Covered Broker-Dealer Provisions Under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act
| Published date | 31 August 2020 |
| Record Number | 2020-16468 |
| Section | Rules and Regulations |
| Court | Federal Deposit Insurance Corporation |
Federal Register, Volume 85 Issue 169 (Monday, August 31, 2020)
[Federal Register Volume 85, Number 169 (Monday, August 31, 2020)]
[Rules and Regulations]
[Pages 53645-53671]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16468]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 380
RIN 3064-AE39
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 302
RIN 3235-AL-51
[Release No. 34-89394; File No. S7-02-16]
Covered Broker-Dealer Provisions Under Title II of the Dodd-Frank
Wall Street Reform and Consumer Protection Act
AGENCY: Federal Deposit Insurance Corporation (``FDIC'' or
``Corporation''); Securities and Exchange Commission (``SEC'' or
``Commission'' and, collectively with the FDIC, the ``Agencies'').
ACTION: Final rule.
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SUMMARY: The Agencies, in accordance with section 205(h) of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank
Act''), are jointly adopting a final rule to implement provisions
applicable to the orderly liquidation of covered brokers and dealers
under Title II of the Dodd-Frank Act (``Title II'').
DATES: The final rule is effective on October 30, 2020.
FOR FURTHER INFORMATION CONTACT:
FDIC:
Alexandra Steinberg Barrage, Associate Director, at (202) 898-3671,
Division of Complex Institution Supervision and Resolution; Joanne W.
Rose, Counsel, at (917) 320-2854, [email protected], Legal Division.
SEC:
Michael A. Macchiaroli, Associate Director, at (202) 551-5510;
Thomas K. McGowan, Associate Director, at (202)
[[Page 53646]]
551-5521; Randall W. Roy, Deputy Associate Director, at (202) 551-5522;
Raymond A. Lombardo, Assistant Director, at (202) 551-5755; Timothy C.
Fox, Branch Chief, at (202) 551-5687; or Nina Kostyukovsky, Special
Counsel, at (202) 551-8833, Division of Trading and Markets, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION:
I. Background
II. Comments on the Proposed Rule
A. Overview
B. The Individual Letters
C. The Law Clinic Letter
D. The OSEC Letter
E. The Joint Letter
III. Section-by-Section Analysis
A. Definitions
1. Definitions Relating to Covered Broker-Dealers
2. Additional Definitions
B. Appointment of Receiver and Trustee for Covered Broker-Dealer
C. Notice and Application for Protective Decree for Covered
Broker-Dealer
D. Bridge Broker-Dealer
1. Power To Establish Bridge Broker-Dealer; Transfer of
Customer Accounts and Other Assets and Liabilities
2. Other Provisions With Respect to Bridge Broker-Dealer
E. Claims of Customers and Other Creditors of a Covered Broker-
Dealer
F. Additional Sections of the Rule
IV. Paperwork Reduction Act
V. Economic Analysis
A. Introduction and General Economic Considerations
B. Economic Baseline
1. SIPC's Role
2. The Corporation's Power To Establish Bridge Broker-Dealers
3. Satisfaction of Customer Claims
C. Expected Benefits, Costs and Effects on Efficiency,
Competition, and Capital Formation
1. Expected Benefits
2. Expected Costs
3. Expected Effects on Efficiency, Competition, and Capital
Formation
D. Alternatives Considered
E. Comments on the Proposed Rule
1. The Law Clinic Letter
2. The OSEC Letter
3. The Joint Letter
VI. Regulatory Analysis and Procedures
A. Regulatory Flexibility Act Certification
B. Plain Language
VII. Other Matters
VIII. Statutory Authority
I. Background
Title II of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 \1\ (the ``Dodd-Frank Act'') provides an
alternative insolvency regime for the orderly liquidation of large
financial companies that meet specified criteria.\2\ Section 205 of
Title II sets forth certain provisions specific to the orderly
liquidation of certain large broker-dealers, and paragraph (h) of
section 205 requires the Agencies, in consultation with the Securities
Investor Protection Corporation (``SIPC''), jointly to issue rules to
implement section 205.\3\
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010, Public Law 111-203, 124 Stat. 1376 (2010) and codified at 12
U.S.C. 5301 et seq. Title II of the Dodd-Frank Act is codified at 12
U.S.C. 5381-5394.
\2\ See 12 U.S.C. 5384 (pertaining to the orderly liquidation of
covered financial companies).
\3\ See 12 U.S.C. 5385 (pertaining to the orderly liquidation of
covered broker-dealers).
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In the case of a broker-dealer, or a financial company \4\ in which
the largest U.S. subsidiary is a broker-dealer, the Board of Governors
of the Federal Reserve System (``Board'') and the Commission are
authorized jointly to issue a written orderly liquidation
recommendation to the U.S. Treasury Secretary (``Secretary''). The FDIC
must be consulted in such a case.
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\4\ Section 201(a)(11) of the Dodd-Frank Act (12 U.S.C.
5381(a)(11)) (defining financial company) and 12 CFR 380.8 (defining
activities that are financial in nature or incidental thereto).
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The recommendation, which may be sua sponte or at the request of
the Secretary, must contain a discussion regarding eight criteria
enumerated in section 203(a)(2) \5\ and be approved by a vote of not
fewer than a two-thirds majority of the Board then serving and a two-
thirds majority of the Commission then serving.\6\ Based on similar but
not identical criteria enumerated in section 203(b), the Secretary
would consider the recommendation and (in consultation with the
President) determine whether the financial company poses a systemic
risk meriting liquidation under Title II.\7\
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\5\ See 12 U.S.C. 5383(a)(2)(A) through (G).
\6\ See 12 U.S.C. 5383(a)(1)(B) (pertaining to vote required in
cases involving broker-dealers).
\7\ See 12 U.S.C. 5383(b) (pertaining to a determination by the
Secretary).
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Title II also provides that in any case in which the Corporation is
appointed receiver for a covered financial company,\8\ the Corporation
may appoint itself receiver for any covered subsidiary \9\ if the
Corporation and the Secretary make the requisite joint determination
specified in section 210.\10\
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\8\ See 12 U.S.C. 5381(a)(8) (definition of covered financial
company).
\9\ See 12 U.S.C. 5381(a)(9) (definition of covered subsidiary).
A covered subsidiary of a covered financial company could include a
broker-dealer.
\10\ See 12 U.S.C. 5390(a)(1)(e).
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A company that is the subject of an affirmative section 203(b) (or
section 210(a)(1)(E)) \11\ determination would be considered a covered
financial company for purposes of Title II.\12\ As discussed below, a
covered broker or dealer is a covered financial company that is
registered with the Commission as a broker or dealer and is a member of
SIPC.\13\ Under the process specified in section 203 or 210, the
broker-dealer will be a ``covered broker-dealer,'' section 205 and the
final rule will apply, the covered broker-dealer will be placed into
orderly liquidation, and the FDIC will be appointed receiver.\14\
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\11\ See id.
\12\ See 12 U.S.C. 5381(a)(8) (definition of covered financial
company); 12 U.S.C. 5390(a)(1)(E)(ii) (treatment as covered
financial company).
\13\ See 12 U.S.C. 5381(a)(7) (definition of covered broker or
dealer). For convenience, we hereinafter refer to entities that meet
this definition as covered broker-dealers.
\14\ See 12 U.S.C. 5384 (pertaining to orderly liquidation of
covered financial companies).
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The FDIC and the SEC jointly published for public comment a notice
of proposed rulemaking titled ``Covered Broker-Dealer Provisions under
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection
Act'' in the Federal Register on March 2, 2016. The 60-day comment
period ended on May 2, 2016.\15\ In keeping with the statutory mandate,
the proposed rule, among other things, (i) clarified how the relevant
provisions of the Securities Investor Protection Act of 1970 (``SIPA'')
\16\ would be incorporated into a Title II proceeding, (ii) specified
the purpose and the content of the application for a protective decree
required by section 205(a)(2)(A) of the Dodd-Frank Act,\17\ (iii)
clarified the FDIC's power as receiver with respect to the transfer of
assets of a covered broker-dealer to a bridge broker-dealer, (iv)
specified the roles of the FDIC as receiver and SIPC as trustee with
respect to a covered broker-dealer, (v) described the claims process
applicable to customers and other creditors of a covered broker-dealer,
(vi) provided for SIPC's administrative expenses, and (vii) provided
that the treatment of qualified financial contracts (``QFCs'') of the
covered broker-dealer would be governed exclusively by section 210 of
the Dodd-Frank Act.\18\
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\15\ 81 FR 10798 (March 2, 2016).
\16\ 15 U.S.C. 78aaa-lll.
\17\ 12 U.S.C. 5385(a)(2)(A) (application for a protective
decree).
\18\ 12 U.S.C. 5390.
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II. Comments on the Proposed Rule
A. Overview
Six comment letters were submitted to the FDIC and the SEC on the
proposed rule. Three are from individuals (the ``Individual Letters''),
one is from students in a law school financial markets and corporate
law clinic (the ``Legal Clinic Letter''), one is from a group that
states it is a ``group of concerned citizens, activists, and financial
professionals that works to
[[Page 53647]]
ensure that financial regulators protect the interests of the public''
(the ``OSEC Letter''), and one is a joint letter from three trade
groups representing various segments of the financial services industry
(the ``Joint Letter'').\19\ The contents of the comments and the
Agencies' responses thereto are addressed below.
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\19\ See comments to File No. S7-02-16 (available at: https://www.sec.gov/comments/s7-02-16/s70216.htm).
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B. The Individual Letters
Two individual commenters are generally supportive of the proposed
rule.\20\ The first individual commenter requests that the notification
requirements of the proposed rule be extended to apply to holding
companies as well as the broker-dealer.\21\ Section 205 of the Dodd-
Frank Act and the proposed rule apply only in situations where the
broker-dealer itself is subject to a Title II liquidation.\22\ Other
provisions of Title II address the orderly liquidation of other
financial companies, including holding companies. Therefore, the
Agencies have made no changes in the final rule based on this comment.
