EDGAR using Inline XBRL, a structured (machine-readable) data language.
Requiring a centralized filing location and a machine-readable data
language for the reports would facilitate access, retrieval, analysis,
and comparison of the disclosed straight-through processing information
across different CMSPs and time periods by the Commission and the
public, thus potentially augmenting the informational benefits of the
report requirement.
2. Costs
    The Commission preliminarily believes that compliance with a T+1
standard settlement cycle would involve initial fixed costs to update
systems and processes.\351\ The Commission does not have all of the
data necessary to form its own firm-level estimates of the costs of
updates to systems and processes, as the types of data needed to form
these estimates are difficult or impossible for the Commission to
collect. However, the Commission has used inputs provided by industry
studies discussed in this release to quantify these costs to the extent
possible in Part V.C.5. In addition, the Commission encourages
commenters to provide any information or data on the costs to market
participants of the proposed rule.
---------------------------------------------------------------------------

    \351\ Industry sources have suggested some updates to systems
and processes might yield operational cost savings after the initial
update. E.g., ``While there may be . . . up-front implementation
costs to transition the industry to T+1, the industry foresees long-
term cost reduction for market participants, and by extension, costs
borne by end investors, given the benefits of moving to T+1
settlement.'' T+1 Report, supra note 18, at 9; see infra Part
V.C.5.a) for industry estimates of the costs and benefits of the
proposed amendment to Rule 15c6-1(a).
---------------------------------------------------------------------------

    The operational cost burdens associated with the proposed amendment
to Rule 15c6-1(a) for different market participants might vary
depending on each market participant's degree of direct or indirect
inter-connectivity to the clearance and settlement process, regardless
of size. For example, market participants that internally manage more
of their own post-trade processes would directly incur more of the
upfront operational costs associated with the proposed amendment to
Rule 15c6-1(a), because they would be required to directly undertake
more of the upgrades and testing necessary for a T+1 standard
settlement cycle. As mentioned in Part II.B, other market participants
might outsource the clearance and settlement of their transactions to
third-party providers of back-office services. The exposures to the
operational costs associated with shortening the standard settlement
cycle would be indirect to the extent that third-party service
providers pass through the costs of infrastructure upgrades to their
customers. The degree to which customers bear operational costs depends
on their bargaining position relative to third-party providers. Large
customers with market power may be able to avoid internalizing these
costs, while small customers in a weaker negotiation position relative
to service providers may bear the bulk of these costs.
    Further, changes to initial and ongoing operational costs may make
some self-clearing market participants alter their decision to continue
internally managing the clearance and settlement of their transactions.
Entities that currently internally manage their clearance and
settlement activity may prefer to restructure their businesses to rely
instead on third-party providers of clearance and settlement services
that may be able to amortize the initial fixed cost of upgrade across a
much larger volume of transaction activity.
    In addition, the shortening of the settlement cycle may increase
the need for some market participants engaging in cross-border and
cross-asset transactions to hedge risks stemming from mismatched
settlement cycles, resulting in additional costs. For example, under
the proposed T+1 settlement cycle, a market participant selling a
security in European equity markets to fund a purchase of securities in
U.S. markets would face a one day lag between settlement in Europe and
settlement in the U.S. The market participant could choose between
bearing an additional day of market risk in the U.S. trading markets by
delaying the purchase by a day, or funding the purchase of U.S. shares
with short-term borrowing. Additionally, because the FX market has a
T+2 settlement cycle,\352\ the market participant would also be faced
with a choice between bearing an additional day of currency risk due to
the need to sell Euros as part of the transaction, or to incur the cost
related to hedging away this risk in the forward or futures market.
---------------------------------------------------------------------------

    \352\ See, e.g., CME Rulebook, Ch. 13, Sec.  1302 (```Spot FX
Transaction''' means a currency purchase and sale that is
bilaterally settled by the counterparties via an actual delivery of
the relevant currencies within two Business Days.''), https://www.cmegroup.com/rulebook/CME/. U.S. and Canadian dollar spot FX
transactions settle on the next business day. Id. Ch. 13, Appendix.
---------------------------------------------------------------------------

    The way that different market participants would likely bear costs
as a result of the proposed amendment to Rule 15c6-1(a) may also vary
based on their business structure. For example, a shorter standard
settlement cycle will require payment for securities that settle
regular-way by T+1 rather than T+2. Generally, regardless of current
funding arrangements between investors and broker-dealers, removing one
business day between execution and settlement would mean that broker-
dealers could choose between requiring investors to fund the purchase
of securities one business day earlier while extending the same level
of credit they do under T+2 settlement, or providing an additional
business day of funding to investors. In other words, broker-dealers
could pass through some of the costs of a shorter standard settlement
cycle by imposing the same shorter cycle on investors, or they could
pass these costs on to investors by raising transactions fees to
compensate for the additional business day of funding the broker-dealer
may choose to provide. The extent to which these costs get passed
through to customers may depend on, among other things, the market
power of the broker-dealer. If a broker-dealer does not face
significant competition, its market power may enable it to recover the
entire initial investment cost from its customers. On the other hand, a
broker-dealer that faces perfect competition for its customers may be
unable to pass along any of these costs to its customers.\353\
---------------------------------------------------------------------------

    \353\ See supra Part V.C.1 for additional discussion regarding
the impact of broker-dealer market power. See infra Part V.C.5.b)(3)
for quantitative estimates of the costs to broker-dealers.
---------------------------------------------------------------------------

    However, broker-dealers that predominantly serve retail investors
may experience the burden of an earlier payment requirement differently
from broker-dealers with more institutional

clients or large custodian banks because of the way retail investors
fund their accounts. Retail investors may find it difficult to
accelerate payments associated with their transactions, which may cause
broker-dealers who are unwilling to extend additional credit to retail
investors to instead require that these investors pre-fund their
transactions.\354\ These broker-dealers may also experience costs
unrelated to funding choices. For instance, retail investors may
require additional or different services such as education regarding
the impact of the shorter standard settlement cycle.
---------------------------------------------------------------------------

    \354\ See infra Part V.C.5.b)(3) for additional discussion
regarding retail investors and their broker-dealers.
---------------------------------------------------------------------------

    Finally, a shorter settlement cycle may result in higher costs
associated with liquidating a defaulting member's position, as a
shorter horizon may result in larger price impacts, particularly for
less liquid assets. For example, when a clearing member defaults, NSCC
is obligated to fulfill its trade guarantee with the defaulting
member's counterparty. One way it accomplishes this is by liquidating
assets from clearing fund contributions from clearing members. However,
liquidating assets in shorter periods of time can have larger adverse
impacts on the prices of the assets. Shortening the standard settlement
cycle from two business days to one business day could reduce the
amount of time that NSCC would have to liquidate its assets, which may
exacerbate the price impact of liquidation.
3. Economic Implications Through Other Commission Rules
    As noted in Part III.E, the proposed amendment to Rule 15c6-1(a),
by shortening the standard settlement cycle, could have an ancillary
impact on the means by which market participants comply with existing
regulatory obligations that relate to the settlement timeframe. The
Commission also provided illustrative examples of specific Commission
rules that include such requirements or are otherwise are keyed-off
settlement date, including Regulation SHO,\355\ and certain provisions
included in the Commission's financial responsibility
rules.356 357
---------------------------------------------------------------------------

    \355\ 17 CFR 242.200 et seq.
    \356\ See supra Part III.E.2.
    \357\ The Commission is also soliciting comment on the impact of
shortening the settlement cycle on compliance with Rule 10b-10 under
the Exchange Act and broker-dealer obligations with regard to
prospectus delivery. See supra Parts III.E.3 and III.E.4. However,
based on current practices and comments received by the Commission
to the T+2 proposing release, the Commission preliminarily believes
shortening the settlement cycle to T+1 will not impact compliance
with these rules. Id.
---------------------------------------------------------------------------

    Financial markets and regulatory requirements have evolved
significantly since the Commission adopted Rule 15c6-1 in 1993. Market
participants have responded to these developments in diverse ways,
including implementing a variety of systems and processes, some of
which may be unique to specific market participants and their
businesses, and some of which may be integrated throughout business
operations of certain market participants. Because of the broad variety
of ways in which market participants currently satisfy regulatory
obligations pursuant to Commission rules, in most circumstances it is
difficult to identify those practices that market participants would
need to change in order to meet these other obligations. Under these
circumstances, and without additional information, the Commission is
unable to provide an estimate of the ancillary economic impact that the
proposed amendment to Rule 15c6-1(a) would have on how market
participants comply with other Commission rules. The Commission invites
commenters to provide quantitative and qualitative information about
these potential economic effects.
    In certain cases, based on information about current market
practices, the Commission preliminarily believes that the proposed
amendment to Rule 15c6-1(a) would be unlikely to change the means by
which market participants comply with existing regulatory requirements.
In these cases, the Commission believes that market participants would
not incur significant increased costs of compliance from such
regulatory requirements from shortening the settlement cycle to T+1.
    In other cases, however, the proposed amendment may incrementally
increase the costs associated with complying with other Commission
rules where such rules potentially require broker-dealers to engage in
purchases of securities. Two examples of these types of rules are
Regulation SHO and the Commission's financial responsibility rules. In
most instances, Regulation SHO governs the timeframe in which a
``participant'' of a registered clearing agency must close out a fail
to deliver position by purchasing or borrowing securities.\358\
Similarly, some of the Commission's financial responsibility rules
relate to actions or notifications that reference the settlement date
of a transaction. For example, Exchange Act Rule 15c3-3(m) \359\ uses
the settlement date to prescribe the timeframe in which a broker-dealer
must complete certain sell orders on behalf of customers. As noted
above, the term ``settlement date'' is also incorporated into paragraph
(c)(9) of Rule 15c3-1,\360\ which explains what it means to ``promptly
transmit'' funds and ``promptly deliver'' securities within the meaning
of paragraphs (a)(2)(i) and (a)(2)(v) of Rule 15c3-1. As explained
above, the concepts of promptly transmitting funds and promptly
delivering securities are incorporated in other provisions of the
financial responsibility rules.\361\ Under the proposed amendment to
Rule 15c6-1(a), the timeframes included in these rules will be one
business day closer to the trade date.
---------------------------------------------------------------------------

    \358\ See supra Part III.E.1.
    \359\ 17 CFR 240.15c3-3(m).
    \360\ 17 CFR 240.15c3-1(c)(9).
    \361\ See, e.g., 17 CFR 240.15c3-1(a)(2)(i), (a)(2)(v); 17 CFR
240.15c3-3(k)(1)(iii), (k)(2)(i), (k)(2)(ii); 17 CFR 240.17a-
5(e)(1)(A); 17 CFR 240.17a-13(a)(3).
---------------------------------------------------------------------------

    The Commission preliminarily believes that shortening these
timeframes would not materially affect the costs that broker-dealers
would likely incur to meet their Regulation SHO obligations and
obligations under the Commission's financial responsibility rules.
Nevertheless, the Commission acknowledges that a shorter settlement
cycle could affect the processes by which broker-dealers manage the
likelihood of incurring these obligations. For example, broker-dealers
may currently have in place inventory management systems that help them
avoid failing to deliver securities by T+2. Broker-dealers would likely
incur costs in order to update these systems to support a shorter
settlement cycle.
    In cases where market participants will need to adjust the way in
which they comply with other Commission rules, the magnitude of the
costs associated with these adjustments is difficult to quantify. As
noted above, market participants employ a wide variety of strategies to
meet regulatory obligations. For example, broker-dealers may ensure
that they have securities available to meet their obligations by using
inventory management systems or they may choose instead to borrow
securities. An estimate of costs is further complicated by the
possibility that market participants could change their compliance
strategies in response to a shorter standard settlement cycle.
    As with the T+2 transition, the Commission anticipates that the
proposed transition to T+1 would again require changes to SRO rules and
changes to the operations or market participants subject to those rules
to achieve consistency with a T+1 standard settlement cycle. Certain
SRO

rules reference existing Rule 15c6-1 or currently define ``regular
way'' settlement as occurring on T+2 and, as such, may need to be
amended in connection with shortening the standard settlement cycle to
T+1. Certain timeframes or deadlines in SRO rules also may refer to the
settlement date, either expressly or indirectly. In such cases, the
SROs may need to amend these rules in connection with shortening the
settlement cycle to T+1.\362\
---------------------------------------------------------------------------

