem is not resolved
by alerting the broker or firm, you should contact the Office of Consumer
Affairs at the SEC in Washington, D.C., or your state's securities office
to obtain information on how you can resolve your problem. (Addresses
are available at the end of this publication.) It's important that you
let your securities regulator know if you are experiencing difficulties
with the three day settlement cycle so that your concerns may be addressed.
CHECK YOUR CONFIRM:
"I never agreed
to buy this! I'll have to call the firm tomorrow to straighten this
Should "Hold" Your Securities? You?
Your Brokerage Firm? Or the Company in Which
You have choices when it comes to buying securities and whether you "hold"
your securities in your name or the name of your brokerage firm. How you
decide to buy and hold your securities is up to you.
Your choices have not been
limited by the switch to three-day settlement.
"When I buy, I'm
in for the long-term. I like to keep my certificates close at hand."
For instance, when you buy stock in a company you can ask for the actual
stock certificate to be sent to you. You can literally hold your stock
certificates in your own hands, before you place your certificates in
a secure location. The company you've invested in knows that you are the
shareholder and how to reach you directly.
"I want to save
as much money as possible when I buy or sell."
If you buy stock directly from the company you've invested in through
"direct registration" or dividend reinvestment programs, you
can either have the company record your purchase on their books, called
"book entry," or ask the company to mail certificates directly
"I don't want
the hassle of worrying about losing or having my stock certificates stolen."
If you buy through a broker, your brokerage firm may arrange for your
securities to be kept safely in a vault at a "depository."
When you allow your brokerage
firm to take responsibility for your certificates, your certificates are
said to be held in "street name." The company registers your
brokerage firm or its agent as the shareholder. Your brokerage firm will
keep records showing you as the real or "beneficial owner."
There are advantages and
disadvantages to these different ways of buying and holding your securities.
Which method is best for you depends on your unique needs and how you
invest. The following information summarizes the advantages and disadvantages
of the choices you face.
You can be sure that
you will meet the new three day deadline because your securities are
already on hand at your broker's office.
Your brokerage firm is
responsible for safeguarding your securities certificates so you don't
have to worry about your securities certificates being lost or stolen.
Brokerage firms may keep
you informed of important developments such as tender offers or when
bonds are called.
It is easier to use margin
accounts and place limit orders that direct your broker to sell a
security at a specific price.
Some brokerage firms
may charge you an "inactivity" fee for holding your securities
if you do not trade regularly.
Some brokerage firms
only pass along dividend and interest payments to investors on a weekly,
bi-weekly or monthly basis.
Since your name is not
on the books of the company, important corporate communications may
not be mailed directly to you from the company, which could result
If you want to sell your
securities through another brokerage firm, it generally takes two
weeks to arrange for your securities to be transferred to the new
firm and fees may be charged for the transfer.
Buying Securities Directly
From The Company:
Direct Registration and Dividend Reinvestment Plans
Have Advantages and Disadvantages
Investors do not typically
pay brokerage commissions on transactions, account maintenance fees
or inactivity fees. However, some companies may charge service fees
for buying or selling shares or reinvesting dividends.
Investors are "registered"
on the books of the company as the shareholder and receive communications
and dividend payments directly from the company.
If you want to receive
certificates you will generally not be charged a fee and you can then
sell when you want through a broker of your choice.
You do not control many
of the key elements of your transaction: price, timing and the amount
you may buy or sell at any one time.
Generally, the price
at which you buy or sell is an average market price determined by
past price movements over a day, several days or ten days, depending
on the individual company.
If you invest in more
than one program, you forego the convenience of having your investments
appear on one statement.
If you are interested in
learning more about direct registration, you should contact companies
directly and ask whether they have a direct registration program and how
the program works.
if the brokerage firm holding my cash or securities goes bankrupt or loses
The vast majority of brokerage firms are members of the Securities Investors
Protection Corporation (SIPC). If your brokerage firm goes bankrupt, and
it is a member of SIPC, then your securities and money are protected up
to $500,000, including a $100,000 limit for cash. However, SIPC does not
protect you against losses caused by a decline in the market value of
your securities. Your monthly account statements and confirmations will
be sufficient to establish your claim for money or securities. You should
keep those records in a safe place in the event that you need to file
a claim with SIPC. If you want to know whether your brokerage firm is
a member of SIPC, you should ask your broker, or call SIPC at (202) 371-8300.
Recommended further reading:
are investment advisers?
Internet Fraud: How to avoid Internet
Tips for online investing: What you
need to know about trading in fast-moving markets
Trade Execution: What every investor should