Are You Ready for T+1 Settlement?
August 16, 2023
The transition from T+2 to T+1 settlement looms ahead, offering stock plan administrators a new frontier of obstacles and challenges. For a recent episode of the NASPP’s Equity Expert podcast, I spoke with Rebecca Kargl of the Zillow Group and Lamont Walker from Lyft to discuss how this change is expected to influence the future of stock plan administration, and how others in the field can best prepare themselves for the adoption of T+1 in 2024. Below is a summary of our conversation.
Understanding the Shift to T+1
On Feb 15, 2023, the U.S. Securities and Exchange Commission decided to adopt a rule change that would shorten standard settlement from two business days, to now just one. This decision was made to benefit investors and mitigate various market risks, with SEC Chair Gary Gensler emphasizing the need for such adoption due to concerns raised after the 2021 meme stock events, where market fluctuations were occurring at rates not typically seen in years past.
This change is set to go in effect on May 28, 2024, and readers can reference this SEC press release for further detail on the reasoning behind this decision.
Operational Implications of T+1
When thinking about T+1, one of the first things that comes to mind, is the implication this will have on day-to-day operations. When the change was made from T+3 to T+2 back in 2017, it’s important to realize that operationally, settlement deadlines were cut by a third, however, with this upcoming change, deadlines will now be cut in half.
I'm trying to anticipate as much as I can and bring all the people in, but also trying to put together some contingency planning for just potential issues. Or if there's something that we missed, how quickly everybody can jump together to get things wrapped up and corrected. – Lamont Walker
Rebecca and Lamont both expressed their concerns with how this shortened window would affect day-to-day activity and all three of us were in agreement that without the luxury of that extra day to settle trades, communication between team members will need to be better than ever before. There is no longer the leniency of having an additional day to figure out issues, and as Rebecca and Lamont had stated, with so many moving parts, everyone needs to work together to ensure things are tied out before settlement.
There's so many moving parts through the whole thing, you know, it's not press the button and everything is magically done, you have to review and audit and tie out verification among different areas both internally and externally, that all have to work together to make sure that everything is verified and signed off. Because once everything settles, it's a lot harder to unwind it. – Rebecca Kargl
Employee Education: A Silver Lining
In the evolving landscape of stock programs, the transition to the T+1 settlement cycle brings forth a pressing need for robust employee education. Lamont Walker from Lyft encapsulates the challenges and opportunities this shift presents. He shares that at Lyft, they have employed a sell to cover method as their tax withholding strategy for each RSU vesting event. He stated that explaining to his team that shares might vest one day, be sold the next, and then only become available in their accounts two days later has been an intricate process. This coupled with the need to convey that while the value of their shares may be X on vesting day, a dip in market price by the time they're accessible can represent a lower value than may have been initially expected.
So with that being said, in this regard, the quick turnaround brought on by this shift to T+1 can be seen as a beacon of hope in relation to communication centered around employee equity. As shorter settlement times leave participants at a lower risk of market fluctuations, and with equity sometimes not being seen as the benefit it is, especially in times of market downtrends, we hope shorter settlement times can be used to further leverage the benefit of employee equity.
So hopefully, we can take that as one of the small things to our total rewards teams and our education teams and comp teams so we could speak about okay, now that we have one less day that employees will be waiting for their shares to settle in your accounts? How can we promote this as a benefit? Because a lot of times people lose the sight of equity being a benefit, especially if the stocks not turning in, quote unquote, the right direction. – Lamont Walker
Things to Consider: Fostering Relationships
During these times of change, it’s going to be more important than ever to have clear communication lines between all parties. As stock plan administrators, we work between so many different areas of the business and with this upcoming transition, everyone is going to need to be in sync and as Rebecca pointed out, it’s important to understand how these changes are going to not only affect the admin function, but all your ancillary groups.
You know, everybody has their own checks and audits and controls that they're still going to have to uphold as part of the process and it's not just the admin function that you're thinking about. It's all of your ancillary groups and making sure that everybody realizes that the decisions they're making are going to have a downstream effect. – Rebecca Kargl
It's always been important to have strong relationships with adjacent departments, and if you didn’t have a reason before, you definitely have one now. Opening communication lines between business partners will help ensure open dialogue of all affected parties, and Lamont offered some great tips on how to accomplish this.
He explained how often, with our roles as admins, communication rarely occurs when there isn’t a problem, and that can create a negative stigma around our day-to-day interactions.
So for me, what I do, for example, is I keep constant calls with Treasury payroll, accounting, legal, total rewards, I just have a weekly chats with them. When we're in the office, I used to bring them little things because I didn't want them thinking every time I came to them, there was something wrong. – Lamont Walker
In the rapidly evolving world of stock plan administration, the shift to T+1 settlement marks a significant milestone. As we approach this new frontier, it's clear that adaptability, proactive communication, and strong inter-departmental relationships will be the pillars of success. While challenges are inevitable, they also present opportunities for growth, improved processes, and enhanced employee education.
As stock plan administrators, our role is not just to navigate these changes but to lead the way, ensuring that both our teams and the employees we serve are well-prepared for the future. The journey to T+1 is not just about operational adjustments that will need to be made; it's about reimagining the way we work, communicate, and collaborate, cause as we all are starting to feel, T+0 may be closer than we think, and as that window for settlement shortens, our operational efficiency must rise to meet that challenge.
Need to Know More?
To learn more, please check out my interview with Rebecca and Lamont on the Equity Expert podcast, and for all of those attending this year’s NASPP Conference in Washinton D.C. I implore you to make an effort to attend their session on the upcoming adoption of T+1 settlement.