    \362\ The T+1 Report similarly indicates that SROs will likely
need to update their rules to facilitate a transition to a T+1
standard settlement cycle. T+1 Report, supra note 18, at 35.
---------------------------------------------------------------------------

    The Commission invites commenters to provide quantitative and
qualitative information about the impact of the proposed amendment to
Rule 15c6-1(a) on the costs associated with compliance with other
Commission rules.
4. Effect on Efficiency, Competition, and Capital Formation
    Market participants may incur initial costs for the investments
necessary to comply with a shorter standard settlement cycle.\363\
However, these costs would likely differ across market participants and
these differences may exacerbate coordination problems. First, per-
transaction operational costs clearing members incur in connection with
the clearing services they provide may be higher for members that clear
fewer transactions than such costs are for members that clear a higher
volume of transactions. Thus, the extent to which many of the upgrades
necessary for a T+1 standard settlement cycle are optimal for a member
to adopt unilaterally may depend, in part, on the transaction volume
cleared by such member. For example, certain upgrades necessary for a
T+1 standard settlement cycle may result in economies of scale, where
large clearing members are able to comply with the proposed amendment
to Rule 15c6-1(a) at a lower per-transaction cost than smaller members.
As a result, larger members might take a short time to recover their
initial costs for upgrades; smaller members with lower transaction
volumes might take longer to recover their initial cost outlays and
might be more reluctant to make the upgrades in the absence of the
proposed amendment. These differences in cost per transaction may be
mitigated through the use of third-party service providers.
---------------------------------------------------------------------------

    \363\ See supra Part V.C.2.
---------------------------------------------------------------------------

    In addition, the Commission acknowledges that the upgrades
necessary to implement a shorter standard settlement cycle may produce
indirect economic effects. We analyze some of these indirect effects,
such as the impact on competition and third-party service providers, in
the following section.
    A shorter settlement cycle might improve the efficiency of the
clearance and settlement process through several channels. First, the
Commission preliminarily believes that the primary effect that a
shorter settlement cycle would have on the efficiency of the settlement
process would be a reduction in the credit, market, and liquidity risks
that broker-dealers, CCPs, and other market participants are subject to
during the standard settlement cycle.\364\ A shorter standard
settlement cycle will generally reduce the volume of unsettled
transactions that could potentially pose settlement risk to
counterparties. Shortening the period between trade execution and
settlement would enable trades to be settled with less aggregate risk
to counterparties or the CCP. A shorter standard settlement cycle may
also decrease liquidity risk by enabling market participants to access
the proceeds of their transactions sooner, which may reduce the cost
market participants incur to handle idiosyncratic liquidity shocks
(i.e., liquidity shocks that are uncorrelated with the market). That
is, because the time interval between a purchase/sale of securities and
payment is reduced by one business day, market participants with
immediate payment obligations that they could cover by selling
securities would be required to obtain short-term funding for one less
day.\365\ As a result of reduced cost associated with covering their
liquidity needs, market participants may, under particular
circumstances, be able to shift assets that would otherwise be held as
liquid collateral towards more productive uses, improving allocative
efficiency.\366\
---------------------------------------------------------------------------

    \364\ Reduction of these risks should result in the reduction of
margin requirements and other risk management activity that requires
resources that could be put to another use.
    \365\ See supra Part V.B.2.
    \366\ See supra Part V.A.
---------------------------------------------------------------------------

    Second, a shorter standard settlement cycle may increase price
efficiency through its effect on credit risk exposures between
financial intermediaries and their customers. In particular, a prior
study noted that certain intermediaries that transact on behalf of
investors, such as broker-dealers, may be exposed to the risk that
their customers default on payment obligations when the price of
purchased securities declines during the settlement cycle.\367\ As a
result of the option to default on payment obligations, customers'
payoffs from securities purchases resemble European call options and,
from a theoretical standpoint, can be valued as such. Notably, the
value of European call options increases in the time to expiration
\368\ suggesting that the value of call options held by customers who
purchase securities is increasing in the length of the settlement
cycle. In order to compensate itself for the call option that it
writes, an intermediary may include the cost of these call options as
part of its transaction fee and this cost may become a component of
bid-ask spreads for securities transactions. By reducing the value of
customers' option to default by reducing the option's time to maturity,
a shorter standard settlement cycle may reduce transaction costs in
U.S. securities markets. In addition, to the extent that any benefit
buyers receive from deferring payment during the settlement cycle is
incorporated in securities returns,\369\ the proposed amendment to Rule
15c6-1(a) may reduce the extent to which such returns deviate from
returns consistent with changes in fundamentals.
---------------------------------------------------------------------------

    \367\ See Madhavan et al., supra note 296.
    \368\ All other things equal, an option with a longer time to
maturity is more likely to be in the money given that the variance
of the underlying security's price at the exercise date is higher.
    \369\ See supra Part V.B.2.
---------------------------------------------------------------------------

    As discussed in more detail above, the Commission preliminarily
believes that the proposed amendment to Rule 15c6-1(a) would likely
require market participants to incur costs related to infrastructure
upgrades and would likely yield benefits to market participants,
largely in the form of reduced financial risks related to settlement.
As a result, the Commission preliminarily believes that the proposed
amendment to Rule 15c6-1(a) could affect competition in a number of
different, and potentially offsetting, ways.
    The prospective reduction in financial risks related to shortening
the standard settlement cycle may represent a reduction in barriers to
entry for certain market participants.\370\ Reductions in the financial
resources required to cover an NSCC member's clearing fund requirements
that result from a shorter standard settlement cycle could encourage
financial firms that currently clear transactions through NSCC clearing
members to become clearing members themselves.
---------------------------------------------------------------------------

    \370\ See supra Part V.C.1 for a discussion of the reduction in
credit, market, and liquidity risks to which NSCC would be subject
as a result of a shortening of the settlement cycle and the
subsequent reduction financial resources dedicated to mitigating
those risks.

---------------------------------------------------------------------------

    Their entry into the market could promote competition among NSCC
clearing members. Furthermore, if a reduction in settlement risks
results in lower transaction costs for the reasons discussed above,
market participants that were, on the margin, discouraged from
supplying liquidity to securities markets due to these costs could
choose to enter the market for liquidity suppliers, increasing
competition.
    At the same time, the Commission acknowledges that the process
improvements required to enable a shorter standard settlement cycle
could adversely affect competition. Among clearing members, where such
process improvements might be necessary to comply with the shorter
standard settlement cycle required under the proposed amendment to Rule
15c6-1(a), the cost associated with compliance might increase barriers
to entry, because new firms would incur higher fixed costs associated
with a shorter standard settlement cycle if they wish to enter the
market. Clearing members might choose to comply by upgrading their
systems and processes or may choose instead to exit the market for
clearing services. The exit of clearing members could have negative
consequences for competition among clearing members. Clearing activity
tends to be concentrated among larger broker-dealers.\371\ Clearing
member exit could result in further concentration and additional market
power for those clearing members that remain.
---------------------------------------------------------------------------

    \371\ See supra Part V.B.2.
---------------------------------------------------------------------------

    Alternatively, some current clearing members may choose to comply
in part by outsourcing their operational needs to third-party service
providers. Use of third-party service providers may represent a
reasonable response to the operational costs associated with the
proposed amendment to Rule 15c6-1(a). To the extent that third-party
service providers are able to spread the fixed costs of compliance
across a larger volume of transactions than their clients, the
Commission preliminarily believes that the use of third-party service
providers might impose a smaller compliance cost on clearing members
than if these firms directly bore the costs of compliance. The
Commission preliminarily believes that this impact may stretch beyond
just clearing members. The use of third-party service providers may
mitigate the extent to which the proposed amendment to Rule 15c6-1(a)
raises barriers to entry for broker-dealers. Because these barriers to
entry may have adverse effects on competition between clearing members,
we preliminarily believe that the use of third-party service providers
may mitigate the adverse effects of the proposed amendment to Rule
15c6-1(a) on competition between broker-dealers.
    Existing market power may also affect the distribution of
competitive impacts stemming from the proposed amendment to Rule 15c6-
1(a) across different types of market participants. While, as noted
above, reductions in the credit, market, and liquidity risks that
broker-dealers, CCPs, and other market participants are subject to
during the standard settlement cycle could promote competition among
clearing members and liquidity suppliers, these groups may benefit to
differing degrees, depending on the extent to which they are able to
capture the benefits of a shortened standard settlement cycle.
    Finally, a shorter standard settlement cycle might also improve the
capital efficiency of the clearance and settlement process, which would
promote capital formation in U.S. securities markets and in the
financial system generally.\372\ A shorter standard settlement cycle
would reduce the amount of time that collateral must be held for a
given trade, thus freeing the collateral to be used elsewhere earlier.
For a given quantity of trading activity, collateral would also be
committed to clearing fund deposits for a shorter period of time. The
greater collateral efficiency promoted by a shorter settlement cycle
might also indirectly promote capital formation for market participants
in the financial system in general. Specifically, the improved capital
efficiency that would result from a shorter standard settlement cycle
would enable a given amount of collateral to support a larger amount of
financial activity.
---------------------------------------------------------------------------

    \372\ See supra Part V.A for more discussion regarding capital
formation and efficiency.
---------------------------------------------------------------------------

5. Quantification of Direct and Indirect Effects of a T+1 Settlement
Cycle
    In previous years, several industry groups have released estimates
for compliance costs associated with a shorter standard settlement
cycle, including the SIA, the ISC, and BCG.\373\ Although all of these
studies examined prior shortenings of the settlement cycle including
from T+5 to T+3 and from T+3 to T+2, in the absence of a current study
examining shortening from the current T+2 to T+1 they serve as a useful
rough initial estimate of the costs involved in a settlement cycle
shortening. The most recent of these, the BCG Study performed a cost-
benefit analysis of a T+2 standard settlement cycle. Below is a summary
of the cost estimates in the BCG Study and in the following
subsections, an evaluation of these estimates as part of the discussion
of the potential direct and indirect compliance costs related to the
proposed amendment to Rule 15c6-1(a). In addition, the Commission
encourages commenters to provide additional information to help
quantify the economic effects that we are currently unable to quantify
due to data limitations.
---------------------------------------------------------------------------

    \373\ See SIA Business Case Report, supra note 21; see also ISG
White Paper, supra note 26; BCG Study, supra note 22. The SIA has
since merged with other groups to form SIFMA.
---------------------------------------------------------------------------

(a) Industry Estimates of Costs and Benefits
    The BCG Study concluded that the transition to a T+2 settlement
cycle would cost approximately $550 million in incremental initial
investments across industry constituent groups,\374\ which would result
in annual operating savings of $170 million and $25 million in annual
return on reinvested capital from clearing fund reductions.\375\
---------------------------------------------------------------------------

    \374\ The BCG Study generally refers to ``institutional broker-
dealers,'' ``retail broker-dealers,'' ``buy side'' firms, and
``custodian banks,'' without defining these particular groups. The
Commission uses these terms when referring to estimates provided by
the BCG Study but notes that its own definitions of various affected
parties may differ from those in the BCG Study.
    \375\ See BCG Study, supra note 22, at 9-10.
---------------------------------------------------------------------------

    The BCG Study also estimated that the average level of required
investments per firm could range from $1 to 5 million, with large
institutional broker-dealers incurring the largest amount of
investments on a per-firm basis, and buy side firms at the lower end of
the spectrum.\376\ The investment costs for ``other'' entities,
including DTCC, DTCC ITP Matching (US) LLC (f/k/a Omgeo Matching (US)
LLC), service bureaus, RICs and non-self-clearing broker-dealers
totaled $70 million for the entire group. Within this $70 million, DTCC
and Omgeo were estimated to have a compliance investment cost of $10
million each. The study's authors estimated that institutional broker-
dealers would have operational cost savings of approximately 5%, retail
broker-dealers of 2% to 4%, buy-side firms of 2% and custodial banks of
10% to 15% for an industry total operational cost savings of
approximately $170MM per year.\377\
---------------------------------------------------------------------------

