Wake Me Up When September Ends: Hyperlinked Exhibits and Shortened Settlement are Here
Public companies and investors might soon share the sentiment from Green Day’s chart-topper “Wake Me Up When September Ends.” Early September marks the effective dates for two notable changes from the SEC that companies and investors knew were coming but might not be prepared for: (1) the requirement that registration statements and periodic reports include hyperlinks to each exhibit and (2) the shortening of the settlement cycle from “T+3” to “T+2.” This client alert briefly describes what these changes might mean for companies and investors.
The SEC voted on March 1, 2017 to amend Item 601 of Regulation S-K, which dictates the exhibits that companies are required to file with, or incorporate by reference into, their registration statements and periodic and current reports. Effective September 1, 2017, companies must include a hyperlink to each exhibit listed in the exhibit index of these filings in order to facilitate easier access to these exhibits for investors and other users of the information. Smaller reporting companies and non-accelerated filers that submit filings in the ASCII format do not have to comply with these amended rules until September 1, 2018.
Under the final rules, companies must include an active hyperlink to each exhibit listed in the exhibit index, with the exception of any XBRL filings, for all forms for which exhibits are required under Item 601 of Regulation S-K. Hyperlinks are required for both exhibits filed with the registration statement or report and documents separately filed on EDGAR and incorporated by reference into the registration statement or report. The SEC issued an updated EDGAR Filer Manual on July 17, 2017, and Chapter 5 of Volume II describes the specific procedures for creating a hyperlink to a previously-filed exhibit or an exhibit that is being filed at the same time as the registration statement or report. Companies will be relieved to hear that where a filing contains an inaccurate hyperlink, this alone will not render the filing materially deficient or affect a company’s ability to use short-form registration statements. Companies can simply correct an incorrect hyperlink in the next periodic report that includes exhibits pursuant to Item 601.
On March 22, 2017, the SEC voted to amend Rule 15c6-1(a) to shorten the standard settlement cycle for most broker-dealer securities transactions from three business days (“T+3”) to two business days (“T+2”). The new “T+2” settlement cycle will apply to all applicable securities transactions occurring on or after September 5, 2017. The amended rule prohibits broker-dealers from effecting, or entering into a contract for, the purchase or sale of a security that provides for payment of funds and delivery of securities later than T+2, unless otherwise expressly agreed to by the parties at the time of the transaction. Firm commitment underwritten offerings that price after 4:30pm Eastern are still permitted to use a T+3 or T+4 settlement cycle under Rule 15c6-1(c).
The practical effect of this change is that if an investor sells shares of a particular stock on Monday, the investor must deliver his or her shares to the brokerage firm by Wednesday, which is when the transaction will settle. Similarly, if an investor buys shares of stock, he or she will need to pay for the securities one business day earlier than under the current rule. Despite any potential inconvenience to investors, the financial services industry has advocated for a shortened settlement cycle in order to enhance the efficiency of securities transactions and reduce credit, market and liquidity risks resulting from failed trades.