The second individual commenter states that the proposed rule might
limit an individual consumer's right to sue a broker-dealer,
particularly if the claim would be heard in an arbitration with the
Financial Industry Regulatory Authority (``FINRA'').\23\ Any such
limitations regarding an individual consumer's right to sue a broker-
dealer that would arise because of the commencement of orderly
liquidation exist by virtue of Title II of the Dodd-Frank Act, and are
not a result of any matters addressed in the proposed rule.\24\
Accordingly, the Agencies have made no changes in the final rule as a
result of this comment. The third individual commenter is concerned
that the proposed rule may disadvantage the customers of a covered
broker-dealer.\25\ As discussed below, in implementing section 205 of
the Dodd-Frank Act, consistent with the statutory directive contained
therein,\26\ the Corporation and the Commission are seeking to ensure
that all customer claims relating to, or net equity claims based upon,
customer property or customer name securities are satisfied in a manner
and in an amount at least as beneficial to the customers as would have
been the case if the broker-dealer were liquidated under SIPA.\27\
Accordingly, the final rule preserves customer status as would be the
case in a SIPA proceeding. Therefore, the Agencies have made no changes
in the final rule based on this comment.
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\20\ See generally letter from Keith E. Condemi and letter from
Matt Bender.
\21\ See letter from Keith E. Condemi at 1.
\22\ 12 U.S.C. 5385; see also 12 U.S.C. 5383 (setting forth that
the Commission would also be able to make a recommendation in a case
where the largest U.S. subsidiary of a financial company is a broker
or dealer).
\23\ See letter from Matt Bender at 1.
\24\ See 12 U.S.C. 5385(c).
\25\ See letter from Pamela D. Marler at 1.
\26\ See 12 U.S.C. 5385(f)(1) (pertaining to the statutory
requirements with respect to the satisfaction of claims).
\27\ Id.
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C. The Law Clinic Letter
The Law Clinic Letter addresses two specific situations in which
the commenter believes the application of the proposed rule might in
some manner or on some facts have the possibility of delaying or
obstructing consumer access to property in a Title II liquidation of a
covered broker-dealer. First, in this commenter's view, the discretion
provided to SIPC under the proposed rule to use estimates for the
initial allocation of assets to customer accounts at the bridge broker-
dealer is too broad and may result in over-allocations to these
accounts to the detriment of other customers when the overpayments are
recalled.\28\ In particular, the commenter opines that a conservative
initial allocation intended to minimize the possibility of an over-
allocation to any customer and mitigate potential costs and uncertainty
associated with allocation refinements is ``too vague and is not
codified in the rule itself.'' \29\ Further, the commenter asserts as
``irresponsible'' the Agencies' decision to base customer allocations
on the books and records of the covered broker-dealer without fully
understanding the potential costs to customers.\30\ The commenter also
pointed out that the Agencies lack the data demonstrating that delays
experienced by customers in accessing their accounts actually
constitute an actionable problem.\31\ The commenter requests that the
Agencies modify the final rule to make it clear that estimates may be
used only when the liquidated entity acts in bad faith to impede the
reconciliation process.\32\
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\28\ See Law Clinic Letter at 2.
\29\ See id.
\30\ See id. at 5.
\31\ See id.
\32\ See id.
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As stated in the preamble to the proposed rule, the purpose of
using estimates in the customer property allocation process is to
ensure that customers receive the assets held for their customer
accounts, together with SIPC payments, if any, as quickly as is
practicable. Historically, the trustees in SIPA liquidations have
utilized estimates to allow customers partial access to their customer
accounts before a final reconciliation is possible. Returning customer
assets to customers as quickly as possible is important for a number of
reasons. For example, customers may depend financially on these assets.
By way of additional example, it is possible that customers may need
access to their assets in order to be able to de-risk positions or re-
hedge positions. In the case of an orderly liquidation of a covered
broker-dealer, SIPC, as trustee, is charged with making a prompt and
accurate determination of customer net equity and allocation of
customer property.
Although the circumstances of a particular orderly liquidation may
make this process difficult, consistent with historical practice in
SIPA liquidations, the Agencies would endeavor to provide customers
prompt access to their accounts to the extent possible based upon
estimates while that reconciliation is being completed. Accordingly,
the Agencies have made no changes in the final rule as a result of this
comment.
In response to the commenter's concern that the notion of a
conservative initial allocation is vague and not codified in the
proposed rule, the Agencies note that the manner in which an orderly
liquidation of a covered broker-dealer would proceed would depend on
the relevant facts and circumstances. A prescriptive definition of
conservative initial allocation that is codified may not be appropriate
for the orderly liquidations of covered broker-dealers under all
circumstances. Therefore, the Agencies have chosen not to define or to
codify the notion of a conservative initial allocation in the final
rule.\33\
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\33\ For reasons explained in the Economic Analysis, the
Agencies disagree with the commenter's assertion that the Agencies
decided to allow estimates of customer allocations to be based on
the books and records of the covered broker-dealer without fully
understanding the potential costs to customers. Further, and for
reasons explained in the Economic Analysis, the Agencies disagree
with the commenter's point that the Agencies lack the data
demonstrating that delays experienced by customers in accessing
their accounts constitute an actionable problem. See infra Section
V.E.1.
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Second, the Law Clinic Letter suggests two scenarios where a
customer of a covered broker-dealer potentially could be worse off
under the proposed rule than such customer would have been in a SIPA
liquidation.\34\ The first scenario the commenter describes is whenever
a customer's net equity claim is not fully satisfied by the allocation
of customer
[[Page 53648]]
property and the SIPC advance.\35\ The commenter states that under the
proposed rule, this residual claim, which becomes a general unsecured
claim against the broker-dealer's general estate, is satisfied only
after SIPC is repaid for its advances to customers.\36\ The commenter
further points out that, by contrast, under SIPA, SIPC would receive
limited subrogation rights against customers in exchange for the
advance,\37\ and that SIPA does not allow SIPC to recover its advance
before a customer with a residual net equity claim is made whole.\38\
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\34\ See Law Clinic Letter at 5.
\35\ See id. at 6.
\36\ See 12 CFR 380.65(c); 17 CFR 302.105(c), as proposed.
\37\ See 15 U.S.C. 78fff-3(a).
\38\ See Law Clinic Letter at 6.
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Title II requires that all obligations of a covered broker-dealer
relating to, or net equity claims based upon, customer property or
customer name securities shall be promptly discharged by SIPC, the
Corporation, or the bridge financial company, as applicable, by the
delivery of securities or the making of payments to or for the account
of such customer, in a manner and in an amount at least as beneficial
as would have been the case had the covered broker-dealer been
liquidated in a proceeding under SIPA.\39\ The Agencies note that under
the proposed rule, ``SIPC shall make advances in accordance with, and
subject to the limitations imposed by, 15 U.S.C. 78fff-3.'' \40\ This
language incorporates the limits on SIPC's subrogation rights
applicable in a SIPA liquidation.\41\
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\39\ See 12 U.S.C. 5385(f)(1).
\40\ See 12 CFR 380.64(a)(2); 17 CFR 302.104(a)(2), as proposed.
\41\ See 15 U.S.C. 78fff-3(a).
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The commenter states that customers with residual unpaid net equity
claims could be worse off than they would be in a SIPA liquidation if
the combined trustee and receiver's expenses in the Title II
liquidation exceed the expenses of a hypothetical trustee in a SIPA
liquidation because sections 205(g)(2) and 210(b) of the Dodd-Frank Act
subordinate these residual unpaid net equity claims to the expenses of
the trustee and the receiver.\42\ The Agencies understand the
commenter's concern about the potential for increased costs. However,
one of the goals of this rulemaking is to describe the respective roles
of the FDIC and SIPC for the purpose of promoting coordination between
the FDIC and SIPC and reducing potential overlap of functions (and
associated expenses) to be performed by the trustee and receiver. The
Agencies believe that the rule will accomplish this goal. Even if the
combined expenses of the trustee and the receiver in a Title II orderly
liquidation were to exceed the expenses of a trustee in a SIPA
liquidation, the operation of Commission Rules 15c3-1 \43\ and 15c3-
3,\44\ and the resulting history of customer recoveries in SIPA
liquidations, should mitigate the commenter's concern that such costs
will materially impact customer recoveries in an orderly liquidation.
These rules help ensure that, in the event of a broker-dealer failure,
there is an estate of customer property available, plus additional
liquid assets of the broker-dealer in an amount in excess of all the
broker-dealer's unsubordinated liabilities, available to pay customer
claims. During SIPC's 49-year history, cash and securities distributed
for the accounts of customers totaled approximately $141.5 billion. Of
that amount, approximately $140.5 billion came from debtors' estates
and $1.0 billion from the SIPC Fund.\45\ Further, of the approximately
770,400 claims satisfied in completed or substantially completed cases
as of December 31, 2019, a total of 355 were for cash and securities
whose value was greater than the limits of protection afforded by
SIPA.\46\ These customer recovery figures generally support the
Agencies' view that incorporating the existing SIPA customer claims
process into the orderly liquidation should help ensure that customers
in an orderly liquidation of a covered broker-dealer would fare as well
as they would have in a SIPA liquidation. Additionally, the vast
majority of such recoveries came from the pool of customer property
established pursuant to the requirements of Commission Rule 15c3-3.\47\
Such pool of customer property will be available to satisfy customer
claims in Title II. Accordingly, the Agencies have made no changes in
the final rule as a result of this comment.
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\42\ See Law Clinic Letter at 6.
\43\ See 17 CFR 240.15c3-1; see also, e.g., Financial
Responsibility Rules for Broker-Dealer, Exchange Act Rel. No. 70072
(July 30, 2013), 78 FR 51824, 51849 (August 21, 2013) (explaining
that the purpose of Rule 15c3-1 is to help ensure that a broker-
dealer holds, at all times, more than one dollar in highly liquid
asset for each dollar of unsubordinated liabilities (i.e., current
liabilities)).
\44\ See 17 CFR 240.15c3-3. Rule 15c3-3 is designed to ``give
more specific protection to customer funds and securities, in effect
forbidding brokers and dealers from using customer assets to finance
any part of their businesses unrelated to servicing securities
customers . . . .'' Financial Responsibility Rules for Broker-
Dealers, Exchange Act Release No. 70072 (July 30, 2013), 78 FR
51824, 51826 (August 21, 2013). See also Net Capital Requirements
for Brokers and Dealers, Exchange Act Release No. 21651 (January 11,
1985), 50 FR 2690, 2690 (January 18, 1985); Broker-Dealers;
Maintenance of Certain Basic Reserves, Exchange Act Release No. 9856
(November 10, 1972), 37 FR 25224, 25224 (November 29, 1972).
\45\ See SIPC 2019 Annual Report, at 8, available at https://www.sipc.org/media/annual-reports/2019-annual-report.pdf.
\46\ See id. at 9.
\47\ 17 CFR 240.15c3-3.