    \376\ Id. at 30-31.
    \377\ See id. at 41.
---------------------------------------------------------------------------

    The BCG Study also estimated the annual clearing fund reductions
resulting from reductions in clearing firms' clearing funds
requirements to be

$25 million per year.\378\ The study estimated this by considering the
reduction in clearing fund requirements and multiplied it by the
average Federal Funds target rate for the 10-year period up until 2008
(3.5%). The BCG Study also estimated the value of the risk reduction in
buy side exposure to the sell side. The implied savings were estimated
to be $200 million per year, but these values were not included in the
overall cost-benefit calculations.
---------------------------------------------------------------------------

    \378\ See supra note 334 for a discussion of the impact of
increases in daily trading volume since the time of the BCG study on
this estimate.
---------------------------------------------------------------------------

    Several factors limit the usefulness of the BCG Study's estimates
of potential costs and benefits of the proposed amendment to Rule 15c6-
1(a). First, a further shortening of the settlement cycle to T+1 may
require investments in new technology and processes that were not
necessary under the previous shortening to T+2. Second, technological
improvements, such as the increased use of computers and automation in
post-trade processes, that have been made since 2012, when the report
was first published, may have reduced the cost of the upgrades
necessary to comply with a shorter settlement cycle. This may, in turn,
reduce the costs associated with the proposed amendment,\379\ as a
larger portion of market participants may have already adopted many
processes that would reduce the cost of a transition to a shorter
settlement cycle. In addition, the BCG Study considered as a part of
its cost estimates operational cost savings as a result of improvements
to operational efficiency.
---------------------------------------------------------------------------

    \379\ See supra Part V.A. While market participants may have
already made investments consistent with implementing a shorter
settlement cycle, the fact that these investments have not resulted
in a shorter settlement cycle is consistent with the existence of
coordination problems among market participants.
---------------------------------------------------------------------------

    Lastly, the BCG Study was premised on survey responses by a subset
of market participants that may be affected by the rule. Surveys were
sent to 270 market participants and 70 responses were received,
including 20 institutional broker-dealers, prime brokers and
correspondent clearers; 12 retail broker-dealers; 17 buy side firms; 14
RIAs; and seven custodian banks. Given the low response rate, as well
as the uncertainty regarding the sample of market participants that was
asked to complete the survey, the Commission cannot conclude that the
cost estimates in the BCG Study are representative of the costs of all
market participants.\380\
---------------------------------------------------------------------------

    \380\ See BCG Study, supra note 22, at 15.
---------------------------------------------------------------------------

(b) Estimates of Costs
    The proposed amendment to Rule 15c6-1(a) would generate direct and
indirect costs for market participants, who may need to modify and/or
replace multiple systems and processes to comply with a T+1 standard
settlement cycle. As noted above, the T+2 Playbook included a timeline
with milestones and dependencies necessary for a transition to a T+2
settlement cycle, as well as activities that market participants should
consider in preparation for the transition and the Commission
preliminarily believes that this provides an initial guide to those
that would be necessary for a transition to T+1. The Commission
preliminarily believes that the majority of activities for migration to
a T+1 settlement cycle would stem from behavior modification of market
participants and systems testing, and thus the majority of the costs of
migration would be from labor.\381\ These modifications would include a
compression of the settlement timeline, as well as an increase in the
fees that brokers may impose on their customers for trade failures.
Although the T+2 Playbook did not include any direct estimates of the
compliance costs for a T+2 settlement cycle, the Commission utilizes
the timeline in the T+2 Playbook for specific actions necessary to
migrate to a T+2 settlement cycle to directly estimate the inputs
needed for migration, and form preliminary compliance cost estimates
for the shortening to T+2 and uses these as an estimate for the
shortening to T+1.
---------------------------------------------------------------------------

    \381\ See id.
---------------------------------------------------------------------------

    In addition, the T+2 Playbook, the ISC White Paper, and the BCG
Study identified several categories of actions that market participants
might need to take to comply with a T+2 settlement cycle and likely
also with a T+1 settlement cycle--processing, asset servicing, and
documentation.\382\ While the following cost estimates for these
remedial activities span industry-wide requirements for a migration to
a T+1 settlement cycle, the Commission does not anticipate each market
participant directly undertaking all of these activities for several
reasons. First, some market participants work with third-party service
providers to facilitate certain functions that may be impacted by a
shorter standard settlement cycle, such as trade processing and asset
servicing, and thus may only bear the costs of the requirements through
fees paid to those service providers. Second, certain costs might only
fall on specific categories of entities. For example, the costs of
updating the CNS and ID Net system would only directly fall on NSCC,
DTC, and members/participants of those clearing agencies. Finally, some
market participants may already have the processes and systems in place
to accommodate a T+1 standard settlement cycle or would be able to
adjust to a T+1 settlement cycle without incurring significant costs.
For example, some market participants may already have the systems and
processes in place to meet the requirements for same-day trade
affirmation and matching consistent with the requirements in proposed
Rule 15c6-2.\383\ These market participants may thus bear a
significantly lower cost to update their trade affirmation systems/
processes to settle on a T+1 standard settlement cycle.\384\
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    \382\ See T+2 Playbook, supra note 27, at 11.
    \383\ See BCG Study, supra note 22, at 23.
    \384\ The BCG Study, as it is based on survey responses from
market participants, does reflect the heterogeneity of compliance
costs for market participants.
---------------------------------------------------------------------------

    The following section examines several categories of market
participants and estimate the compliance costs for each category. The
Commission's estimate of the number and type of personnel that may be
required is based on the scope of activities for a given category of
market participant necessary for the market participant to migrate to a
T+1 settlement cycle, the market participant's role within the
clearance and settlement process, and the amount of testing required to
minimize undue disruptions.\385\ Hourly salaries for personnel are from
SIFMA's Management and Professional Earnings in the Securities Industry
2013.\386\ These estimates use the timeline from the T+2 Playbook to
determine the length of time personnel would work on the activities
necessary to support a T+1 settlement cycle. The timeline provides an
indirect method to estimate the inputs necessary to migrate to a T+1
settlement cycle, rather than relying directly on survey response
estimates. The Commission acknowledges many entities are already
undertaking activities to support a migration to a T+1 settlement cycle
in anticipation of

the proposed amendment. However, to the extent that the costs of these
activities have already been incurred, the Commission considers these
costs sunk, and they are not included in the analysis below.
---------------------------------------------------------------------------

    \385\ For example, FMUs that play a critical role in the
clearance and settlement infrastructure would require more testing
associated with a T+1 standard settlement cycle than institutional
investors.
    \386\ To monetize the internal costs, the Commission staff used
data from SIFMA publications, modified by Commission staff to
account for an 1800 hour work-year and multiplied by 5.35
(professionals) or 2.93 (office) to account for bonuses, firm size,
employee benefits and overhead. See SIFMA, Management and
Professional Earnings in the Security Industry--2013 (Oct. 7, 2013),
https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013/; SIFMA,
Office Salaries in the Securities Industry--2013 (Oct. 7, 2013),
https://www.sifma.org/resources/research/office-salaries-in-the-securities-industry/. These figures have been adjusted for inflation
using data published by the Bureau of Labor Statistics.
---------------------------------------------------------------------------

(1) FMUs--CCPs and CSDs
    CNS, NSCC/DTC's ID Net service, and other systems would require
adjustment to support a T+1 standard settlement cycle. According to the
T+2 Playbook and the ISC White Paper, regulation-dependent planning,
implementation, testing, and migration activities associated with the
transition to a T+2 settlement cycle could last up to five
quarters.\387\ The Commission preliminarily believes that these
activities would impose a one-time compliance cost of $12.6 million
\388\ for DTC and NSCC each. After this initial compliance cost, the
Commission preliminarily expects that both DTCC and NSCC would incur
minimal ongoing costs from the transition to a T+1 standard settlement
cycle, because the Commission believes that the majority of costs would
stem from pre-migration activities, such as implementation, updates to
systems and processes, and testing.
---------------------------------------------------------------------------

    \387\ See T+2 Playbook, supra note 27, at 11.
    \388\ The estimate is based on the T+2 Playbook timeline, which
estimates regulation-dependent implementation activity, industry
testing, and migration lasting five quarters. The Commission assumes
10 operations specialists (at $149 per hour), 10 programmers (at
$295 per hour), and 1 senior operations manager (at $397/hour),
working 40 hours per week. (10 x $149 + 10 x $295 + 1 x $397) x 5 x
13 x 40 = $12,575,000.
---------------------------------------------------------------------------

(2) Matching/ETC Providers--Exempt Clearing Agencies
    Matching/ETC Providers may need to adapt their trade processing
systems to comply with a T+1 settlement cycle. This may include actions
such as updating reference data, configuring trade match systems, and
configuring trade affirmation systems to affirm trades on T+0.
Matching/ETC Providers would also need to conduct testing and assess
post-migration activities. The Commission preliminarily estimates that
these activities would impose a one-time compliance cost of up to $12.6
million \389\ for each Matching/ETC Provider. However, the Commission
acknowledges that some ETC providers may have a higher cost burden than
others based on the volume of transactions that they process. The
Commission expects that ETC providers would incur minimal ongoing costs
after the initial transition to a T+1 settlement cycle because the
Commission preliminarily believes that the majority of the costs of
migration to a T+1 settlement cycle entail behavioral changes of market
participants and pre-migration testing.
---------------------------------------------------------------------------

    \389\ The estimate is based on the T+2 Playbook timeline, which
estimates regulation-dependent implementation activity for trade
systems, matching, affirmation, testing, and post-migration testing
lasting five quarters. The Commission assumes 10 operations
specialists (at $149 per hour), 10 programmers (at $295 per hour),
and 1 senior operations manager (at $397/hour), working 40 hours per
week. (10 x $149 + 10 x $295 + 1 x $397) x 5 x 13 x 40 =
$12,575,000.
---------------------------------------------------------------------------

(3) Market Participants--Investors, Broker-Dealers, Investment
Advisers, and Bank Custodians
    The overall compliance costs that a market participant incurs would
depend on the extent to which it is directly involved in functions
related to clearance and settlement including trade confirmation/
affirmation, asset servicing, and other activities. For example, retail
investors may bear few (if any) direct costs in a transition to a T+1
standard settlement cycle, because their respective broker-dealer
handles the back-office functions of each transaction. However, as is
discussed below, this does not imply that retail investors would not
face indirect costs from the transition, such as those passed through
from broker-dealers or banks.
    Institutional investors may need to configure systems and update
reference data, which may also include updates to trade funding and
processing mechanisms, to operate in a T+1 environment. The Commission
preliminarily estimates that this would require an initial expenditure
of $2.67 million per entity.\390\ However, these costs may vary
depending on the extent to which a particular institutional investor
has already automated its processes. The Commission preliminarily
expects institutional investors would incur minimal ongoing direct
compliance costs after the initial transition to a T+1 standard
settlement cycle.
---------------------------------------------------------------------------

    \390\ The estimate is based on the T+2 Playbook timeline, which
estimates regulation-dependent implementation activity for trade
systems, reference data, and testing activity to last four quarters.
We assume 2 operations specialists (at $149 per hour), 2 programmers
(at $295 per hour), and 1 senior operations manager (at $397 per
hour), working 40 hours per week. (2 x $149 + 2 x $195 + 1 x $397) x
4 x 13 x 40 = $2,673,400.
---------------------------------------------------------------------------

