The era of T+3 has come to Wall Street and to Main Street.
T+3 is industry shorthand for "trade plus three days," the new Securities and Exchange Commission regulation that requires investors to settle stock trades within three days of execution. Under the old rules, investors had five days to settle trades.
Although seemingly arcane, T+3 has raised the ire of investors across the country, who complain the rules will benefit brokerage firms at the expense of their customers. At a recent series of town meetings held by SEC officials in various U.S. cities complaints about T+3 dominated the question-and-answer sessions.
"There has been a lot of concern about changing this," Nancy Smith, the SEC's director of consumer affairs, said, noting that 400 to 500 investors contacted her agency to complain about T+3. "It has not been a popular move."
So unpopular, in fact, that securities industry officials take pains to point out that T+3 was the SEC's idea, not theirs.
"It is, after all, an SEC rule," says Stuart Kaswell, general counsel for the Securities Industry Association. "Some people think this was purely a securities industry idea and that somehow we're trying to cram this down people's throat. That's just not the case."
The new rule is a somewhat belated outgrowth of the 1987 market crash.
Subsequent studies of how to reduce market risk concluded that shortening the settlement period reduced the chances that clients would renege on trades. It also reduced the time that firms were "loaning" money to their customers.
"This puts more pressure on individual investors to get their money in faster," said Ms. Smith of the SEC. "But the balance is that we have a stronger market with a lot less credit in it at any given time."
Here's how T+3 works: Investors who buy stocks have three business days to get the money into the hands of the brokerage firm that executed the trade. A trade on a Tuesday, for instance, must be paid for, or settled, by Friday. A trade on a Thursday dTC must be settled by the following Tuesday.
Likewise, when stocks are sold, the investor must deliver the stock certificates to the brokerage firm within three business days.
Late payment or late delivery can result in penalties or interest charges.
So why all the fuss? As brokers like to point out, customers are often resistant to change. And T+3 will change the way investors buy and sell stocks.
Under the old rules allowing five days to settle trades, many investors waited until they received a confirmation notice of a stock purchase before mailing the payment to their broker. But there won't be enough time under T+3 to wait for confirmation before writing the check.
Moreover, even if investors don't wait for a confirmation notice, relying on regular mail to meet a three-day deadline isn't a no-lose proposition. A check can be sent by overnight delivery, but that costs $10. An alternative is to wire money directly to the brokerage firm from a bank account, but that also can cost $10 or more each time.
Some observers worry that brokers will use T+3 as a scare tactic to herd customers into asset management accounts. These accounts, offered by most large- and medium-size brokerage firms, combine checking and investment functions and provide automatic payment for stock transactions.
But they aren't cheap compared with traditional bank checking accounts. Annual fees can run from $85 to $110, although some firms are waiving fees in anticipation of a rush of T+3-related business.
"Brokers seem to be using T+3 to try to gain total control of their clients' assets," said Barry Murphy of the National Association of Investors Corp. "I don't know if that's a good thing."
T+3 will also make it more cumbersome for investors who prefer to hold their stock certificates themselves, rather than keep them on deposit with their broker in "street name."
The majority of stock certificates are already held in street name. Observers predict that T+3, by shortening the time available for an investor to deliver stock certificates to a brokerage firm after a sale, will hasten the trend toward street name ownership, a trend brokers encourage. Some firms have already told customers they will start charging a fee to provide stock certificates.
"That's a hot button for a lot of people," said John Markese, president of the American Association of Individual Investors. "They want to hold those stock certificates."
Overall, Mr. Markese said, T+3 "really reduces investors' flexibility and options. It really requires you to keep cash balances (at your brokerage firm) and own stock only in street name."
In some ways, though, the commotion over T+3 may be much ado about nothing.
A study by Principal Financial Securities Inc. in Dallas indicated that 85 percent of the firm's typical stock transactions could be settled in three days.
"We don't think we'll see a huge impact from T+3," chief financial officer Eddie Anderson said.
Adds Stan Allred, a senior vice president at Southwest Securities in Dallas: "It's going to be a nonevent for the big investment houses and the larger regional firms."
Now that T+3 has arrived, can T+1 or T+none be far behind? Some trades, such as those involving options and government bonds, already must be settled in one day. And the securities industry obviously is looking forward to a day probably years away when stocks are bought and sold with no paper changing hands.
"This is a step along the way," said Mr. Kaswell of the Securities Industry Association. "It's a matter of evolution. This may cause some short-term dislocations, but the idea is to make the system safer for everybody."