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D. The OSEC Letter
The OSEC Letter generally supports the proposed rule and outlines
several benefits to the proposed rule, recognizing that the proposed
rule relied upon the established framework for liquidations under SIPA
in describing the orderly liquidation claims process.\48\ The commenter
highlights one perceived difference between the SIPA process and the
process described in the proposed rule, however, and suggests that the
rule would be improved by increasing the amount of time that customers
have to file claims.\49\ The OSEC Letter states that the proposed rule
tracks section 8(a)(3) of SIPA by mandating that customer claims for
net equity must be filed within 60 days after the date the notice to
creditors to file claims is first published, while general creditors of
the covered broker-dealer have up to six months to file their claims
and have a good faith exception for late filings.\50\ The OSEC Letter
also suggests that the proposed rule be used as an opportunity to
reduce moral hazard by imposing restrictions on executive compensation
at broker-dealers.\51\ The OSEC letter states that the proposed rule
``fails to adequately penalize senior management, employees, and
advisors who are complicit in producing the covered broker dealer's
financial instability.'' \52\ The OSEC Letter supports the
establishment of a bridge broker-dealer and suggests that the FDIC
consider and encourage the establishment of multiple bridge entities to
limit over-concentration and interconnectedness risk.\53\
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\48\ See generally OSEC Letter.
\49\ See id. at 3.
\50\ See id.
\51\ See id.
\52\ See id.
\53\ See id. at 5.
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While the Agencies appreciate the comments raised in the OSEC
Letter, the Agencies have not made changes in the final rule as a
result of these comments. First, the OSEC Letter has misconstrued the
proposed rule with respect to the time allowed for claims. The proposed
rule provides that all creditors--customers as well as general
unsecured creditors--have the opportunity to file claims within time
frames consistent with the requirements of SIPA and of the Dodd-Frank
Act. Under the
[[Page 53649]]
proposed rule, customers would have the same six-month period to file
claims as all other creditors and have an exception for late filings
comparable to the SIPA good faith exception. However, under both SIPA
and the proposed rule, if a customer files its claim within 60 days
after the date the notice to creditors to file claims is first
published, the customer is assured that its net equity claim will be
paid, in kind, from customer property or, to the extent such property
is insufficient, from SIPC funds. If the customer files a claim after
the 60 days, the claim need not be paid with customer property and, to
the extent such claim is paid by funds advanced by SIPC, it would be
satisfied in cash, securities, or both, as SIPC determines is most
economical to the estate. Therefore, the Agencies have made no changes
in the final rule as a result of the comment.
The OSEC Letter also suggests that the proposed rule be used as an
opportunity to reduce moral hazard by imposing restrictions on
executive compensation at broker-dealers.\54\ The OSEC letter states
that the proposed rule ``fails to adequately penalize senior
management, employees, and advisors who are complicit in producing the
covered broker dealer's financial instability.'' \55\ Restrictions on
executive compensation are outside the scope of the rulemaking
requirement of section 205(h) of the Dodd-Frank Act.\56\ The Agencies
have made no changes in the final rule as a result of this comment.
Regarding the commenter's suggestion that the FDIC consider and
encourage the establishment of multiple bridge entities to limit over-
concentration and interconnectedness risk, the Agencies note that both
the Dodd-Frank Act and the proposed rule permit the FDIC to establish
multiple bridge broker-dealers in a Title II orderly liquidation and
therefore the Agencies have made no changes in the final rule as a
result of this comment.
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\54\ See OSEC Letter at 3.
\55\ See id.
\56\ Section 956 of the Dodd-Frank Act addresses incentive-based
payment arrangements. 12 U.S.C. 5641.
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E. The Joint Letter
The Joint Letter is generally supportive of the proposed rule but
states that certain portions of the proposed rule would benefit from
additional clarification, either through additional rulemaking or
interpretive statements.\57\
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\57\ See generally Joint Letter.
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1. Necessity for Rule
The Joint Letter states that the proposed rule is likely to have an
extremely narrow scope of application and calls into question the
necessity of the proposed rule.\58\ In the preamble to the proposed
rule, the Agencies specifically acknowledged the limited circumstances
in which the rule would be applied. However, the Dodd-Frank Act
requires the Agencies jointly to issue rules to implement section 205
of the Dodd-Frank Act.\59\ The Agencies believe that the clarifications
provided by the final rule will prove valuable should a broker-dealer
ever be subject to a Title II orderly liquidation and, therefore, the
Agencies are promulgating this final rule.
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\58\ See id. at 2.
\59\ See 12 U.S.C. 5385(h).
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2. Liquidation Under SIPA
The Joint Letter notes the concern that the proposed rule could
create, rather than reduce, uncertainty because the proposed rule does
not repeat the full statutory text of section 205(a) that SIPC will act
as trustee for the liquidation under the Securities Investor Protection
Act of the covered broker-dealer.\60\
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\60\ See Joint Letter at 4.
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The proposed rule clarifies that although the trustee will make
certain determinations, such as the allocation of customer property, in
accordance with the relevant definitions under SIPA, the orderly
liquidation of the covered broker-dealer is in fact pursuant to a
proceeding under the Dodd-Frank Act, rather than a process under SIPA.
The Agencies acknowledge that the reference to a liquidation ``under
SIPA'' in section 205 of the statute may create ambiguity. The purpose
of the rulemaking required by section 205(h) of the Dodd-Frank Act is
to clarify these provisions and provide a framework for implementing a
Title II orderly liquidation of a broker-dealer. Thus, in the preamble
to the proposed rule, the Agencies explained that the omission of the
reference to the appointment of SIPC as a trustee for a liquidation
``under [SIPA]'' is intended to make clear that the rule applies to an
orderly liquidation of a covered broker-dealer under the Dodd-Frank
Act, not a SIPA proceeding.\61\ The proposed rule seeks to eliminate
any potential confusion caused by referring to a ``liquidation under
[SIPA]'' in the Dodd-Frank Act when there is, in fact, no proceeding
under SIPA and the broker-dealer is being liquidated under Title II,
while implementing the statutory objective that the protections
afforded to customers under SIPA are recognized in the Title II
process. Therefore, the Agencies have made no changes in the final rule
as a result of this comment.
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\61\ See Section III.B. See also 12 U.S.C. 5383(b)(2).
---------------------------------------------------------------------------
3. Coordination With the Commodity Futures Trading Commission
The Joint Letter requests that the Agencies clarify how the orderly
liquidation process would operate if the broker-dealer were a joint
broker-dealer/futures commission merchant (``FCM'').\62\ The Joint
Letter points out that many broker-dealers in the United States are
both broker-dealers registered with the SEC and FCMs registered with
the U.S. Commodity Futures Trading Commission (the ``CFTC'').\63\ FCMs
fall under the definition of ``commodity broker'' under the Bankruptcy
Code.\64\ The Joint Letter states that, based on recent precedent, in
the event a joint broker-dealer/FCM were to become subject to
liquidation proceedings under SIPA, the trustee appointed by SIPC would
be subject to the same duties as a trustee in a commodity broker
liquidation under subchapter IV of chapter 7 of the Bankruptcy Code, to
the extent consistent with SIPA.\65\ The Joint Letter also states that,
based on recent precedent, while the proceeding itself would be
conducted under SIPA, there would likely be a parallel claims process
in which the rules for determining what constitutes ``customer
property'' with respect to commodity customers and the satisfaction of
commodity customer claims through account transfers or distributions of
customer property would be determined under the commodity broker
liquidation provisions of subchapter IV of chapter 7 of the Bankruptcy
Code and the CFTC Part 190 Rules.\66\
---------------------------------------------------------------------------
\62\ See Joint Letter at 6.
\63\ See id.
\64\ See 11 U.S.C. 101(6) (``Commodity broker means futures
commission merchant . . . as defined in [11 U.S.C. 761] with respect
to which there is a customer, as defined in [11 U.S.C. 761].'').
\65\ 15 U.S.C. 78fff-1(b).
\66\ 17 CFR part 190.
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The Agencies believe that Title II addresses the commenter's
question. More specifically, section 210(m) of the Dodd-Frank Act
addresses the resolution of a commodity broker in Title II.\67\ The
section provides that the FDIC as receiver shall apply the provisions
of subchapter IV of chapter 7 of the Bankruptcy Code, in respect of the
distribution to any customer of all customer property and member
property, as if such commodity broker were a debtor for purposes of
such subchapter.
---------------------------------------------------------------------------
\67\ 12 U.S.C. 5390(m).
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[[Page 53650]]
4. The Incorporation of the Rules of SIPC Contained in 17 CFR Part 300
The Joint Letter recommends that the final rule clarify that any
reference to SIPA also includes the rules of SIPC in 17 CFR part
300.\68\ These rules are extensive and cover many topics including
topics specifically covered by the proposed rule and in some cases may
conflict with the claims process established by the Dodd-Frank Act and
the rule. Furthermore, the purpose of the final rule is to address the
orderly liquidation of brokers and dealers under Title II, which is
distinct and separate from a proceeding under SIPA.\69\ The Agencies
therefore have made no changes in the final rule as a result of this
comment.
---------------------------------------------------------------------------
\68\ See Joint Letter at 8.
\69\ See, e.g., Section III.B.
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5. Other Comments Contained in the Joint Letter
The Joint Letter also requests three clarifications of the proposed
rule. First, the Joint Letter requests that the final rule clarify that
certain past SIPC practices with respect to the treatment of customers
whose accounts have been transferred to another institution will govern
the treatment of customers in similar circumstances under Title II.\70\
More specifically, the Joint Letter states that it is important for the
stability of the financial markets that the Agencies affirmatively
clarify that they intend to follow these past SIPC practices with
respect to the treatment of customers whose accounts have been
transferred to another institution.\71\ The purpose of the rule is
largely to clarify certain procedural matters and the particular
requirements of the Dodd-Frank Act with respect to the orderly
liquidation of broker-dealers. The rule is not intended to interpret
SIPA or codify SIPC's past practices. However, the Agencies note that
the involvement of SIPC in the orderly liquidation, as well as the
Agencies' stated desire to model the orderly liquidation customer
claims process on the SIPA customer claims process, make it clear that
the Agencies and SIPC will endeavor to coordinate in a manner to
promote financial market stability, consistent with the statutory
imperatives in Title II.\72\
---------------------------------------------------------------------------
\70\ See Joint Letter at 7.
\71\ See id.
\72\ See id.