    Broker-dealers that serve institutional investors would not only
need to configure their trading systems and update reference data, but
may also need to update trade confirmation/affirmation systems,
documentation, cashiering and asset servicing functions, depending on
the roles they assume with respect to their clients. The Commission
preliminarily estimates that, on average, each of these broker-dealers
would incur an initial compliance cost of $5.44 million.\391\ The
Commission preliminarily expects that these broker-dealers would incur
minimal ongoing direct compliance costs after the initial transition to
a T+1 standard settlement cycle.
---------------------------------------------------------------------------

    \391\ The estimate is based on the T+2 Playbook timeline, which
estimates regulation-dependent implementation activity for trade
systems, reference data, documentation, asset servicing, and testing
to last four quarters. We assume 5 operations specialists (at $149
per hour), 5 programmers (at $295 per hour), and 1 senior operations
manager (at $397 per hour), working 40 hours per week. (5 x $149 + 5
x $256 + 1 x $345) x 4 x 13 x 40 = $4,721,600.
---------------------------------------------------------------------------

    Broker-dealers that serve retail customers may also need to spend
significant resources to educate their clients about the shorter
settlement cycle. The Commission preliminarily estimates that these
broker-dealers would incur an initial compliance cost of $9.91 million
each.\392\ However, unlike previously mentioned market participants,
the Commission expects that broker-dealers that serve retail investors
may face significant one-time compliance costs after the initial
transition to T+1. Retail investors may require additional education
and customer service, which may impose costs on their broker-dealers.
The Commission preliminarily believes that a reasonable upper bound for
the costs associated with this requirement is $30,000 per broker-
dealer.\393\ Assuming all clearing and introducing broker-dealers must
educate retail customers, the upper bound for the costs of retail
investor education would be approximately $40.6 million.\394\
---------------------------------------------------------------------------

    \392\ The estimate is based on the T+2 Playbook timeline, which
estimates regulation-dependent implementation activity for trade
systems, reference data, documentation, asset servicing, customer
education and testing to last five quarters. We assume 5 operations
specialists (at $149 per hour), 5 programmers (at $295 per hour), 5
trainers (at $239 per hour) and 1 senior operations manager (at $397
per hour), working 40 hours per week. (5 x $149 + 5 x $295 + 5 x
$239 + 1 x $397) x 5 x 13 x 40 = $9,914,000.
    \393\ This estimate is based on the assumption that a broker-
dealer chooses to educate customers using a 10-minute video that
takes at most $3,000 per minute to produce. See Crowdfunding,
Exchange Act Release No. 76324 (Oct. 30, 2015), 80 FR 71388, 71529 &
n.1683 (Nov. 16, 2015).
    \394\ Calculated as $30,000 per broker-dealer x (156 broker-
dealers reporting as self-clearing + 1,126 broker-dealers reporting
as introducing but not self-clearing + 71 broker-dealers reporting
as introducing and self-clearing) = $40,590,000.
---------------------------------------------------------------------------

    Custodian banks would need to update their asset servicing
functions to comply with a shorter settlement cycle. The Commission
preliminarily estimates that custodian banks would incur an initial
compliance cost of $1.34

million,\395\ and expects custodian banks to incur minimal ongoing
compliance costs after the initial transition because the Commission
preliminarily believes that most of the costs would stem from pre-
migration updates and testing.
---------------------------------------------------------------------------

    \395\ The estimate is based on the T+2 Playbook timeline, which
estimates regulation-dependent implementation activity for asset
servicing and testing to last two quarters. We assume 2 operations
specialists (at $149 per hour), 2 programmers (at $295 per hour),
and 1 senior operations manager (at $397 per hour), working 40 hours
per week. (2 x $149 + 2 x $295 + 1 x $397) x 2 x 13 x 40 =
$1,336,700.
---------------------------------------------------------------------------

    The proposed amendment to Rule 204-2 would require investment
advisers to maintain records of allocations (if any), confirmations or
affirmations if the adviser is a party to a contract under that rule.
Based on Form ADV filings as of December 2020, approximately 13,804
advisers registered with the Commission are required to maintain copies
of certain books and records relating to their advisory business.\396\
The Commission further estimates that 2,521 registered advisers
required to maintain copies of certain books and records relating to
their advisory business would not be required to make and keep the
proposed required records because they do not have any institutional
advisory clients.\397\ Therefore, the remaining 11,283 of these
advisers would be subject to the related proposed amendment to Rule
204-2 under the Advisers Act, would enter a contract with a broker or
dealer under proposed Rule 15c6-2 and therefore be subject to the
related proposed recordkeeping amendment.
---------------------------------------------------------------------------

    \396\ See infra note 424.
    \397\ See id.
---------------------------------------------------------------------------

    As discussed above, based on staff experience, the Commission
believes that many advisers already have recordkeeping processes in
place to retain records of confirmations received, and allocations and
affirmations sent to brokers or dealers. The Commission believes these
are customary and usual business practices for many advisers, but that
some small and mid-size advisers do not currently retain these records.
Further, the Commission believes that the vast majority of these books
and records are kept in electronic fashion with an ability to capture a
date and time stamp, such as in a trade order management or other
recordkeeping system, through system logs of file transfers, email
archiving or as part of DTC's Institutional Trade Processing services,
but that some advisers maintain paper records (e.g., confirmations)
and/or communicate allocations by telephone. In addition, as noted in
Section III.C, above, we believe that up to 70% of institutional trades
are affirmed by custodians, and therefore advisers may not retain or
have access to the affirmations these custodians sent to brokers or
dealers.\398\
---------------------------------------------------------------------------

    \398\ See DTCC ITP Forum Remarks, supra note 58.
---------------------------------------------------------------------------

    For those advisers maintaining date and time stamped electronic
records already, we estimate no incremental compliance costs. We
estimate that the proposed amendments to rule 204-2 would result in an
initial one-time compliance cost of approximately $30,500 for the small
and mid-size advisers \399\ that we estimate do not currently maintain
these records, which we amortize over three years for an estimated
annual cost of approximately $10,167.\400\ In addition, we believe that
only a small number of advisers, or 1% of advisers that have
institutional clients, do not send allocations or affirmations
electronically to brokers or dealers (e.g., they communicate them by
telephone).\401\ We estimate that these advisers will incur initial
one-time costs of approximately $16,000 updating their policies and
procedures and training their personnel to send these communications
through their existing electronic systems, which we amortize over three
years for an estimated annual cost of approximately $5,333.\402\
---------------------------------------------------------------------------

    \399\ For purposes of the Paperwork Reduction Act, infra section
VI, we estimated the number of small and mid-sized advisers based on
Form ADV Items 2.A.(2) (for mid-sized advisers) and 12 (for small
advisers).
    \400\ The estimate assumes that the proposed amendments to Rule
204-2 would result in an initial increase in the collection of
information burden estimate by 2 hours for the small and medium size
advisers that have institutional clients that we estimate do not
currently maintain these records. We estimate this number of
advisers to be approximately 50% of small and medium sized
registered investment advisers that have institutional clients, or
approximately 220 small and medium size advisers. See infra Table 1
(Summary of burden estimates for the proposed amendment to Rule 204-
2) note 4. The estimated 2 hours per adviser would be an initial
burden to update procedures and instruct personnel to retain these
records in the advisers' electronic recordkeeping systems, including
any confirmations that they may receive in paper format and do not
currently retain. We believe that these advisers already have
recordkeeping systems to accommodate these records, which would
include, at a minimum, spreadsheet formats and email retention
systems. As with our estimates relating to the previous amendments
to Advisers Act Rule 204-2, the Commission expects that performance
of these functions would most likely be allocated between compliance
clerks and general clerks, with compliance clerks performing 17% of
the function and general clerks performing 83% of the function. We
assume 20 minutes of a compliance clerk (at $76 per hour) and 100
minutes of a general clerk (at $68 per hour). (1/3 x 76 + 5/3 x 68)
x 220 = $30,507.
    \401\ We estimate that currently registered large advisers that
do not currently maintain electronic records, would be part of the
estimated 1% of advisers that would incur 2 hours each to comply
with the proposed amendment as described above. For new large
advisers, we estimate that there would be no incremental cost
associated with this proposed amendment, as we believe these
advisers would implement electronic systems as part of their initial
compliance with Rule 204-2, and that these electronic systems would
have an ability to capture a date and time stamp.
    \402\ We estimate 1% of 11,283 or 113 advisers do not sent
allocations or affirmations electronically. We assume, for each
adviser, 20 minutes for a compliance clerk (at $76 per hour) and 100
minutes of a general clerk (at $68 per hour). (1/3 x 76 + 5/3 x 68)
x 113 = $15,669.
---------------------------------------------------------------------------

    In addition, we estimate that 70% of institutional trades are
affirmed by custodians, and therefore advisers may not retain or have
access to the affirmations these custodians sent to brokers or dealers.
Because we do not know the number of advisers that correlate to these
trades, we estimate for purposes of this collection of information that
70% of advisers with institutional clients make institutional trades
that are affirmed by custodians. Therefore, we estimate that these
advisers would incur initial one-time costs of approximately $1,095,000
to direct their institutional clients' custodians to copy the adviser
on any affirmations sent through email, or for the adviser to use its
systems to issue affirmations, which we amortize over three years for
an estimated annual cost of approximately $365,500.\403\
---------------------------------------------------------------------------

    \403\ We estimate 70% of 11,283 or 7,898 advisers affirm trades
through custodians. We assume, for each advisor, 20 minutes for a
compliance clerk (at $76 per hour) and 100 minutes of a general
clerk (at $68 per hour). (1/3 x 76 + 5/3 x 68) x 7,898 = $1,095,189.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-27 would require a CMSP to establish, implement,
maintain, and enforce written policies and procedures. Based on the
similar policies and procedures requirements and the corresponding
burden estimates previously made by the Commission for Rules 17Ad-
22(d)(8) and 17Ad-22(e)(2),\404\ the Commission preliminarily estimates
that respondent CMSPs would incur an aggregate one-time cost of
approximately $27,000.\405\
---------------------------------------------------------------------------

    \404\ See Clearing Agency Standards, Exchange Act Release No.
68080 (Oct. 22, 2012), 77 FR 66219, 66260 (Nov. 2, 2012) (``Clearing
Agency Standards Adopting Release''); Standards for Covered Clearing
Agencies, Exchange Act Release No. 78961 (Sept. 28, 2016), 81 FR
70786, 70891-92 (Oct. 13, 2016) (``CCA Standards Adopting
Release'').
    \405\ There are currently three CMSPs and the Commission
anticipates that one additional entity may seek to become a CMSP in
the next three years. The aggregate cost was estimated as follows:
(Assistant General Counsel at $602/hour x 8 hours = $4,816) +
(Compliance Attorney at $334/hour x 6 hours = $2,004) = $6,820 x 4
CMSPs equals $27,280.
---------------------------------------------------------------------------

    The proposed rule would also require ongoing documentation
activities with respect to the annual report required to be submitted
to the Commission. Based on the similar reporting requirements and the
corresponding burden estimates

previously made by the Commission for Rule 17Ad-22(e)(23),\406\ the
Commission preliminarily estimates that the ongoing activities required
by proposed Rule 17Ad-27 would impose an aggregate annual cost of this
ongoing burden of approximately $44,000.\407\
---------------------------------------------------------------------------

    \406\ See CCA Standards Adopting Release, supra note 404, at
70899.
    \407\ This figure was calculated as follows: [(Compliance
Attorney at $397/hour x 24 hours = $9,528) + (Computer Operations
Manager at $480/hour x 10 hours = $4,800) = $14,328 x 4 CMSPs =
$57,312]. In addition, we estimate that the Inline XBRL requirement
would require respondent CMSPs to spend $900 each year to license
and renew Inline XBRL compliance software and/or services, and incur
1 internal burden hour to apply and review Inline XBRL tags for the
three disclosure requirements on the report, resulting in a total
annual aggregate cost of $5,188 [(Compliance Attorney at $397/hour x
1 hour = $397) + $900 in external costs = $1,297 x 4 CMSPs =
$5,188]. In addition, respondent CMSPs that do not already have
access to EDGAR would be required to file a Form ID so as to obtain
the access codes that are required to file or submit a document on
EDGAR. We anticipate that each respondent would require 0.15 hours
to complete the Form ID, and for purposes of the PRA, that 100% of
the burden of preparation for Form ID will be carried by each
respondent internally. Because two respondent CMSPs already have
access to EDGAR, we anticipate that proposed amendments would result
in a one-time nominal increase of 0.30 burden hours for Form ID,
which would not meaningfully add to, and would effectively be
encompassed by, the existing burden estimates associated with these
reports.
---------------------------------------------------------------------------

