Shortened Settlement Period Should Increase Safety But Investors Slow To Return Stock Certificates May Have To Pay Fines
Wall Street will shed another relic of its ticker tape heritage this week when the securities industry shortens the settlement period for most trades from five days to three.
Investors need to pay attention to the change, since they could face late fees and interest charges if they don’t get their money or stock certificates to their brokers on time.
The shortened settlement times are aimed at making financial markets safer at a time of increased volatility due in part to the growth of computer technology, which has allowed more money to move faster and farther than ever before.
The shorter settlement period was mandated by the Securities and Exchange Commission, which believes the change will lead to safer and more efficient securities markets. By cutting back on the number of unsettled trades, the agency hopes to reduce the chance that a financial firm will fail during a period of high volatility, like the 1987 stock-market crash.
Although the longer settlement period has not created any problems in the state of Washington, in other areas fraud has caused investors losses in the millions of dollars.
On Wall Street, the new rule is known as “T-plus-3,” or trade date plus three days, which goes into effect June 7. It boils down to this:
When you buy securities, your brokerage firm must receive your payment no later than three business days after the trade is executed. The clock starts ticking the first business day after the trade, so a trade executed on Monday won’t have to have funds in until the close of business Thursday.
When you sell securities, your brokerage firm must receive your securities certificate no later than three days after you authorize the sale. That also means you get your money from a stock sale two days earlier than in the past, said Marc E. Lackritz, president of Securities Industry Association.
The new rule applies to stocks, mutual fund shares, municipal bonds and corporate bonds that are traded on an exchange. It doesn’t apply to government bonds, futures and options, which already settle one day after the trade date.
Consumers need to be alert to several major issues with the shortened settlement period.
If you miss a deadline, expect to pay a late fee in some form, which varies from firm to firm. Regulators reported they’ve heard of fees ranging from $15 to $100. Wall Street firms charge the fees because they’re saddled with the risk of completing the trade if the customers’ funds or securities don’t come through on time.
“What we are urging investors to do is shop around and make sure that with the brokerage firm they choose, they understand what the different fees are and when they apply,” said Nancy Smith, consumer affairs director for the Securities and Exchange Commission.
One way to avoid the hassle is to have enough cash in your brokerage account, either through a money market account or in a “central asset management” account. That way a firm can merely transfer the funds out of your account to complete the trade.
Some Wall Street firms view the shortened settlement time as a marketing opportunity to sell asset management accounts, such as “wrap fee” accounts, which can carry higher fees for consumers, said Susan Shands, a securities regulator for the state of Mississippi.
“If you are one who makes a few trades around Christmas or tax time, it may be cheaper for you to FedEx a check or take it to the broker than set up another account,” Shands said.
The asset management accounts, however, are convenient for investors who trade frequently, seek professional investment advice or borrow against their securities.
Electronic fund transfers from your bank account to the brokerage firm can help you meet the faster deadlines. Not all wire payments are the same.
Fund transfers through the National Automated Clearinghouse Association in Herndon, Va., offer consumers a clear benefit: You can move to rescind the trade 60 days after the fact if an error or dispute arises with your broker.
“That’s one of the reasons why some people in the securities industry have not been in a rush to use the ACH,” said Rick Golden, a clearinghouse spokesman. Consumers have to specifically ask their brokers for a fund transfer through the Automated Clearinghouse and they will have to sign a form authorizing such a payment.
Consumer activists say investors need to determine if your securities are registered in your name or the name of your brokerage firm. If they’re in your name, you have to deliver the certificates to the brokerage firm in time to complete the sale.
A simpler way is registering securities in your brokerage firm’s name - or “street name” - making them handle the paperwork.
Dick Stream, operations director for the Minneapolis brokerage Piper Jaffray Inc., said the solution for many of his firm’s clients is a combination of registering securities in “street name” and keeping sufficient funds in a money market account.
xxxx Quick shuffle Securities that will be affected by the change to three-day settlement: Corporate debt securities. Equities. Municipal securities. Mtuual funds. Limited partnerships that are listed on an exchange. Securities that won’e be affected by the three-day settlement rule: Unlisted limited partnerships. Some new issues of securities. -Knight-Ridder