---------------------------------------------------------------------------
Second, the Joint Letter requests that the final rule clarify that
if customer accounts are transferred to a bridge broker-dealer, the
FDIC, in consultation with SIPC, will endeavor to transfer to the
bridge broker-dealer any liabilities that are secured by customer
property that has been rehypothecated by the covered broker-dealer.\73\
While it is possible that a transfer to the bridge broker-dealer of any
liabilities secured by customer property would be more expeditious and
less burdensome than closing financing transactions in the covered
broker-dealer and re-opening equivalent financing transactions with the
bridge broker-dealer, the Agencies cannot commit to such an approach in
the final rule because it is not known whether such an approach would
prove appropriate in all cases. Moreover, the Agencies note that this
practice is not required in a SIPA liquidation. Nevertheless, the
Agencies restate their intention that the use of the bridge broker-
dealer would be designed to give customers access to their accounts as
quickly as practicable in the form and amount that they would receive
in a SIPA liquidation.\74\
---------------------------------------------------------------------------
\73\ See Joint Letter at 8.
\74\ See 12 U.S.C. 5385(f)(1); see also, 81 FR at 10804.
---------------------------------------------------------------------------
Third, the Joint Letter requests that the final rule clarify that
the FDIC will cooperate with SIPC in allocating property from the
broker-dealer's general estate to the pool of customer property if
shortfalls in customer property resulted from regulatory compliance
failures.\75\ The Agencies, in consultation with SIPC, have cooperated
to develop the final rule that, among other things, addresses this
issue. The rule provides that SIPC, as trustee for a covered broker-
dealer, shall determine, among other things, whether the property of
the covered broker-dealer qualifies as customer property.\76\ The rule
incorporates the definition of ``customer property'' from SIPA,\77\
with only a change from the term ``debtor'' to the term ``covered
broker-dealer'' to reflect the use of the ``customer property''
definition in the context of orderly liquidation.\78\ These provisions
reflect the statutory requirement that all customer claims relating to,
or net equity claims based upon, customer property or customer name
securities be satisfied in a manner and in an amount at least as
beneficial to customers as would have been the case if the broker-
dealer were liquidated under SIPA.\79\ The Agencies are of the view
that these provisions of the rule directly address the commenter's
concern.
---------------------------------------------------------------------------
\75\ See Joint Letter at 8.
\76\ See 12 CFR 380.64(a)(1); 17 CFR 302.104(a)(1).
\77\ See 15 U.S.C. 78lll(4).
\78\ See 12 CFR 380.60(g); 17 CFR 302.100(g).
\79\ See 12 U.S.C. 5385(f)(1); see also 12 CFR 380.60(f)-(h); 17
CFR 302.100(f)-(h).
---------------------------------------------------------------------------
III. Section-by-Section Analysis
A. Definitions 80
---------------------------------------------------------------------------
\80\ The definitions section appears in 12 CFR 380.60 for
purposes of the Corporation and 17 CFR 302.100 for purposes of the
Commission.
---------------------------------------------------------------------------
The definitions section of the final rule defines certain key
terms. Consistent with the remainder of the final rule, the definitions
are designed to help ensure that, as the statute requires, all customer
claims relating to, or net equity claims based upon, customer property
or customer name securities are satisfied in a manner and in an amount
at least as beneficial to them as would have been the case if the
broker-dealer were liquidated under SIPA, without the appointment of
the FDIC as receiver and without any transfer of assets or liabilities
to a bridge financial company, and with a filing date as of the date on
which the FDIC was appointed as receiver.\81\ To effectuate the
statutory requirement, the definitions in the final rule are very
similar or identical to the corresponding definitions in SIPA and Title
II, and where they differ, it is for purposes of clarity only and not
to change or modify the meaning of the definitions under either act.
---------------------------------------------------------------------------
\81\ See 12 U.S.C. 5385(f)(1) (pertaining to obligations to
customers) and 12 U.S.C. 5385(d)(1)(A)-(C) (limiting certain actions
of the Corporation that would adversely affect, diminish or
otherwise impair certain customer rights).
---------------------------------------------------------------------------
1. Definitions Relating to Covered Broker-Dealers
The final rule defines the term covered broker or dealer as ``a
covered financial company that is a qualified broker or dealer.'' \82\
Pursuant to section 201(a)(10) of the Dodd-Frank Act, the terms
customer, customer name securities, customer property, and net equity
in the context of a covered broker-dealer are defined as having the
same meanings as the corresponding terms in section 16 of SIPA.\83\
---------------------------------------------------------------------------
\82\ See 12 CFR 380.60(d) and 17 CFR 302.100(d). See also 12
U.S.C. 5381(a)(7).
\83\ 12 U.S.C. 5381(a)(10) (``The terms `customer', `customer
name securities', `customer property', and `net equity' in the
context of a covered broker or dealer, have the same meanings as in
section 16 of the Securities Investor Protection Act of 1970 (15
U.S.C. 78lll).''). See also 15 U.S.C. 78lll and sections 380.60 and
302.100.
---------------------------------------------------------------------------
Section 16(2)(A) of SIPA defines customer of a debtor, in pertinent
part, as ``any person (including any person with whom the debtor deals
as principal or agent) who has a claim on account of securities
received, acquired, or held by the debtor in the ordinary course of its
business as a broker or dealer from or for the securities accounts of
such person for safekeeping, with a view to sale, to cover consummated
sales,
[[Page 53651]]
pursuant to purchases, as collateral, security, or for purposes of
effecting transfer.'' \84\ Section 16(3) of SIPA defines customer name
securities as ``securities which were held for the account of a
customer on the filing date by or on behalf of the debtor and which on
the filing date were registered in the name of the customer, or were in
the process of being so registered pursuant to instructions from the
debtor, but does not include securities registered in the name of the
customer which, by endorsement or otherwise, were in negotiable form.''
\85\ Section 16(4) of SIPA defines customer property, in pertinent
part, as ``cash and securities (except customer name securities
delivered to the customer) at any time received, acquired, or held by
or for the account of a debtor from or for the securities accounts of a
customer, and the proceeds of any such property transferred by the
debtor, including property unlawfully converted.'' \86\ Section
(16)(11) of SIPA defines net equity as ``the dollar amount of the
account or accounts of a customer, to be determined by--(A) calculating
the sum which would have been owed by the debtor to such customer if
the debtor had liquidated, by sale or purchase on the filing date--(i)
all securities positions of such customer (other than customer name
securities reclaimed by such customer); and (ii) all positions in
futures contracts and options on futures contracts held in a portfolio
margining account carried as a securities account pursuant to a
portfolio margining program approved by the Commission, including all
property collateralizing such positions, to the extent that such
property is not otherwise included herein; minus (B) any indebtedness
of such customer to the debtor on the filing date; plus (C) any payment
by such customer of such indebtedness to the debtor which is made with
the approval of the trustee and within such period as the trustee may
determine (but in no event more than sixty days after the publication
of notice under section (8)(a) [of SIPA]).'' \87\
---------------------------------------------------------------------------
\84\ 15 U.S.C. 78lll(2)(A). See also 12 CFR 380.60(e) and 17 CFR
302.100(e) (``The term customer of a covered broker or dealer shall
have the same meaning as in 15 U.S.C. 78lll(2) provided that the
references therein to debtor shall mean the covered broker or
dealer.'').
\85\ 15 U.S.C. 78lll(3). See also 12 CFR 380.60(f) and 17 CFR
302.100(f) (``The term customer name securities shall have the same
meaning as in 15 U.S.C. 78lll(3) provided that the references
therein to debtor shall mean the covered broker or dealer and the
references therein to filing date shall mean the appointment
date.'').
\86\ 15 U.S.C. 78lll(4). The definition of customer property
goes on to include: (1) ``securities held as property of the debtor
to the extent that the inability of the debtor to meet his
obligations to customers for their net equity claims based on
securities of the same class and series of an issuer is attributable
to the debtor's noncompliance with the requirements of section
15(c)(3) of the 1934 Act and the rules prescribed under such
section''; (2) ``resources provided through the use or realization
of customers' debit cash balances and other customer-related debit
items as defined by the Commission by rule''; (3) ``any cash or
securities apportioned to customer property pursuant to section 3(d)
[of SIPA]''; (4) ``in the case of a portfolio margining account of a
customer that is carried as a securities account pursuant to a
portfolio margining program approved by the Commission, a futures
contract or an option on a futures contract received, acquired, or
held by or for the account of a debtor from or for such portfolio
margining account, and the proceeds thereof''; and (5) ``any other
property of the debtor which, upon compliance with applicable laws,
rules, and regulations, would have been set aside or held for the
benefit of customers, unless the trustee determines that including
such property within the meaning of such term would not
significantly increase customer property.'' See also 12 CFR
380.60(g) and 17 CFR 302.100(g) (``The term customer property shall
have the same meaning as in 15 U.S.C. 78lll(4) provided that the
references therein to debtor shall mean the covered broker or
dealer.'').
\87\ 15 U.S.C. 78lll(11) (emphasis added). See also 12 CFR
380.60(h) and 17 CFR 302.100(h) (``The term net equity shall have
the same meaning as in 15 U.S.C. 78lll(11) provided that the
references therein to debtor shall mean the covered broker or dealer
and the references therein to filing date shall mean the appointment
date.'').
---------------------------------------------------------------------------
The final rule defines the term appointment date as ``the date of
the appointment of the Corporation as receiver for a covered financial
company that is a covered broker or dealer.'' \88\ The appointment date
constitutes the filing date as that term is used under SIPA \89\ and,
like the filing date under SIPA, is the reference date for the
computation of net equity.\90\
---------------------------------------------------------------------------
\88\ See 12 CFR 380.60(a) and 17 CFR 302.100(a).
\89\ See 12 CFR 380.60(a) and 17 CFR 302.100(a).
\90\ See 12 CFR 380.60(a) and 17 CFR 302.100(a). See also 12
U.S.C. 5385(a)(2)(C) (``For purposes of the liquidation proceeding,
the term `filing date' means the date on which the Corporation is
appointed as receiver of the covered broker or dealer.''); 15 U.S.C.
78lll(7) (``The term `filing date' means the date on which an
application for a protective decree is filed under section 5(a)(3),
except that--(A) if a petition under title 11 of the United States
Code concerning the debtor was filed before such date, the term
`filing date' means the date on which such petition was filed; (B)
if the debtor is the subject of a proceeding pending in any court or
before any agency of the United States or any State in which a
receiver, trustee, or liquidator for such debtor has been appointed
and such proceeding was commenced before the date on which such
application was filed, the term `filing date' means the date on
which such proceeding was commenced; or (C) if the debtor is the
subject of a direct payment procedure or was the subject of a direct
payment procedure discontinued by SIPC pursuant to section 10(f),
the term `filing date' means the date on which notice of such direct
payment procedure was published under section 10(b).'').