(4) Indirect Costs
    In estimating these implementation costs, the Commission notes that
market participants who bear the direct costs of the actions they
undertake to comply with the amendment to Rule 15c6-1 may pass these
costs on to their customers. For example, retail and institutional
investors might not directly bear the cost of all of the necessary
upgrades for a T+1 settlement cycle, but might indirectly bear these
costs as their broker-dealers might increase their fees to amortize the
costs of updates among their customers. The Commission is unable to
quantify the overall magnitude of the indirect costs that retail and
institutional investors may bear, because such costs would depend on
the market power of each broker-dealer, and each broker-dealer's
willingness to pass on the costs of migration to a T+1 standard
settlement cycle to its customers. However, the Commission
preliminarily believes that in situations where broker-dealers have
little or no competition, broker-dealers may pass on as much as 100% of
their initial costs to their customers. As discussed above, this could
be as high as the full amount of the estimated $5.44 million for
broker-dealers that serve institutional investors, and $9.91 million
for broker-dealers that serve retail investors. However, in situations
where broker-dealers face heavy competition for customers, they may
bear the full costs of the initial investment, and avoid passing on any
portion of these costs to their customers.
    As noted in Part V.B.4, the ability of market participants to pass
implementation costs on to customers likely depends on their relative
bargaining power. For example, CCPs, like many other utilities, exhibit
many of the characteristics of natural monopolies and, as a result, may
have market power, particularly relative to broker-dealers who submit
trades for clearing. This means that CCPs may be able to share
implementation costs they directly face related to shortening the
settlement cycle with broker-dealers through higher clearing fees.
Conversely, to the extent that institutional investors have market
power relative to broker-dealers, broker-dealers may not be in a
position to impose indirect costs on them.
(5) Industry-Wide Costs
    To estimate the aggregate, industry-wide cost of a transition to a
T+1 standard settlement cycle, the Commission takes its own per-entity
estimates and multiplies them by our estimate of the respective number
of entities. The Commission preliminarily estimates that there are
1,229 buy-side firms, 156 self-clearing broker-dealers, and 49
custodian banks.\408\ Additionally, while there are three Matching/ETC
Providers, the Commission believes that only one of these is currently
providing services in the U.S. We estimate there are 1,282 broker-
dealers that would incur investor education costs. One way to establish
a total industry initial compliance cost estimate would be to multiply
each estimated per-entity cost by the respective number of entities and
sum these values, which would result in an estimate of $4.97
billion.\409\ The Commission, however, preliminarily believes that this
estimate is likely to overstate the true initial cost of transition to
a T+1 settlement cycle for a number of reasons. First, our per-entity
estimates do not account for the heterogeneity in market participant
size, which may have a significant impact on the costs that market
participants face. While the BCG Study included both estimates of the
number of entities in different size categories as well as estimates of
costs that an entity in each size category is likely to incur, it did
not provide sufficient underlying information to allow the Commission
to estimate the relationship between participant size and compliance
cost and thus we cannot produce comparable estimates. The Commission
solicits comment on the extent to which market participants believe
that the compliance costs for proposed Rule 15c6-1(a) would scale with
market participant size.
---------------------------------------------------------------------------

    \408\ The estimate for the number of buy-side firms is based on
the Commission's 13(f) holdings information filers with over $1
billion in assets under management, as of December 31, 2020. The
estimate for the number of broker-dealers is based on FINRA FOCUS
Reports of firms reporting as self-clearing. See supra note 312 and
accompanying text. The estimate for the number of custodian banks is
based on the number of ``settling banks'' listed in DTC's Member
Directories, available at http://www.dtcc.com/client-center/dtc-directories.
    \409\ Calculated as 156 broker-dealers (self-clearing) x
$9,914,000 + 1,282 broker-dealers (self-clearing and introducing) x
$30,000 + 49 custodian banks x $1,337,000 + 1,229 buy-side firms x
$2,673,000 + 1 Matching/ETC Providers x $12,575,000 + 2 FMUs x
$12,575,000 + (IA costs of 30,500 + 16,000 + 1,095,000) + (CMSP
initial costs of $26,000) = $ 4,974,556,500.
---------------------------------------------------------------------------

    Second, investments by third-party service providers may mean that
many of the estimated compliance costs for market participants are
duplicated. The BCG Study suggests that ``leverage'' from service
providers may yield a savings of $194 million, reducing aggregate costs
by approximately 29%.\410\ The Commission seeks further comment on the
extent to which the efficiencies generated by the investments of
service providers might reduce the compliance costs of market
participants. Taking into account potential cost reductions due to
repurposing existing systems and using service providers as described
above, the Commission preliminarily believes that $3.5 billion
represents a reasonable range for the total industry initial compliance
costs.\411\
---------------------------------------------------------------------------

    \410\ See BCG Study, supra note 22, at 79.
    \411\ The lower bound of this range is calculated as ($4.97
billion x (1-0.29)) = $3.5 billion.
---------------------------------------------------------------------------

    In addition to these initial costs, a transition to a shorter
settlement cycle may also result in certain ongoing industry-wide
costs. Though the Commission preliminarily believes that a move to a
shorter settlement cycle would generally bring with it a reduced
reliance on manual processing, a shorter settlement cycle may also
exacerbate remaining operational risk. This is because a shorter
settlement cycle would provide market participants with less time to
resolve errors. For example, if there is an entry error in the trade
match details sent by either counterparty for a trade, both
counterparties would have one extra day to resolve the error under the
baseline than in a T+1 environment. For these errors, a shorter
settlement cycle

may increase the probability that the error ultimately results in a
settlement fail. However, the Commission preliminarily believes that a
large variety of operational errors are possible in the clearance and
settlement process and some of these errors are likely to be
infrequent, the Commission is unable to quantify the impact that a
shorter settlement cycle may have on the ongoing industry-wide costs
stemming from a potential increase in operational risk.

D. Reasonable Alternatives

1. Amend 15c6-1(c) to T+2
    The Commission is proposing to delete Rule 15c6-1(c) that
establishes a T+4 settlement cycle for firm commitment offerings for
securities that are priced after 4:30 p.m. ET, unless otherwise
expressly agreed to by the parties at the time of the transaction.\412\
The Commission has considered amending Rule 15c6-1(c) to shorten the
settlement cycle for firm commitment offerings to T+2.
---------------------------------------------------------------------------

    \412\ See supra Part III.A.3.
---------------------------------------------------------------------------

    The T+1 Report stated that paragraph (c) is rarely used in the
current T+2 settlement environment.\413\ The Commission adopted
paragraph (c) of Rule 15c6-1 in 1995, two years after Rule 15c6-1 was
originally adopted.\414\ At the time, the rule included a limited
exemption from the requirements under paragraph (a) of the rule for the
sale for cash pursuant to a firm commitment offering registered under
the Securities Act.\415\ The exemption for firm commitment offerings
was added in response to public comments stating that new issue
securities could not settle on T+3 because prospectuses could not be
printed prior to the trade date (the date on which the securities are
priced).\416\
---------------------------------------------------------------------------

    \413\ T+1 Report, supra note 18, at 33-35.
    \414\ See Prospectus Delivery; Securities Transaction Settlement
Cycle, Exchange Act Release No. 34-35705 (May 11, 1995), 60 FR 26604
(May 17, 1995) (``1995 Amendments Adopting Release'').
    \415\ The exemption was limited to sales to an underwriter by an
issuer and initial sales by the underwriting syndicate and selling
group. Any secondary resales of such securities were to settle on a
T+3 settlement cycle. T+3 Adopting Release, supra note 9, at 52898.
    \416\ Id.
---------------------------------------------------------------------------

    As discussed further in Part III.E.4, Rule 172 has implemented an
``access equals delivery'' model that permits, with certain exceptions,
final prospectus delivery obligations to be satisfied by the filing of
a final prospectus with the Commission, rather than delivery of the
prospectus to purchasers. As a result of these changes, broker-dealers
generally do not require time to print and deliver prospectus--a point
originally cited by many commenters in support of adopting paragraph
(c).\417\
---------------------------------------------------------------------------

    \417\ Id. at 32.
---------------------------------------------------------------------------

    Although rarely used in the current T+2 settlement environment, the
IWG expects a T+1 standard settlement cycle would increase reliance on
paragraph (c).\418\ The T+1 Report further stated that the IWG
recommends retaining paragraph (c) but amending it to establish a
standard settlement cycle of T+2 for firm commitment offerings.\419\
The T+1 Report cites issues with respect to documentation and other
operational elements of equity offerings that may delay settlement to
T+2 in a T+1 environment. As the Commission is not currently aware of
any specific documentation associated with firm commitment offerings
that cannot be completed by T+1, the Commission preliminarily believes
that the need to complete possibly complex transaction documentation
prior to settlement does not justify proposing a T+2 standard
settlement cycle for equity offerings.
---------------------------------------------------------------------------

    \418\ T+1 Report, supra note 18, at 33-35.
    \419\ Id. at 33.
---------------------------------------------------------------------------

    In addition, establishing T+1 as the standard settlement cycle for
these firm commitment offerings, and thereby aligning the settlement
cycle with the standard settlement cycle for securities generally,
would reduce exposures of underwriters, dealers, and investors to
credit and market risk, and better ensure that the primary issuance of
securities is available to settle secondary market trading in such
securities. The Commission believes that harmonizing the settlement
cycle for such firm commitment offerings with secondary market trading,
to the greatest extent possible, limits the potential for operational
risk. In addition, if paragraph (c) is removed as proposed, paragraph
(d) would continue to provide underwriters and the parties to a
transaction the ability to agree, in advance of a particular
transaction, to a settlement cycle other than the standard set forth in
Rule 15c6-1(a).
    Therefore, in the Commission's view, deleting paragraph (c) while
retaining paragraph (d) provides sufficient flexibility for market
participants to manage the potential need for longer than T+1
settlement on certain firm commitment offerings priced after 4:30 p.m.
that may include ``complex'' documentation because paragraph (d) would
continue to permit the underwriters and the parties to a transaction to
agree, in advance of entering the transaction, whether T+1 settlement
or some other settlement timeframe is appropriate for the transaction.
In addition, the Commission preliminarily believes that having the
underwriters and the parties to the transaction agree in advance of
entering the transaction whether to deviate from the standard
settlement cycle established in paragraph (a) would promote
transparency among the parties, in advance of entering the transaction,
as to the length of the time that it takes to complete complex
documentation with respect to the transaction.
2. Propose 17Ad-27 To Require Certain Outcomes
    The Commission is proposing Rule 17Ad-27 to require a CMSP
establish, implement, maintain and enforce policies and procedures to
facilitate straight-through processing for transactions involving
broker-dealers and their customers.\420\ Proposed Rule 17Ad-27 also
would require a CMSP to submit every twelve months to the Commission a
report that describes the following: (i) The CMSP's current policies
and procedures for facilitating straight-through processing; (ii) its
progress in facilitating straight-through processing during the twelve
month period covered by the report; and (iii) the steps the CMSP
intends to take to facilitate and promote straight-through processing
during the twelve month period that follows the period covered by the
report.
---------------------------------------------------------------------------

    \420\ See supra Part III.D (discussing the proposed rule); see
also supra Part III.D.1 (discussing straight-through processing).
---------------------------------------------------------------------------

    The Commission has taken a ``policies and procedures'' approach in
developing the proposed rule because it preliminarily believes such an
approach will remain effective over time as CMSPs consider and offer
new technologies and operations to improve the settlement of
institutional trades. The Commission also believes that improving the
CMSPs' systems to facilitate straight-through processing can help
market participants consider additional ways to make their own systems
more efficient. In addition, a ``policies and procedures'' approach can
help ensure that a CMSP considers in a holistic fashion how the
obligations it applies to its users will advance the implementation of
methodologies, operational capabilities, systems, or services that
support straight-through processing.
    The Commission has considered as an alternative to the policies and
procedures approach in proposed Rule 17Ad-27, proposing a rule to
require CMSPs to achieve certain outcomes that

would facilitate straight-through processing. For example, the
Commission could propose to require that a CMSP do the following: (i)
Enable the users of its service to complete the matching, confirmation,
or affirmation of the securities transaction as soon as technologically
and operationally practicable and no later than the end of the day on
which the transaction was effected by the parties to the transaction;
or (ii) forward or otherwise submit the transaction for settlement as
soon as technologically and operationally practicable, as if using
fully automated systems.
    The Commission believes that these requirements would achieve
certain discrete objectives with respect to straight-through processing
and would promote prompt and accurate clearance and settlement. The
Commission believes, however, that the proposed approach requires
policies and procedures that include a holistic review and framework
for considering how systems and processes facilitate straight-through
processing and that can adapt over time to changes in technology and
operations, both among and beyond the CMSP's systems.

