Barring some sort of unforeseen obstacle, T+2 settlement is scheduled to go into effect on September 5 of this year. (That’s the Tuesday after Labor Day—what better way to cap a holiday weekend than with a major change in the US securities markets? I guess they didn’t want to wait until December 26).
On Tuesday, I blogged about why the securities industry is moving to T+2 (“Progress Towards T+2“). For today’s blog entry, I have a list of six things you need to think about with respect to T+2.
1. Be prepared to shorten processing time for any stock plan transactions that involve open market sales. This includes same-day-sale and sell-to-cover transactions. The broker will need to receive the shares and know the funds to be transferred to the company to cover the cost of the transaction and tax withholding in time to settle by T+2. That means you’ll have one less day to process the transaction.
2. Other types of transactions may be affected as well. Cash and net exercises and share withholding don’t involve open market transactions and, thus, theoretically aren’t subject to the mandated settlement period. But, in recent years, many companies have begun allowing employees to conduct these transactions using the automated, self-service tools provided by their brokers. Some (many? all?) brokers may subject these transactions to the same two-day settlement period simply because that is how their systems will be designed to work.
3. Watch out for complicated transactions. It may be no sweat to calculate the tax withholding for US employees and get that information over to your brokers in 24 hours. But for non-US employees, where you may have to contact local payroll (possibly in a time zone that is half a day off from yours) for the appropriate tax rate, this might not be so easy. And then there are your mobile employees. Withholding at the maximum tax rate and refunding the excess through local payroll might be the only way to manage this process.
4. Beware the IRS deposit deadline for same-day sales. Where the company’s cumulative deposit liability to the IRS exceeds $100,000, the deposit needs to be made within one business day. But for same-day sale exercises, an IRS field directive considers the deposit timely if made within one day of the settlement date. If settlement occurs on T+2, that means the deposit now needs to be made by T+3.
5. Talk to your brokers. Contact your brokers to find out what they are doing to prepare for T+2 and what testing opportunities will be available to you. Think about what you’ll need from your brokers and communicate this to them. Don’t wait for your brokers to contact you; get out in front of this.
6. Don’t forget about employee communications. Your brokers are going to be communicating this change to your participants. Make sure you know what they will be communicating and when, so you aren’t caught off guard. And review your own educational materials for any mention of the settlement period.
Some of the panelists in the NASPP Conference session on this encouraged the use of the term “settlement period” without explaining how long this period is, so that if/when the period is reduced to T+1, you don’t have to change it again. I hate that idea. It makes a confusing concept even more confusing for employees. And it could be decades before we move to T+1 (moving from T+3 to T+2 took 20 years). By then, you’ll probably have been promoted (or retired) and updating the educational materials will be someone else’s problem.