---------------------------------------------------------------------------
2. Additional Definitions
In addition to the definitions relating to covered broker-dealers
under section 201(a)(10) of the Dodd-Frank Act,\91\ the final rule
defines the following terms: (1) Bridge broker or dealer; \92\ (2)
Commission; \93\ (3) qualified broker or dealer; \94\ (4) SIPA \95\ and
(5) SIPC.\96\
---------------------------------------------------------------------------
\91\ See 12 U.S.C. 5381(a)(10) (``The terms `customer',
`customer name securities', `customer property', and `net equity' in
the context of a covered broker or dealer, have the same meanings as
in section 78lll of title 15.'').
\92\ See 12 CFR 380.60(b) and 17 CFR 302.100(b).
\93\ See 12 CFR380.60(c) and 17 CFR 302.100(c).
\94\ See 12 CFR 380.60(i) and 17 CFR 302.100(i).
\95\ See 12 CFR 380.60(j) and 17 CFR 302.100(j).
\96\ See 12 CFR 380.60(k) and 17 CFR 302.100(k).
---------------------------------------------------------------------------
The term bridge broker or dealer is defined as ``a new financial
company organized by the Corporation in accordance with section 210(h)
of the Dodd-Frank Act for the purpose of resolving a covered broker or
dealer.'' \97\ The term Commission is defined as the ``Securities and
Exchange Commission.'' \98\ The term qualified broker or dealer refers
to ``a broker or dealer that (A) is registered with the Commission
under section 15(b) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(b)); and (B) is a member of SIPC,'' but is not itself subject to a
Title II receivership.\99\ This definition is consistent with the
statutory definition but is abbreviated for clarity. It is not intended
to change or modify the statutory definition. The term SIPA refers to
the ``Securities Investor Protection Act of 1970, 15 U.S.C. 78aaa-
lll.'' \100\ The term SIPC refers to the ``Securities Investor
Protection Corporation.'' \101\
---------------------------------------------------------------------------
\97\ See 12 CFR 380.60(b) and 17 CFR 302.100(b). See also 15
U.S.C. 5390(h)(2)(H) (setting forth that the FDIC, as receiver for a
covered broker or dealer, may approve articles of association for
one or more bridge financial companies with respect to such covered
broker or dealer).
\98\ See 12 CFR 380.60(c) and 17 CFR 302.100(c).
\99\ See 12 CFR 380.60(i) and 17 CFR 302.100(i).
\100\ See 12 CFR 380.60(j) and 17 CFR 302.100(j).
\101\ See 12 CFR 380.60(k) and 17 CFR 302.100(k).
---------------------------------------------------------------------------
B. Appointment of Receiver and Trustee for Covered Broker-Dealer
102
---------------------------------------------------------------------------
\102\ The section about the appointment of receiver and trustee
for covered broker-dealers appears in 12 CFR 380.61 for purposes of
the Corporation and 17 CFR 302.101 for purposes of the Commission.
The rule text for both agencies is identical.
---------------------------------------------------------------------------
Upon the FDIC's appointment as receiver for a covered broker-
dealer, section 205 of the Dodd-Frank Act specifies that the
Corporation ``shall appoint . . . [SIPC] to act as trustee for the
liquidation under [SIPA] of the covered [broker-dealer].'' \103\ The
final rule deviates from the statutory language in some cases to
clarify the orderly liquidation process. For example, the final rule
makes it clear that SIPC is to be appointed as trustee for the covered
broker-dealer but does not repeat the phrase ``for the liquidation
under SIPA'' since there is
[[Page 53652]]
no proceeding under SIPA and the covered broker-dealer is being
liquidated under Title II. As noted above, the orderly liquidation
process under Title II is an alternative to a liquidation under
SIPA.\104\ Section 205 of the Dodd-Frank Act also states that court
approval is not required for such appointment.\105\ For ease and
clarity, the final rule specifies the statutory roles of SIPC as
trustee and the FDIC as receiver, which are further explained in other
sections of the final rule.\106\
---------------------------------------------------------------------------
\103\ See 12 U.S.C. 5385(a)(1).
\104\ See 12 U.S.C. 5383(b)(2).
\105\ Id.
\106\ See 12 CFR 380.61 and 17 CFR 302.101.
---------------------------------------------------------------------------
C. Notice and Application for Protective Decree for Covered Broker-
Dealer 107
---------------------------------------------------------------------------
\107\ The notice and application for protective decree for the
covered broker-dealer section appears in 12 CFR 380.62 for purposes
of the FDIC and 17 CFR 302.102 for purposes of the Commission.
---------------------------------------------------------------------------
Upon the appointment of SIPC as trustee for the covered broker-
dealer, Title II requires SIPC, as trustee, promptly to file an
application for a protective decree with a federal district court, and
SIPC and the Corporation, in consultation with the Commission, jointly
to determine the terms of the protective decree to be filed.\108\
Although a SIPA proceeding is conducted under bankruptcy court
supervision,\109\ a Title II proceeding is conducted entirely outside
of the bankruptcy courts, through an administrative process, with the
FDIC acting as receiver.\110\ As a result, a primary purpose of filing
a notice and application for a protective decree is to give notice to
interested parties that an orderly liquidation proceeding has been
initiated. The final rule provides additional clarification of the
statutory requirement of notice and application for a protective decree
by setting forth the venue in which the notice and application for a
protective decree is to be filed. It states that a notice and
application for a protective decree is to be filed with the federal
district court in which a liquidation of the covered broker-dealer
under SIPA is pending, or if no such SIPA liquidation is pending, the
federal district court for the district within which the covered
broker-dealer's principal place of business is located.\111\ This court
is a federal district court of competent jurisdiction specified in
section 21 or 27 of the Exchange Act, 15 U.S.C. 78u, 78aa.\112\ It also
is the court with jurisdiction over suits seeking de novo judicial
claims determinations under section 210(a)(4)(A) of the Dodd-Frank
Act.\113\ While the statute grants authority to file the notice and
application for a protective decree in any federal court of competent
jurisdiction specified in section 21 or 27 or the Securities Exchange
Act of 1934, the final rule restricts the filing to the courts
specified above in order to make it easier for interested parties to
know where the protective decree might be filed. The final rule also
clarifies that if the notice and application for a protective decree is
filed on a date other than the appointment date (i.e., the date the
FDIC is appointed as receiver), the filing shall be deemed to have
occurred on the appointment date for purposes of the rule.\114\
---------------------------------------------------------------------------
\108\ See 12 U.S.C. 5385(b)(3) (pertaining to the filing of a
protective decree by SIPC).
\109\ See 15 U.S.C. 78eee(b).
\110\ See 15 U.S.C. 5388 (requiring the dismissal of all other
bankruptcy or insolvency proceedings upon the appointment of the
Corporation as receiver for a covered financial company).
\111\ See 12 CFR 380.62(a) and 17 CFR 302.102(a).
\112\ See 12 U.S.C. 5385(a)(2)(A) (specifying the federal
district courts in which the application for a protective decree may
be filed).
\113\ See 12 U.S.C. 5390(a)(4)(A) (a claimant may file suit in
the district or territorial court for the district within which the
principal place of business of the covered financial company is
located).
\114\ See 12 CFR 380.62(a) and 17 CFR 302.102(a).
---------------------------------------------------------------------------
This section of the final rule governing the notice and application
for a protective decree also includes a non-exclusive list of notices
drawn from other parts of Title II.\115\ The goal of the application
for protective decree is to inform interested parties that the covered
broker-dealer is in orderly liquidation and to highlight the
application of certain provisions of the orderly liquidation authority,
particularly with respect to applicable stays and other matters that
might be addressed in a protective decree issued under SIPA. The final
rule specifies that a notice and application for a protective decree
under Title II may, among other things, provide for notice: (1) That
any existing case or proceeding under the Bankruptcy Code or SIPA would
be dismissed, effective as of the appointment date, and no such case or
proceeding may be commenced with respect to a covered broker-dealer at
any time while the Corporation is the receiver for such covered broker-
dealer; \116\ (2) of the revesting of assets, with certain exceptions,
in a covered broker-dealer to the extent that they have vested in any
entity other than the covered broker-dealer as a result of any case or
proceeding commenced with respect to the covered broker-dealer under
the Bankruptcy Code, SIPA, or any similar provision of state
liquidation or insolvency law applicable to the covered broker-dealer;
\117\ (3) of the request of the Corporation as receiver for a stay in
any judicial action or proceeding in which the covered broker-dealer is
or becomes a party for a period of up to 90 days from the appointment
date; \118\ (4) that except with respect to QFCs,\119\ no person may
exercise any right or power to terminate, accelerate, or declare a
default under any contract to which the covered broker-dealer is a
party or to obtain possession of or exercise control over any property
of the covered broker-dealer or affect any contractual rights of the
covered broker-dealer without the consent of the FDIC as receiver of
the covered broker-dealer upon consultation with SIPC during the 90-day
period beginning from the appointment date; \120\ and (5) that the
exercise of rights and the performance of obligations by parties to
QFCs with the covered broker-dealer may be affected, stayed, or delayed
pursuant to the provisions of Title II (including but not limited to 12
U.S.C. 5390(c)) and the regulations promulgated thereunder.\121\
---------------------------------------------------------------------------
\115\ See 12 CFR 380.62(b) and 17 CFR 302.102(b).
\116\ See 12 CFR 380.62(b)(2)(i) and 17 CFR 302.102(b)(2)(i).
See also 12 U.S.C. 5388(a) (regarding dismissal of any case or
proceeding relating to a covered broker-dealer under the Bankruptcy
Code or SIPA on the appointment of the Corporation as receiver and
notice to the court and SIPA).
\117\ See 12 CFR 380.62(b)(2)(ii) and 17 CFR 302.102(b)(2)(ii).
See also 12 U.S.C. 5388(b) (providing that the notice and
application for a protective decree may also specify that any
revesting of assets in a covered broker or dealer to the extent that
they have vested in any other entity as a result of any case or
proceeding commenced with respect to the covered broker or dealer
under the Bankruptcy Code, SIPA, or any similar provision of State
liquidation or insolvency law applicable to the covered broker or
dealer shall not apply to assets of the covered broker or dealer,
including customer property, transferred pursuant to an order
entered by a bankruptcy court).
\118\ See 12 CFR 380.62(b)(2)(iii) and 17 CFR
302.102(b)(2)(iii). See also 12 U.S.C. 5390(a)(8) (providing for the
temporary suspension of legal actions upon request of the
Corporation).