E. Request for Comment

    The Commission solicits comment on the potential economic impact of
the proposed amendment to Rule 15c6-1(a), the proposed deletion of Rule
15c6-1(c), proposed new Rule 15c6-2, the proposed amendment to Rule
204-2, and proposed new Rule 17Ad-27. In addition, the Commission
solicits comment on related issues that may inform the Commission's
views regarding the economic impact of the proposed amendment to Rule
15c6-1(a), the proposed deletion of Rule 15c6-1(c), proposed new Rule
15c6-2, the proposed amendment to Rule 204-2, and proposed new Rule
17Ad-27 as well as alternatives to the proposed amendments, deletion,
and new rules. The Commission in particular seeks comment on the
following:
    144. The Commission invites commenters to provide additional data
on the time it takes to complete each step within the current clearance
and settlement process. What are current constraints or impediments for
each step within the clearance and settlement process that would limit
the ability to shorten the settlement cycle from T+2 to T+1? Do these
constraints or impediments vary by market participant type?
    145. The Commission invites commenters to provide additional data
on the expected collateral efficiency gains from a T+1 standard
settlement cycle. How would clearing fund deposits change as a result
of the proposed amendment? To what extent does this change fully
represent the change to the level of risk associated with the
settlement cycle for securities transactions?
    146. The Commission invites commenters to discuss the impact of a
T+1 settlement cycle on broker-dealers and their customers, including
custodians who may hold securities on behalf of said customers. What
types of adaptations would be necessary to comply with a T+1 settlement
cycle, and what are their relative costs and benefits?
    147. The Commission invites commenters to provide data regarding
the extent to which a broker-dealer engages in ``internalization'' of a
transaction on behalf of a customer. How prevalent are internalization
practices? How does the volume of internalization compare to the volume
of transactions that are submitted for clearing? \421\
---------------------------------------------------------------------------

    \421\ See Part II.B.2 (further discussing internalization by
broker-dealers).
---------------------------------------------------------------------------

    148. The Commission invites commenters to discuss the potential
impact of a T+1 standard settlement cycle with respect to cross-border
and cross-asset class transactions. Would a T+1 standard settlement
cycle make any cross-border or cross-asset transactions more or less
costly?
    149. The Commission invites commenters to discuss the anticipated
market changes, if any, if the proposed amendment to Rule 15c6-1(a)
were not adopted. Which activities necessary for compliance with a T+1
standard settlement cycle would occur in the absence of the proposed
rule amendment and how quickly would they occur?
    150. In addition to the prospective impact on costs/burdens, the
Commission solicits comments related to the credit, market, liquidity,
legal, and operational risks (increase or decrease) associated with
shortening the standard settlement cycle to T+1, and in particular,
quantification of such risks.
    151. Are there types of customers other than institutional
customers that would be affected by proposed Rule 15c6-2? If so, please
describe what types of customers. Would the rules impose an
unanticipated burden on these customers? Please explain.
    152. What are the benefits and costs of requiring broker dealers to
enter into written agreements with customers engaging in the trade date
allocation, confirmation and affirmation process where such agreements
require the process to be completed by the end of the day on trade
date?
    153. What are the relative burdens of proposed Rule 15c6-2 on the
different market participants involved in the allocation, confirmation,
and affirmation process, particularly smaller market participants?

VI. Paperwork Reduction Act

    Two of the rule proposals, proposed Rule 17Ad-27 and the proposed
amendment to Rule 204-2(a), contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\422\ The Commission is submitting the proposed collections
of information to the Office of Management and Budget (``OMB'') for
review in accordance with the PRA. For the proposed amendment to Rule
204-2(a), the title of the information collection is ``Rule 204-2 under
the Investment Advisers Act of 1940'' (OMB control number 3235-0278).
For proposed Rule 17Ad-27, the title of the information collection is
``Clearing Agency Standards for Operation and Governance'' (OMB Control
No. 3235-0695). An agency may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless it
displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \422\ See 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Proposed Amendment to Rule 204-2

    Under Section 204 of the Advisers Act, investment advisers
registered or required to register with the Commission under Section
203 of the Advisers Act must make and keep for prescribed periods such
records (as defined in Section 3(a)(37) of the Exchange Act), furnish
copies thereof, and make and disseminate such reports as the
Commission, by rule, may prescribe as necessary or appropriate in the
public interest or for the protection of investors. Rule 204-2 sets
forth the requirements for maintaining and preserving specified books
and records. This collection of information is found at 17 CFR 275.
204-2 and is mandatory. The Commission staff uses the collection of
information in its regulatory and examination program. Responses to the
requirements of the proposed amendment to Rule 204-2 that are provided
to the Commission in the context of its regulatory and examination
program would be kept confidential subject to the provisions of
applicable law.\423\
---------------------------------------------------------------------------

    \423\ See Section 210(b) of the Advisers Act, 15 U.S.C. 80b-
10(b).

---------------------------------------------------------------------------

    The proposed amendment to Rule 204-2 would require advisers to
maintain records of certain documents described in proposed Rule 15c6-2
if the adviser is a party to a contract under that rule. Rule 15c6-2
specifically identifies ``allocations, confirmations or affirmations''
as documents that must be completed no later than the end of the day on
trade date. The respondents to this collection of information are
approximately 13,804 advisers registered with the Commission.\424\ The
Commission further estimates that 2,521 of these registered advisers
would not be required to make and keep the proposed required records
because they do not have any institutional advisory clients.\425\
Therefore, the remaining 11,283 of these advisers, or 81.74% of the
total registered advisers that are subject to Rule 204-2, would enter a
contract with a broker or dealer under proposed Rule 15c6-2 and
therefore be subject to the related proposed recordkeeping amendment.
---------------------------------------------------------------------------

    \424\ Based on data from Form ADV as of December, 2020.
    \425\ Based on data from Form ADV as of December, 2020, this
figure represents registered investment advisers that: (i) Report no
clients that are registered investment companies in response to Item
5.D, (ii) do not report any institutional separately managed
accounts in Item 5.D., or separately managed account exposures in
Section 5.K.(1) of Schedule D, and (iii) do not advise any reported
hedge funds as per Section 7.B.(1) of Schedule D.
---------------------------------------------------------------------------

    As discussed above, based on staff experience, the Commission
believes that many advisers already have recordkeeping processes in
place to retain records of confirmations received, and allocations and
affirmations sent to brokers or dealers.\426\ The Commission believes
that while these are customary and usual business practices for many
advisers, some small and mid-size advisers do not currently retain
these records. Further, the Commission believes that the vast majority
of these books and records are kept in electronic fashion in a trade
order management or other recordkeeping system, through system logs of
file transfers, email archiving or as part of DTC's Institutional Trade
Processing services, but that some advisers maintain paper records
(e.g., confirmations) and/or communicate allocations by telephone. In
addition, as noted in Section III.C, above, we believe that up to 70%
of institutional trades are affirmed by custodians, and therefore
advisers may not retain or have access to the affirmations these
custodians sent to brokers or dealers.\427\ Also as noted above, based
on staff experience, the Commission believes that many advisers send
allocations and affirmations electronically to brokers or dealers, and
therefore these records are already date and time stamped in many
instances. Nevertheless, the proposed amendments would explicitly add a
new requirement to date and time stamp allocations and affirmations
(but not confirmations), and thus increase this collection of
information burden. The Commission estimates that the associated
increase in burden would be included in our estimate described in the
chart below for advisers that we believe do not electronically send
allocations and affirmations to their brokers or dealers.
---------------------------------------------------------------------------

    \426\ See supra Section III.C.
    \427\ See DTCC ITP Forum Remarks, supra note 58.
---------------------------------------------------------------------------

    We describe the estimated burdens associated with the proposed
recordkeeping amendment below. These estimated changes from the
currently approved burden are due to the estimated increase in the
internal hour and internal time cost burden that would be due to the
proposed amendment, and the increase in the number of registered
investment advisers (an increase of 80 advisers).

                                      Table 1--Summary of Burden Estimates for the Proposed Amendment to Rule 204-2
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Annual
             Advisers                 Initial internal  hour     Annual internal hour         Wage rate \2\          Internal time cost    external cost
                                              burden                  burden \1\                                          per year          burden \3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
220 small and mid-size advisers     2 hours per adviser \5\...  2 hours, amortized     $69.36 per hour...........  0.667 hour x $69.36                $0
 that have institutional clients,                                over a 3 year                                      per hour = $43.60
 that we believe do not currently                                period, for an                                     per adviser per
 maintain the proposed records \4\.                              annual ongoing                                     year. $69.36 x
                                                                 internal burden of                                 146.74 aggregate
                                                                 0.667 hours per year                               hours = $10,159.16
                                                                 (220 advisers x                                    aggregate cost per
                                                                 0.667 hours each =                                 year.
                                                                 146.74 aggregate
                                                                 annual hours).
--------------------------------------------------------------------------------------------------------------------------------------------------------
113 advisers that have              2 hours per adviser \7\...  2 hours, amortized     $69.36 per hour...........  0.667 hour x $69.36                 0
 institutional clients that staff                                over a 3 year                                      per hour = $43.60
 estimates do not send allocations                               period, for an                                     per adviser per
 or affirmations electronically to                               annual ongoing                                     year. $69.36 per
 brokers or dealers (e.g., they                                  internal burden of                                 hour x 75.37
 communicate them by telephone)                                  0.667 hours per year                               aggregate hours =
 \6\.                                                            (113 advisers x                                    $5,227.67 aggregate
                                                                 0.667 hours each =                                 cost per year.
                                                                 75.37 aggregate
                                                                 annual hours).
--------------------------------------------------------------------------------------------------------------------------------------------------------
7,898 advisers with institutional   2 hours per adviser \9\...  2 hours, amortized     $69.36 per hour...........  0.667 hour x $69.36                 0
 clients that the staff estimates                                over a 3 year                                      per hour = $43.60
 make institutional trades that                                  period, for an                                     per adviser per
 are affirmed by custodians, and                                 annual ongoing                                     year. $69.36 per
 therefore do not maintain the                                   internal burden of                                 hour x 5,267.97
 proposed affirmations \8\.                                      0.667 hours per year                               aggregate hours =
                                                                 (7,898 advisers x                                  $365,386.40
                                                                 0.667 hours each =                                 Aggregate cost per
                                                                 5,267.97 aggregate                                 year.
                                                                 hours).
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total estimated burden per adviser per year resulting from the  5,490.08 aggregate     $380,791.95 per year (5,490.08 aggregate hours                  0
 proposed amendment.                                             hours per year,\10\    per year x $69.36 per hour)
                                                                 or 0.4 blended hours
                                                                 per year per adviser
                                                                 \11\.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Currently approved aggregate burden...........................  2,764,563 aggregate                       $175,980,426                                 0
                                                                 hours per year.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimated revised aggregate burden............................  2,786,199 hours \12\.                 $193,250,787.60 \13\                             0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ We believe that the estimated internal hour burdens associated with the proposed amendment would be one-time initial burdens, and we amortize these
  burdens over three years.

\2\ As with our estimates relating to the previous amendments to Advisers Act Rule 204-2, the Commission expects that performance of these functions
  would most likely be allocated between compliance clerks and general clerks, with compliance clerks performing 17% of the function and general clerks
  performing 83% of the function. Data from SIFMA's Office Salaries in the Securities Industry 2013, modified by Commission staff to account for an 1800-
  hour work-year and inflation, and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead, suggest that costs for these
  position are $76 and $68, respectively. A blended hourly rate is therefore: (.17 x $76) + (.83 x $68) = $69.36 per hour.
\3\ Under the currently approved PRA for Rule 204-2, there is no cost burden other than the cost of the hour burden described herein, and we believe
  that the proposed amendment would not result in any cost burden other than the cost of the hour burden.
\4\ Based on staff experience, we estimate that approximately 50% of small and mid-sized registered investment advisers that have institutional clients,
  do not currently maintain the proposed records. Based on Form ADV data as of December 2020, we estimate that there are 199 and 241 mid-sized and small
  entity RIAs, respectively, that would be required to retain the proposed new records, for a total of 440 advisers (these are advisers that report the
  following on Form ADV Part 1A as of December 2020: (i) Having any clients that are registered investment companies in response to Item 5.D, (ii)
  having any institutional separately managed accounts in Item 5.D., or separately managed account exposures in Section 5.K.(1) of Schedule D, or (iii)
  advising any reported hedge funds as per Section 7.B.(1) of Schedule D). The categories of mid-size and small entity advisers are based on responses
  to the following Items of Form ADV Part 1A: Item 2.a.(2) (mid-size RIA) and Items 5.F. and 12 (small entity). 50% of 440 advisers = 220 advisers.
\5\ We estimate an initial burden of 2 hours per adviser, to update procedures and instruct personnel to retain the proposed required records in the
  advisers' electronic recordkeeping systems, including any confirmations that they may receive in paper format and do not currently retain. We believe
  that these advisers already have recordkeeping systems to accommodate these records, which would include, at a minimum, spreadsheet formats and email
  retention systems which have an ability to capture a date and time stamp. For those advisers maintaining date and time stamped electronic records
  already, we estimate no incremental compliance costs.
\6\ We believe that only a small number of advisers, or 1% of advisers that have institutional clients, do not send allocations or affirmations
  electronically to brokers or dealers (e.g., they communicate them by telephone). 1% of 11,283 RIAs with institutional clients = 112.83 advisers
  (rounded to 113). For new large advisers, we estimate that there would be no incremental cost associated with this proposed amendment, as we believe
  these advisers would implement electronic systems as part of their initial compliance with Rule 204-2, and that these electronic systems would have an
  ability to capture a date and time stamp.
\7\ We estimate that these advisers would incur an initial burden of 2 hours of updating their procedures and training their personnel to send these
  communications through their existing electronic systems (such as, at a minimum, their current spreadsheet formats and current email and electronic
  retention system to maintain electronic records with date and time stamps). Because these email and electronic retention systems would provide date
  and time stamps, we estimate there would be no incremental compliance costs in connection with the proposed date and time stamp requirement.
\8\ As noted above, we estimate that 70% of institutional trades are affirmed by custodians, and therefore advisers may not retain or have access to the
  affirmations these custodians sent to brokers or dealers. We believe that some of these advisers themselves, however, sometimes send affirmations to
  brokers or dealers. Because we do not know the number of advisers that correlate to these trades, we estimate for purposes of this collection of
  information that 70% of advisers with institutional clients make institutional trades that are affirmed by custodians. This estimate equals 7,898.1
  advisers, rounded to 7,898 advisers (70% of 11,283 RIAs with institutional clients = approximately 7,898 advisers).
\9\ We estimate that the proposed amendments to rule 204-2 would result in an initial increase in the collection of information burden estimate by 2
  hours for these advisers, to direct their institutional clients' custodians to electronically copy the adviser on any affirmations sent through email
  or for the adviser to use its systems to issue affirmations.
\10\ 146.74 hours + 75.37 hours + 5,267.97 hours = 5,490.08 hours.
\11\ 5,490.08 aggregate hours per year/13,804 total RIAs that are subject to Rule 204-2 = a blended average of 0.4 hours per adviser per year.
\12\ The currently approved collection of information burden is 2,764,563 aggregate hours for 13,724 advisers, or 201.44 hours per adviser. The proposed
  new collection of information burden would add approximately 0.4 blended hours per adviser per year, for a total estimate of 201.84 blended hours per
  adviser per year, or 2,786,199 aggregate hours under amended Rule 204-2 for all registered advisers subject to the rule (201.84 blended hours per
  adviser x 13,804 RIAs subject to Rule 204-2 = 2,786,199 aggregate burden hours for RIAs).
\13\ (201.84 estimated revised burden hours per adviser x $69.36 per hour) x 13,804 RIAs = $193,250,787.60 revised aggregate annual cost of the hour
  burden for Rule 204-2.

B. Proposed Rule 17Ad-27

    The purpose of the collections under proposed Rule 17Ad-27 is to
ensure that CMSPs facilitate the ongoing development of operational and
technological improvements associated with the straight-through
processing of institutional trades, which may in turn facilitate
further shortening of the settlement cycle in the future. The
collections are mandatory. To the extent that the Commission receives
confidential information pursuant to this collection of information,
such information would be kept confidential subject to the provisions
of applicable law.\428\
---------------------------------------------------------------------------

    \428\ See, e.g., 5 U.S.C. 552 et seq. Exemption 4 of the Freedom
of Information Act provides an exemption for trade secrets and
commercial or financial information obtained from a person and
privileged or confidential. See 5 U.S.C. 552(b)(4). Exemption 8 of
the Freedom of Information Act provides an exemption for matters
that are contained in or related to examination, operating, or
condition reports prepared by, on behalf of, or for the use of an
agency responsible for the regulation or supervision of financial
institutions. See 5 U.S.C. 552(b)(8).
---------------------------------------------------------------------------

    Respondents under this rule are the three CMSPs to which the
Commission has granted an exemption from registration as a clearing
agency. The Commission anticipates that one additional entity may seek
to become a CMSP in the next three years, and so for purposes of this
proposal the Commission has assumed four respondents.
    Proposed Rule 17Ad-27 would require a CMSP to establish, implement,
maintain, and enforce written policies and procedures. Based on the
similar policies and procedures requirements and the corresponding
burden estimates previously made by the Commission for Rules 17Ad-
22(d)(8) and 17Ad-22(e)(2),\429\ the Commission estimates that
respondent CMSPs would incur an aggregate one-time burden of
approximately 56 hours to create new policies and procedures,\430\ and
that the aggregate cost of this one time burden would be $27,280.\431\
---------------------------------------------------------------------------

    \429\ See Clearing Agency Standards Adopting Release, supra note
404; CCA Standards Adopting Release, supra note 404.
    \430\ This figure was calculated as follows: (Assistant General
Counsel for 8 hours + Compliance Attorney for 6 hours) = 14 hours x
4 respondent CMSPs = 56 hours.
    \431\ This figure was calculated as follows: (Assistant General
Counsel at $602/hour x 8 hours = $4,816) + (Compliance Attorney at
$334/hour x 6 hours = $2,004) = $6,820 x 4 CMSPs equals $27,280.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-27 would impose ongoing burdens on a respondent
CMSP as follows: (i) Ongoing monitoring and compliance activities with
respect to the written policies and procedures required by the proposed
rule; and (ii) ongoing documentation activities with respect to the
required annual report. Based on the similar reporting requirements and
the corresponding burden estimates previously made by the Commission
for Rule 17Ad-22(e)(23),\432\ the Commission estimates that the ongoing
activities required by proposed Rule 17Ad-27 would impose an aggregate
annual burden on respondent CMSPs of 140 hours,\433\ and an aggregate
cost of $58,900.\434\ The total industry cost is estimated to be
$84,592.\435\
---------------------------------------------------------------------------

    \432\ See CCA Standards Adopting Release, supra note 404, at
70899.
    \433\ This figure was calculated as follows: (Compliance
Attorney for 25 hours + Computer Operations Manager for 10 hours) =
34 hours x 4 respondent CMSPs = 136 hours. As discussed previously,
supra note 407, the Commission estimates that the Inline XBRL
requirement would require respondent CMSPs to incur one additional
ongoing burden hour to apply and review Inline XBRL tags, as
follows: (Compliance Attorney for 1 hour) x 4 CMSPs = 4 hours. Taken
together, the total ongoing burden is 140 hours (136 hours + 4 hours
= 140 hours).
    \434\ This figure was calculated as follows: [(Compliance
Attorney at $397/hour x 24 hours = $9,528) + (Computer Operations
Manager at $480/hour x 10 hours = $4,800)] = $14,328 x 4 CMSPs =
$57,312. The Commission also estimates the costs associated with the
one burden hour associated with applying and review Inline XBRL tags
as follows: (Compliance Attorney at $397/hour x 1 hour = $397) x 4
CMSPs = $1,588. Taken together, the total amount is $58,900 ($57,312
+ $1,588 = $58,900).
    \435\ This figure was calculated as follows: $27,280 (industry
one-time burden) + $58,900 (industry ongoing burden) = $84,592.

                                             Table 2--Summary of Burden Estimates for Proposed Rule 17Ad-27
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Initial
                                                              Type of        Number of      burden per    Ongoing burden   Total annual   Total industry
             Name of information collection                   burden        respondents       entity        per entity      burden  per   burden (hours)
                                                                                (hours)         (hours)     entity (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
17Ad-27.................................................   Recordkeeping               4              56              35              91             364
--------------------------------------------------------------------------------------------------------------------------------------------------------

C. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
    154. Evaluate whether the proposed collections of information are
necessary for the proper performance of the Commission's functions,
including whether the information shall have practical utility;
    155. Evaluate the accuracy of the Commission's estimates of the
burdens of the proposed collections of information;
    156. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
    157. Evaluate whether there are ways to minimize the burden of
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology; and
    158. Evaluate whether the proposed rules and rule amendments would
have any effects on any other collection of information not previously
identified in this section.
    Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Secretary, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with
reference to File Number S7-[ ]-22. Requests for materials submitted to
OMB by the Commission with regard to this collection of information
should be in writing, with reference to File Number S7-[ ]-22 and be
submitted to the Securities and Exchange Commission, Office of FOIA/PA
Services, 100 F Street NE, Washington, DC 20549-2736. As OMB is
required to make a decision concerning the collection of information
between 30 and 60 days after publication, a comment to OMB is best
assured of having its full effect if OMB receives it within 30 days of
publication.