\119\ See 12 U.S.C. 5390(c)(8)(D) (defining qualified financial
contract as ``any securities contract, commodity contract, forward
contract, repurchase agreement, swap agreement, and any similar
agreement that the Corporation determines by regulation, resolution,
or order to be a qualified financial contract for purposes of this
paragraph'').
\120\ 12 U.S.C. 5390(c)(13)(C)(i) .
\121\ See 12 CFR 380.62(b)(2)(iv) and 17 CFR 302.102(b)(2)(iv).
See also 12 U.S.C. 5390(c)(8)(F) (rendering unenforceable all QFC
walkaway clauses (as defined in 12 U.S.C. 5390(c)(8)(F)(iii))
including those provisions that suspend, condition, or extinguish a
payment obligation of a party because of the insolvency of a covered
financial company or the appointment of the FDIC as receiver) and 12
U.S.C. 5390(c)(10)(B)(i) (providing that a person who is a party to
a QFC with a covered financial company may not exercise any right
that such person has to terminate, liquidate, or net such contract
solely by reason of or incidental to the appointment of the FDIC as
receiver (or the insolvency or financial condition of the covered
financial company for which the FDIC has been appointed as
receiver)--until 5:00 p.m. (eastern time) on the business day
following the appointment, or after the person has received notice
that the contract has been transferred pursuant to 12 U.S.C.
5390(c)(9)(A)).
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[[Page 53653]]
The final rule makes clear that the matters listed for inclusion in
the notice and application for a protective decree are neither
mandatory nor all-inclusive. The items listed are those that the
Agencies believe might provide useful guidance to customers and other
parties who may be less familiar with the Title II process than with a
SIPA proceeding. It is worth noting that the language relating to QFCs
is rather general. In certain circumstances it may be worthwhile
specifically to highlight the one-day stay provisions in section
210(c)(10) of the Dodd-Frank Act, the provisions relating to the
enforcement of affiliate contracts under section 210(c)(16) of the
Dodd-Frank Act, and other specific provisions relating to QFCs or other
contracts.
D. Bridge Broker-Dealer 122
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\122\ The bridge broker or dealer section appears in 12 CFR
380.63 for purposes of the Corporation and 17 CFR 302.103 for
purposes of the Commission.
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1. Power To Establish Bridge Broker-Dealer; Transfer of Customer
Accounts and Other Assets and Liabilities
Section 210 of the Dodd-Frank Act sets forth the Corporation's
powers as receiver of a covered financial company.\123\ One such power
the Corporation has, as receiver, is the power to form bridge financial
companies.\124\ Paragraph (a) of this section of the final rule states
that the Corporation as receiver for a covered broker-dealer, or in
anticipation of being appointed receiver for a covered broker-dealer,
may organize one or more bridge broker-dealers with respect to a
covered broker-dealer.\125\ Paragraph (b) of this section of the final
rule states that if the Corporation were to establish one or more
bridge broker-dealers with respect to a covered broker-dealer, then the
Corporation as receiver for such covered broker-dealer shall transfer
all customer accounts and all associated customer name securities and
customer property to such bridge broker[s]-dealer[s] unless the
Corporation, after consultation with the Commission and SIPC,
determines that: (1) The transfer of such customer accounts, customer
name securities, and customer property to one or more qualified broker-
dealers will occur promptly such that the use of the bridge broker[s]-
dealer[s] would not facilitate such transfer to one or more qualified
broker-dealers; or (2) the transfer of such customer accounts to the
bridge broker[s]-dealer[s] would materially interfere with the ability
of the FDIC to avoid or mitigate serious adverse effects on financial
stability or economic conditions in the United States.\126\ The use of
the word ``promptly'' in the final rule, in this context, is intended
to emphasize the urgency of transferring customer accounts, customer
name securities, and customer property either to a qualified broker-
dealer or to a bridge broker-dealer as soon as practicable to allow
customers the earliest possible access to their accounts.
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\123\ 12 U.S.C. 5390.
\124\ See 12 U.S.C. 5390(h)(1)(A) (granting general power to
form bridge financial companies). See also 12 U.S.C.
5390(h)(2)(H)(i) (granting authority to organize one or more bridge
financial companies with respect to a covered broker-dealer).
\125\ See 12 CFR 380.63 and 17 CFR 302.103. See also 12 U.S.C.
5390(h)(2)(H) (granting the Corporation as receiver authority to
organize one or more bridge financial companies with respect to a
covered broker-dealer).
\126\ See 12 CFR 380.63(b) and 17 CFR 302.103(b). See also 12
U.S.C 5390(a)(1)(O)(i)(I)-(II) (listing the specific conditions
under which customer accounts would not be transferred to a bridge
financial company if it was organized).
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Paragraph (c) of this section of the final rule states that the
Corporation as receiver for the covered broker-dealer also may transfer
to such bridge broker[s]-dealer[s] any other assets and liabilities of
the covered broker-dealer (including non-customer accounts and any
associated property) as the Corporation may, in its discretion,
determine to be appropriate. Paragraph (c) is based upon the broad
authority of the Corporation as receiver to transfer any assets or
liabilities of the covered broker-dealer to a bridge financial company
in accordance with, and subject to the requirements of, section
210(h)(5) of the Dodd-Frank Act \127\ and is designed to facilitate the
receiver's ability to continue the covered broker-dealer's operations,
minimize systemic risk, and maximize the value of the assets of the
receivership.\128\ The transfer of assets and liabilities to a bridge
broker-dealer under the final rule will enable the receiver to continue
the day-to-day operations of the broker-dealer and facilitate the
maximization of the value of the assets of the receivership by making
it possible to avoid a forced or other distressed sale of the assets of
the covered broker-dealer. In addition, the ability to continue the
operations of the covered broker-dealer may help mitigate the impact of
the failure of the covered broker-dealer on other market participants
and financial market utilities and thereby minimize systemic risk.
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\127\ See 12 U.S.C. 5390(h)(5)(A) (providing that the receiver
``may transfer any assets and liabilities of a covered financial
company''). The statute sets forth certain restrictions and
limitations that are not affected by this final rule. See, e.g., 12
U.S.C. 5390(h)(1)(B)(ii) (restricting the assumption of liabilities
that count as regulatory capital by the bridge financial company)
and 12 U.S.C. 5390(h)(5)(F) (requiring that the aggregate
liabilities transferred to the bridge financial company may not
exceed the aggregate amount of assets transferred).
\128\ See 12 CFR 380.63(f) and 17 CFR 302.103(f). See also 12
U.S.C. 5390(h)(5) (granting authority to the Corporation as receiver
to transfer assets and liabilities of a covered financial company to
a bridge financial company). Similarly, under Title II, the
Corporation, as receiver for a covered broker-dealer, may approve
articles of association for such bridge broker-dealer. See 12 U.S.C.
5390(h)(2)(H)(i). The bridge broker-dealer would also be subject to
the federal securities laws and all requirements with respect to
being a member of a self-regulatory organization, unless exempted
from any such requirements by the Commission as is necessary or
appropriate in the public interest or for the protection of
investors. See 12 U.S.C. 5390(h)(2)(H)(ii).
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Finally, paragraph (c) of this section of the final rule clarifies
that the transfer to a bridge broker-dealer of any account or property
pursuant to this section does not create any implication that the
holder of such an account qualifies as a ``customer'' or that the
property so transferred qualifies as ``customer property'' or
``customer name securities'' within the meaning of SIPA or within the
meaning of the final rule. Under Title II, the Corporation may transfer
all the assets of a covered broker-dealer to a bridge broker-
dealer.\129\ Such a transfer of assets may include, for example,
securities that were sold to the covered broker-dealer under reverse
repurchase agreements. Under the terms of a typical reverse repurchase
agreement, it is common for the broker-dealer to be able to use the
purchased securities for its own purposes. In contrast, Commission
rules specifically protect customer funds and securities and
essentially forbid broker-dealers from using customer assets to finance
any part of their businesses unrelated to servicing securities
customers.\130\ An integral component of the broker-dealer customer
protection regime is that, under SIPA, customers have preferred status
relative to general creditors with respect to customer property and
customer name securities.\131\ Given the preferred status of customers,
litigation has arisen regarding whether, consistent with the above
example, claims of repurchase agreement (``repo'') counterparties are
[[Page 53654]]
``customer'' claims under SIPA.\132\ In implementing section 205 of the
Dodd-Frank Act, consistent with the statutory directive contained
therein,\133\ the Corporation and the Commission are seeking to ensure
that all customer claims relating to, or net equity claims based upon,
customer property or customer name securities are satisfied in a manner
and in an amount at least as beneficial to the customers as would have
been the case if the broker-dealer were liquidated under SIPA.\134\
Accordingly, the final rule preserves customer status as would be the
case in a SIPA proceeding. Thus, the final rule clarifies that moving
assets to a bridge financial company as part of a Title II orderly
liquidation is not determinative as to whether the holder of such an
account qualifies as a ``customer'' or if the property so transferred
qualifies as ``customer property'' or ``customer name securities.''
Rather, the status of the account holder and the assets in the orderly
liquidation of a covered broker-dealer will depend upon whether the
claimant would be a customer under SIPA.\135\
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\129\ See 12 U.S.C 5390(h)(2)(H) and 12 U.S.C. 5390(h)(5)
(granting authority to the Corporation as receiver to transfer
assets and liabilities of a covered broker-dealer).
\130\ See Net Capital Requirements for Brokers and Dealers,
Exchange Act Release No. 21651 (January 11, 1985), 50 FR 2690, 2690
(January 18, 1985). See also Broker-Dealers; Maintenance of Certain
Basic Reserves, Exchange Act Release No. 9856 (November 10, 1972),
37 FR 25224, 25224 (November 29, 1972).
\131\ See 15 U.S.C. 78fff(a).
\132\ See, e.g., In re Lehman Brothers Inc., 492 B.R. 379
(Bankr. S.D.N.Y. 2013), aff'd, 506 B.R. 346 (S.D.N.Y. 2014).
\133\ See 12 U.S.C. 5385(f)(1) (pertaining to the statutory
requirements with respect to the satisfaction of claims).
\134\ Id.
\135\ See 15 U.S.C. 78lll(2)(B) (SIPA definition of customer).
See also 12 U.S.C. 5381(a)(10) (defining customer, customer name
securities, customer property, and net equity in the context of a
covered broker-dealer as the same meanings such terms have in
section 16 of SIPA (15 U.S.C. 78lll)); In re Bernard L. Madoff Inv.
Sec. LLC, 654 F.3d 229, 236 (2d Cir. 2011).
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2. Other Provisions With Respect to Bridge Broker-Dealer
The final rule addresses certain matters relating to account
transfers to the bridge broker-dealer.\136\ The process set forth in
this part of the final rule is designed to ensure that all customer
claims relating to, or net equity claims based upon, customer property
or customer name securities are satisfied in a manner and in an amount
at least as beneficial to customers as would have been the case if the
broker-dealer were liquidated under SIPA.\137\ In a SIPA proceeding,
the trustee would generally handle customer accounts in two ways.
First, a trustee may sell or otherwise transfer to another SIPC member,
without the consent of any customer, all or any part of a customer's
account, as a way to return customer property to the control of the
customer.\138\ Such account transfers are separate from the customer
claim process. Customer account transfers are useful insofar as they
serve to allow customers to resume trading more quickly and minimize
disruption in the securities markets. If it is not practicable to
transfer customer accounts, then the second way of returning customer
property to the control of customers is through the customer claims
process. Under bankruptcy court supervision, the SIPA trustee will
determine each customer's net equity and the amount of customer
property available for customers.\139\ Once the SIPA trustee determines
that a claim is a customer claim (an ``allowed customer claim''), the
customer will be entitled to a ratable share of the fund of customer
property. As discussed above, SIPA defines ``customer property'' to
generally include all the customer-related property held by the broker-
dealer.\140\ Allowed customer claims are determined on the basis of a
customer's net equity,\141\ which, as described above, generally is the
dollar value of a customer's account on the filing date of the SIPA
proceeding less indebtedness of the customer to the broker-dealer on
the filing date.\142\ Once the trustee determines the fund of customer
property and customer net equity claims, the trustee can establish each
customer's pro rata share of the fund of customer property. Customer
net equity claims generally are satisfied to the extent possible by
providing the customer with the identical securities owned by that
customer as of the day the SIPA proceeding was commenced.\143\
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\136\ See 12 CFR 380.63(d) and 17 CFR 302.103(d).
\137\ See 12 U.S.C. 5385(f) (obligations of a covered broker-
dealer to customers shall be ``satisfied in the manner and in an
amount at least as beneficial to the customer'' as would have been
the case had the actual proceeds realized from the liquidation of
the covered broker-dealer been distributed in a proceeding under
SIPA).
\138\ See 15 U.S.C. 78fff-2(f).
\139\ See generally 15 U.S.C. 78fff.
\140\ See 15 U.S.C. 78lll(4). See also Section II.A.1.
\141\ See 15 U.S.C. 78lll(11).
\142\ Id. See also Section II.A.1.
\143\ See 15 U.S.C. 78fff-2(d).
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Although a Title II orderly liquidation is under a different
statutory authority than a SIPA proceeding, under the final rule, the
process for determining and satisfying customer claims will follow a
substantially similar process to a SIPA proceeding. Upon the
commencement of a SIPA liquidation, customers' cash and securities held
by the broker-dealer are returned to customers on a pro rata
basis.\144\ If sufficient funds are not available at the broker-dealer
to satisfy customer net equity claims, SIPC advances will be used to
supplement the distribution, up to a ceiling of $500,000 per customer,
including a maximum of $250,000 for cash claims.\145\ When applicable,
SIPC will return securities that are registered in the customer's name
or are in the process of being registered directly to each
customer.\146\ As in a SIPA proceeding, in a Title II orderly
liquidation of a covered broker-dealer, the process of determining net
equity thus begins with a calculation of customers' net equity. A
customer's net equity claim against a covered broker-dealer is deemed
to be satisfied and discharged to the extent that customer property of
the covered broker-dealer, along with property made available through
advances from SIPC, is transferred and allocated to the customer's
account at the bridge broker-dealer. The bridge broker-dealer
undertakes the obligations of the covered broker-dealer only with
respect to such property. The Corporation, as receiver, in consultation
with SIPC, as trustee, will allocate customer property and property
made available through advances from SIPC in a manner consistent with
SIPA and with SIPC's normal practices thereunder. The calculation of
net equity will not be affected by the assumption of liability by the
bridge broker-dealer to each customer in connection with the property
transferred to the bridge broker-dealer. The use of the bridge broker-
dealer is designed to give customers access to their accounts as
quickly as practicable, while ensuring that customers receive assets in
the form and amount that they would receive in a SIPA liquidation.\147\
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\144\ 15 U.S.C. 8fff-2(b).
\145\ 15 U.S.C. 8fff-3(a).
\146\ 15 U.S.C. 8fff-2(b)(2)
\147\ This outcome will satisfy the requirements of section
205(f)(1) of the Dodd-Frank Act. See 12 U.S.C. 5385(f)(1)
(``Notwithstanding any other provision of this title, all
obligations of a covered broker or dealer or of any bridge financial
company established with respect to such covered broker or dealer to
a customer relating to, or net equity claims based upon, customer
property or customer name securities shall be promptly discharged by
SIPC, the Corporation, or the bridge financial company, as
applicable, by the delivery of securities or the making of payments
to or for the account of such customer, in a manner and in an amount
at least as beneficial to the customer as would have been the case
had the actual proceeds realized from the liquidation of the covered
broker or dealer under this title been distributed in a proceeding
under [SIPA] without the appointment of the Corporation as receiver
and without any transfer of assets or liabilities to a bridge
financial company, and with a filing date as of the date on which
the Corporation is appointed as receiver.'').
---------------------------------------------------------------------------
The final rule also provides that allocations to customer accounts
at the bridge broker-dealer may initially be derived from estimates
based upon the books and records of the covered broker-dealer or other
information deemed relevant by the Corporation as receiver,
[[Page 53655]]
in consultation with SIPC as trustee.\148\ This approach is based upon
experience with SIPA liquidations where, for example, there were
difficulties reconciling the broker-dealer's records with the records
of central counterparties or other counterparties or other factors that
caused delay in verifying customer accounts.\149\ This provision of the
final rule is designed to facilitate access to accounts for the
customers at the bridge broker-dealer as soon as is practicable under
the circumstances while facilitating the refinement of the calculation
of allocations of customer property to customer accounts as additional
information becomes available. This process will help ensure both that
customers have access to their customer accounts as quickly as
practicable and that customer property ultimately will be fairly and
accurately allocated.
---------------------------------------------------------------------------
\148\ See 12 CFR 380.63(d) and 17 CFR 302.103(d). See also 12
U.S.C. 5385(h) (granting the Corporation and the Commission
authority to adopt rules to implement section 205 of the Dodd-Frank
Act).
\149\ See, e.g., In re Lehman Brothers Inc., (Bankr. S.D.N.Y
2008), Trustee's Preliminary Investigation Report and
Recommendations, available at http://dm.epiq11.com/LBI/Project#).
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The final rule also states that the bridge broker-dealer undertakes
the obligations of a covered broker-dealer with respect to each person
holding an account transferred to the bridge broker-dealer, but only to
the extent of the property (and SIPC funds) so transferred and held by
the bridge broker-dealer with respect to that person's account.\150\
This portion of the final rule provides customers of the bridge broker-
dealer with the assurance that the securities laws relating to the
protection of customer property will apply to customers of a bridge
broker-dealer in the same manner as they apply to customers of a
broker-dealer which is being liquidated outside of Title II.\151\ In
the view of the Agencies, such assurances will help to reduce
uncertainty regarding the protections that will be offered to
customers.
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\150\ See 12 CFR 380.63(d) and 17 CFR 302.103(d).
\151\ See also 12 U.S.C. 5390(h)(2)(H)(ii) (stating that the
bridge financial company shall be subject to the federal securities
laws and all requirements with respect to being a member of a self-
regulatory organization, unless exempted from any such requirements
by the Commission, as is necessary or appropriate in the public
interest or for the protection of investors).
---------------------------------------------------------------------------
This portion of the final rule also provides that the bridge
broker-dealer will not have any obligations with respect to any
customer property or other property that is not transferred from the
covered broker-dealer to the bridge broker-dealer.\152\ A customer's
net equity claim remains with the covered broker-dealer and, in most
cases, will be satisfied, in whole or in part, by transferring the
customer's account together with customer property, to the bridge
broker-dealer.\153\ In the event that a customer's account and the
associated account property is not so transferred, the customer's net
equity claim will be subject to satisfaction by SIPC as the trustee for
the covered broker-dealer in the same manner and to the same extent as
in a SIPA proceeding.\154\
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\152\ See 12 CFR 380.63(d) and 17 CFR 302.103(d).
\153\ See 12 CFR 380.63(d) and 17 CFR 302.103(d).
\154\ See 12 U.S.C. 5385(f)(2).
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The bridge broker-dealer section of the final rule \155\ also
provides that the transfer of assets or liabilities of a covered
broker-dealer, including customer accounts and all associated customer
name securities and customer property, assets and liabilities held by a
covered broker-dealer for non-customer creditors, and assets and
liabilities associated with any trust or custody business, to a bridge
broker-dealer, will be effective without any consent, authorization, or
approval of any person or entity, including but not limited to, any
customer, contract party, governmental authority, or court.\156\ This
section is based on the Corporation's authority, under three separate
statutory provisions of Title II.\157\ The broad language of this
paragraph of the final rule is intended to give full effect to the
statutory provisions of the Dodd-Frank Act regarding transfers of
assets and liabilities of a covered financial company,\158\ which
represent a determination by Congress that, in order to mitigate risk
to the financial stability of the United States and minimize moral
hazard following the failure of a covered financial company, the
Corporation as receiver must be free to determine which contracts,
assets, and liabilities of the covered financial company are to be
transferred to a bridge financial company, and to transfer such
contracts, assets, and liabilities expeditiously and irrespective of
whether any other person or entity consents to or approves of the
transfer. The impracticality of requiring the Corporation as receiver
to obtain the consent or approval of others in order to effectuate a
transfer of the failed company's contracts, assets, and liabilities
arises whether the consent or approval otherwise would be required as a
consequence of laws, regulations, or contractual provisions, including
as a result of options, rights of first refusal, or similar contractual
rights, or any other restraints on alienation or transfer. Paragraph
(e) of the final rule will apply regardless of the identity of the
holder of the restraint on alienation or transfer, whether such holder
is a local, state, federal or foreign government, a governmental
department or other governmental body of any sort, a court or other
tribunal, a corporation, partnership, trust, or other type of company
or entity, or an individual, and regardless of the source of the
restraint on alienation or transfer, whether a statute, regulation,
common law, or contract. It is the Corporation's view that the transfer
of any contract to a bridge financial company would not result in a
breach of the contract and would not give rise to a claim or liability
for damages. In addition, under section 210(h)(2)(E) of the Dodd-Frank
Act, no additional assignment or further assurance is required of any
person or entity to effectuate such a transfer of assets or liabilities
by the Corporation as receiver for the covered broker-dealer. Paragraph
(e) of the final rule will facilitate the prompt transfer of assets and
liabilities of a covered broker-dealer to a bridge broker-dealer and
enhance the Corporation's ability to maintain critical operations of
the covered broker-dealer. Rapid action to set-up a bridge broker-
dealer and transfer assets, including customer accounts and customer
property, may be critical to preserving financial stability and to
giving customers the promptest possible access to their accounts.