VII. Small Business Regulatory Enforcement Fairness Act

    Under the Small Business Regulatory Enforcement Fairness Act of
1996,\436\ a rule is ``major'' if it has resulted, or is likely to
result in: An annual effect on the economy of $100 million or more; a
major increase in costs or prices for consumers or individual
industries; or significant adverse effects on competition, investment,
or innovation. The Commission requests comment on whether the proposed
rules and rule amendments would be a ``major'' rule for purposes of the
Small Business Regulatory Enforcement Fairness Act. In addition, the
Commission solicits comment and empirical data on: The potential effect
on the U.S. economy on annual basis; any potential increase in costs or
prices for consumers or individual industries; and any potential effect
on competition, investment, or innovation.
---------------------------------------------------------------------------

    \436\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

VIII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires the Commission,
in promulgating rules, to consider the impact of those rules on small
entities.\437\ Section 603(a) of the Administrative Procedure Act,\438\
as amended by the RFA, generally requires the Commission to undertake a
regulatory flexibility analysis of all proposed rules to determine the
impact of such rulemaking on ``small entities.'' \439\ Section 605(b)
of the RFA states that this requirement shall not apply to any proposed
rule which, if adopted, would not have a significant economic impact on
a substantial number of small entities.\440\ The Commission has
prepared the following initial regulatory flexibility analysis in
accordance with Section 603(a) of the RFA.
---------------------------------------------------------------------------

    \437\ See 5 U.S.C. 601 et seq.
    \438\ 5 U.S.C. 603(a).
    \439\ Section 601(b) of the RFA permits agencies to formulate
their own definitions of ``small entities.'' See 5 U.S.C. 601(b).
The Commission has adopted definitions for the term ``small entity''
for the purposes of rulemaking in accordance with the RFA. These
definitions, as relevant to this rulemaking, are set forth in 17 CFR
240.0-10.
    \440\ See 5 U.S.C. 605(b).
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A. Proposed Rules and Amendments for Rules 15c6-1, 15c6-2, and 204-2

1. Reasons for, and Objectives of, the Proposed Actions
    The Commission is proposing to amend Exchange Act Rule 15c6-1 to
shorten the standard settlement cycle for securities transactions
(other than those excluded by the rule) from T+2 to T+1. The Commission
believes that the proposed amendments to Rule 15c6-1 to shorten the
standard settlement cycle from two days to one day would offer market
participants benefits by reducing exposure to credit, market, and
liquidity risk, as well as related reductions to overall systemic risk.
    The Commission is also proposing new Exchange Act Rule 15c6-2 to
prohibit broker-dealers from entering into contracts with their
institutional customers unless those contracts require that the parties
complete allocations, confirmations, and affirmations by the end of the
trade date. The Commission believes that new Rule 15c6-2 would help
facilitate settlement of these institutional trades in a T+1 or shorter
standard settlement cycle by promoting the timely transmission of trade
data necessary to achieve settlement. Furthermore, the Commission
believes that proposed Rule 15c6-2 would foster continued improvements
in institutional trade processing, which should in turn also further
improve accuracy and efficiency, reduce fails, and in turn,
collectively reduce operational risk.
    The Commission is proposing a related amendment to investment
adviser recordkeeping rule under the Advisers Act designed to ensure
that advisers that are parties to contracts under proposed Rule 15c6-2
retain records of confirmations received, and of the allocations and
affirmations sent to a broker or dealer, with a date and time stamp
that indicates when the allocation or affirmation was sent to the
broker or dealer.
2. Legal Basis
    The Commission proposes amendments to Rule 15c6-1 and new Rule
15c6-2 pursuant to authority set forth in the Exchange Act,
particularly

Sections 15(c)(6),\441\ 17A,\442\ and 23(a).\443\ The Commission
proposes an amendment to Rule 204-2 pursuant to authority set forth in
Sections 204 and 211 of the Advisers Act.\444\
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    \441\ 15 U.S.C. 78o(c)(6).
    \442\ 15 U.S.C. 78q-1.
    \443\ 15 U.S.C. 78w(a).
    \444\ 15 U.S.C. 80b-4 and 80b-11.
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3. Small Entities Subject to the Proposed Rule and Proposed Rule
Amendments
    Paragraph (c) of Exchange Act Rule 0-10 provides that, for purposes
of Commission rulemaking in accordance with the provisions of the RFA,
when used with reference to a broker or dealer, the Commission has
defined the term ``small entity'' to mean a broker or dealer: (1) With
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
Exchange Act,\445\ or if not required to file such statements, a
broker-dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last business day of the
preceding fiscal year (or in the time that it has been in business, if
shorter); and (2) is not affiliated with any person (other than a
natural person) that is not a small business or small
organization.\446\
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    \445\ 17 CFR 240.17a-5(c).
    \446\ 17 CFR 240.0-10(d).
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    Under Commission rules, for the purposes of the Advisers Act and
the Regulatory Flexibility Act, an investment adviser generally is a
small entity if it: (i) Has assets under management having a total
value of less than $25 million; (ii) did not have total assets of $5
million or more on the last day of the most recent fiscal year; and
(iii) does not control, is not controlled by, and is not under common
control with another investment adviser that has assets under
management of $25 million or more, or any person (other than a natural
person) that had total assets of $5 million or more on the last day of
its most recent fiscal year.\447\
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    \447\ See 17 CFR 275.0-7.
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    The proposed amendments to Rule 15c6-1 would prohibit broker-
dealers, including those that are small entities, from effecting or
entering into a contract for the purchase or sale of a security (other
than an exempted security, government security, municipal security,
commercial paper, bankers' acceptances, or commercial bills) that
provides for payment of funds and delivery of securities no later than
the first business day after the date of the contract unless otherwise
expressly agreed to by the parties at the time of the transaction.
Proposed Rule 15c6-2 would prohibit broker-dealers, where the broker-
dealer has agreed with its customer to engage in an allocation,
confirmation, or affirmation process, from effecting or entering into a
contract for the purchase or sale of a security (other than an exempted
security, a government security, a municipal security, commercial
paper, bankers' acceptances, or commercial bills) on behalf of a
customer unless such broker or dealer has entered into a written
agreement with the customer that requires the allocation, confirmation,
affirmation, or any combination thereof, be completed no later than the
end of the day on trade date in such form as may be necessary to
achieve settlement in compliance with Rule 15c6-1(a). Based on FOCUS
Report data, the Commission estimates that, as of June 30, 2021,
approximately 1,439 of broker-dealers might be deemed small entities
for purposes of this analysis.
    The proposed amendment to Rule 204-2 would require that advisers
that are parties to contracts under proposed Rule 15c6-2 retain records
of confirmations received, and of the allocations and affirmations sent
to a broker or dealer, with a date and time stamp for each allocation
(as applicable) and each affirmation that indicates when the allocation
or affirmation was sent to the broker or dealer. As discussed in Part
VI above, the Commission estimates that based on IARD data as of
December 30, 2020, approximately 11,283 investment advisers would be
subject to the proposed amendment to rule 204-2 under the Advisers Act.
Our proposed amendment would not affect most investment advisers that
are small entities (``small advisers'') because they are generally
registered with one or more state securities authorities and not with
the Commission. Under Section 203A of the Advisers Act, most small
advisers are prohibited from registering with the Commission and are
regulated by state regulators.\448\ Based on IARD data, the Commission
estimates that as of December 2020, approximately 431 advisers
registered with the Commission are small entities under the Regulatory
Flexibility Act.\449\ Of these, the Commission anticipates that 199, or
46% of small advisers registered with the Commission, would be subject
to the proposed amendment under the Advisers Act.\450\
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    \448\ 15 U.S.C. 80b-3a.
    \449\ Based on responses from registered investment adviser to
Items 5.F. and 12 of Form ADV.
    \450\ Based on data from Form ADV as of December 2020, this
figure represents registered investment advisers that: (i) Report
clients that are registered investment companies in response to Item
5.D, (ii) report any institutional separately managed accounts in
Item 5.D., or have particular separately managed account exposures
in Section 5.K.(1) of Schedule D, or (iii) advise reported hedge
funds as per Section 7.B.(1) of Schedule D.
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4. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
    The proposed amendments to Rule 15c6-1 would not impose any new
reporting or recordkeeping requirements on broker-dealers that are
small entities. However, the proposed amendments to Rule 15c6-1 may
impact certain broker-dealers, including those that are small entities,
to the extent that broker-dealers may need to make changes to their
business operations and incur certain costs in order to operate in a
T+1 environment.
    For example, conversion to a T+1 standard settlement cycle may
require broker-dealers, including those that are small entities, to
make changes to their business practices, as well as to their computer
systems, and/or to deploy new technology solutions. Implementation of
these changes may require broker-dealers to incur new or increased
costs, which may vary based on the business model of individual broker-
dealers as well as other factors.
    Additionally, conversion to a T+1 standard settlement cycle may
also result in an increase in costs to certain broker-dealers who
finance the purchase of customer securities until the broker-dealer
receives payment from its customers. To pay for securities purchases,
many customers liquidate other securities or money fund balances held
for them by their broker-dealers in consolidated accounts such as cash
management accounts. However, some broker-dealers may elect to finance
the purchase of customer securities until the broker-dealer receives
payment from its customers for those customers that do not choose to
liquidate other securities or have a sufficient money fund balance
prior to trade execution to pay for securities purchases. Broker-
dealers that elect to finance the purchase of customer securities may
incur an increase in costs in a T+1 environment resulting from
settlement occurring one day earlier unless the broker-dealer can
expedite customer payments.
    Proposed Rule 15c6-2 would not impose any new reporting or
recordkeeping requirements on broker-dealers that are small entities.
However,

the proposed rule may impact certain broker-dealers, including those
that are small entities, to the extent that broker-dealers may need to
make changes to their business operations and incur certain costs in
order to achieve trade date completion of institutional trade
allocations, confirmations, and affirmations. For example, completion
of allocations, confirmations, and affirmations on trade date may
require broker-dealers, including those that are small entities, to
make changes to their business practices, as well as to their computer
systems, and/or to deploy new technology solutions. Implementation of
these changes may require broker-dealers to incur new or increased
costs, which may vary based on the business model of individual broker-
dealers as well as other factors.
    The proposed amendment to Rule 204-2 imposes certain reporting and
compliance requirements on certain investment advisers, including those
that are small entities. It would require them to retain records of
each confirmation received, and any allocation and each affirmation
sent given to a broker or dealer, with a date and time stamp for each
allocation (if applicable) and affirmation that indicates when the
allocation or affirmation was sent to the broker or dealer. The reasons
for and objectives of, the proposed amendment to the books and records
rule are discussed in more detail in Part III.C. These requirements as
well as the costs and burdens on investment advisers, including those
that are small entities, are discussed in Parts V and VI and below. As
discussed above, there are approximately 431 small advisers, and
approximately 199 small advisers would be subject to amendments to the
books and records rule. As discussed in Part VI.A, the proposed
amendments to Rule 204-2 under the Advisers Act would increase the
annual burden by approximately 0.4 blended hours per adviser per year,
or an increased burden of 172.4 blended hours in the aggregate for
small advisers.\451\ The Commission therefore believes the annual
monetized aggregate cost to small advisers associated with our proposed
amendments would be approximately $11,957.66.\452\
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    \451\ 0.4 hour x 431 small advisers = 172.4 blended hours in the
aggregate for small advisers.
    \452\ 172.4 blended hours x $69.36 per hour = $11,957.66. See
Part VI.A for a discussion of the monetized cost of the hour burden
per adviser.
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5. Duplicative, Overlapping, or Conflicting Federal Rules
    The Commission believes that no federal rules duplicate, overlap or
conflict with the proposed amendments to Rule 15c6-1, proposed Rule
15c6-2, or the proposed amendment to Rule 204-2.
6. Significant Alternatives
    The RFA requires that the Commission include in its regulatory
flexibility analysis a description of any significant alternatives to
the proposed rule which would accomplish the stated objectives of
applicable statutes and which would minimize any significant economic
impact of the proposed rule on small entities.\453\ Pursuant to Section
3(a) of the RFA, the Commission's initial regulatory flexibility
analysis must consider certain types of alternatives, including: (a)
The establishment of differing compliance or reporting requirements or
timetables that take into account the resources available to small
entities; (b) the clarification, consolidation, or simplification of
the compliance and reporting requirements under the rule for small
entities; (c) the use of performance rather than design standards; and
(d) an exemption from coverage of the rule, or any part of thereof, for
such small entities.\454\
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    \453\ 5 U.S.C. 603(c).
    \454\ Id.
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    The Commission considered alternatives to the proposed amendments
to Rule 15c6-1 that would accomplish the stated objectives of the
amendment without disproportionately burdening broker-dealers that are
small entities, including: Differing compliance requirements or
timetables; clarifying, consolidating or simplifying the compliance
requirements; using performance rather than design standards; or
providing an exemption for certain or all broker-dealers that are small
entities. The purpose of Rule 15c6-1 is to establish a standard
settlement cycle for broker-dealer transactions. Alternatives, such as
different compliance requirements or timetables, or exemptions, for