---------------------------------------------------------------------------
\155\ See 12 CFR 380.63(e) and 17 CFR 302.103(e).
\156\ See 12 CFR 380.63(e) and 17 CFR 302.103(e); see also 12
U.S.C. 5390(h)(5)(D).
\157\ See 12 U.S.C. 5390(h)(5)(D). See also 12 U.S.C.
5390(a)(1)(G); 12 U.S.C. 5390(a)(1)(O). Notably, the power to
transfer customer accounts and customer property without customer
consent is also found in SIPA. See 15 U.S.C. 78fff-2(f).
\158\ The final rule text omits the reference to ``further''
approvals found in 12 U.S.C. 5390(h)(5)(D). The reference in the
statute is to the government approvals needed in connection with
organizing the bridge financial company, such as the approval of the
articles of association and by-laws, as established under 12 U.S.C.
5390(h). These approvals will already have been obtained prior to
any transfer under the proposed rule, making the reference to
``further'' approvals unnecessary and superfluous.
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Paragraph (f) of the bridge broker-dealer provision of the final
rule provides for the succession of the bridge broker-dealer to the
rights, powers, authorities, or privileges of the covered broker-
dealer.\159\ This provision of the final rule draws directly from
authority provided in Title II and is designed to facilitate the
ability of the Corporation as receiver to operate the bridge broker-
dealer.\160\ Pursuant to paragraph (g) of the bridge broker-dealer
provision,\161\
[[Page 53656]]
the bridge broker-dealer will also be subject to the federal securities
laws and all requirements with respect to being a member of a self-
regulatory organization, unless exempted from any such requirements by
the Commission as is necessary or appropriate in the public interest or
for the protection of investors.\162\ This provision of the final rule
also draws closely upon Title II.\163\
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\159\ See 12 CFR 380.63(f) and 17 CFR 302.103(f).
\160\ See 12 U.S.C. 5390(h)(2)(H)(i).
\161\ See 12 CFR 380.63(g) and 17 CFR 302.103(g).
\162\ See 12 U.S.C. 5390(h)(2)(H)(ii).
\163\ Id.
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Paragraph (h) of the bridge broker-dealer provision of the final
rule states that at the end of the term of existence of the bridge
broker-dealer, any proceeds or other assets that remain after payment
of all administrative expenses of the bridge broker-dealer and all
other claims against the bridge broker-dealer will be distributed to
the Corporation as receiver for the related covered broker-dealer.\164\
Stated differently, the residual value in the bridge broker-dealer
after payment of its obligations will benefit the creditors of the
covered broker-dealer in satisfaction of their claims.
---------------------------------------------------------------------------
\164\ See 12 CFR 380.63(h) and 17 CFR 302.103(h). See also 12
U.S.C. 5385(d)(2); 12 U.S.C. 5390(h)(15)(B).
---------------------------------------------------------------------------
E. Claims of Customers and Other Creditors of a Covered Broker-Dealer
\165\
---------------------------------------------------------------------------
\165\ The section of the final rule on claims of customers and
other creditors of a covered broker-dealer appears in 12 CFR 380.64
for purposes of the Corporation and 17 CFR 302.104 for purposes of
the Commission. The rule text for both agencies is identical.
---------------------------------------------------------------------------
The final rule's section on the claims of the covered broker-
dealer's customers and other creditors addresses the claims process for
those customers and other creditors as well as the respective roles of
the trustee and the receiver with respect to those claims.\166\ This
section provides SIPC with the authority as trustee for the covered
broker-dealer to make determinations, allocations, and advances in a
manner consistent with its customary practices in a liquidation under
SIPA.\167\ Specifically, the section provides: ``The allocation of
customer property, advances from SIPC, and delivery of customer name
securities to each customer or to its customer account at a bridge
broker or dealer, in partial or complete satisfaction of such
customer's net equity claims as of the close of business on the
appointment date, shall be in a manner, including form and timing, and
in an amount at least as beneficial to such customer as would have been
the case had the covered broker or dealer been liquidated under SIPA.''
\168\ Each customer of a covered broker-dealer will receive cash and
securities at least equal in amount and value, as of the appointment
date, to what that customer would have received in a SIPA
proceeding.\169\
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\166\ See 12 CFR 380.64 and 17 CFR 302.104.
\167\ See 12 CFR 380.64(a)(4) and 17 CFR 302.104(a)(4). See also
15 U.S.C. 78aaa et seq.
\168\ See 12 CFR 380.64(a)(4) and 17 CFR 302.104(a)(4).
\169\ See 15 U.S.C. 78aaa et seq.
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This section further addresses certain procedural aspects of the
claims determination process in accordance with the requirements set
forth in section 210(a)(2)-(5) of the Dodd-Frank Act.\170\ The section
describes the role of the receiver of a covered broker-dealer with
respect to claims and provides for the publication and mailing of
notices to creditors of the covered broker-dealer by the receiver in a
manner consistent with both SIPA and the notice procedures applicable
to covered financial companies generally under section 210(a)(2) of the
Dodd-Frank Act.\171\ The section provides that the notice of the
Corporation's appointment as receiver must be accompanied by notice of
SIPC's appointment as trustee.\172\ In addition, the Corporation, as
receiver, will consult with SIPC, as trustee, regarding procedures for
filing a claim including the form of claim and the filing instructions,
to facilitate a process that is consistent with SIPC's general
practices.\173\ The claim form will include a provision permitting a
claimant to claim customer status, if applicable, but the inclusion of
any such claim to customer status on the claim form will not be
determinative of customer status under SIPA.
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\170\ 12 U.S.C. 5390(a)(2)-(5).
\171\ See 12 CFR 380.64(b) and 17 CFR 302.104(b). See also 12
U.S.C. 5390(a)(2).
\172\ See 12 CFR 380.64(b)(1) and 17 CFR 302.104(b)(1) (``The
Corporation as receiver shall coordinate with SIPC as trustee to
post the notice on SIPC's website at www.sipc.org. . . .'').
\173\ See 12 CFR 380.64(b)(2) and 17 CFR 302.104(b)(2).
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The final rule sets the claims bar date as the date following the
expiration of the six-month period beginning on the date that the
notice to creditors is first published.\174\ The claims bar date in the
final rule is consistent with section 8(a) of SIPA, which provides for
the barring of claims after the expiration of the six-month period
beginning upon publication.\175\ The six-month period is also
consistent with section 210(a)(2)(B)(i) of the Dodd-Frank Act, which
requires that the claims bar date be no less than ninety days after
first publication.\176\ As required by section 210(a)(3)(C)(i) of the
Dodd-Frank Act, the final rule provides that any claim filed after the
claims bar date shall be disallowed, and such disallowance shall be
final, except that a claim filed after the claims bar date will be
considered by the receiver if (i) the claimant did not receive notice
of the appointment of the receiver in time to file a claim before the
claim date, and (ii) the claim is filed in time to permit payment of
the claim, as provided by section 210(a)(3)(C)(ii) of the Dodd-Frank
Act.\177\ This exception for late-filed claims due to lack of notice to
the claimant serves a similar purpose (i.e., to ensure a meaningful
opportunity for claimants to participate in the claims process) as the
``reasonable, fixed extension of time'' that may be granted to the
otherwise applicable six-month deadline under SIPA to certain specified
classes of claimants.\178\
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\174\ See 12 CFR 380.64(b)(3) and 17 CFR 302.104(b)(3)
(discussing claims bar date).
\175\ See 15 U.S.C. 78fff-2(a).
\176\ See 12 U.S.C. 5390(a)(2)(B)(i).
\177\ See 12 CFR 380.64(b)(3) and 17 CFR 302.104(b)(3). See also
12 U.S.C. 5390(a)(3)(C)(i)-(ii).
\178\ See 15 U.S.C. 78fff-2(a)(3).
---------------------------------------------------------------------------
Section 8(a)(3) of SIPA provides that a customer who wants to
assure that its net equity claim is paid out of customer property must
file its claim with the SIPA trustee within a period of time set by the
court (not exceeding 60 days after the date of publication of the
notice provided in section 8(a)(1) of SIPA) notwithstanding that the
claims bar date is later.\179\ The final rule conforms to this section
of SIPA by providing that any claim for net equity filed more than 60
days after the notice to creditors is first published need not be paid
or satisfied in whole or in part out of customer property and, to the
extent such claim is paid by funds advanced by SIPC, it will be
satisfied in cash or securities, or both, as SIPC, the trustee,
determines is most economical to the receivership estate.\180\
---------------------------------------------------------------------------
\179\ See 15 U.S.C. 78fff-2(a)(3) and 15 U.S.C. 78fff-2(a)(1).
\180\ See 12 CFR 380.64(b)(3) and 17 CFR 302.104(b)(3). See also
15 U.S.C. 78fff-2(a)(3).
---------------------------------------------------------------------------
Under the final rule, the Corporation as receiver is required to
notify a claimant whether it allows a claim within the 180-day period
\181\ as such time period may be extended by written agreement,\182\ or
the expedited 90-day period,\183\ whichever would be applicable. The
process established for the determination of claims by customers of a
covered broker-dealer for customer property or customer name securities
constitutes the exclusive process for the determination of such
claims.\184\ This process corresponds to
[[Page 53657]]
the SIPA provision that requires that customer claims to customer
property be determined pro rata based on each customer's net equity
applied to all customer property as a whole.\185\ While the Dodd-Frank
Act provides for expedited treatment of certain claims within 90 days,
given that all customers may have preferred status with respect to
customer property and customer name securities, no one customer's
claim, or group of customer claims, will be treated in an expedited
manner ahead of other customers' claims. Consequently, the concept of
expedited relief will not apply to customer claims.\186\ The receiver's
determination to allow or disallow a claim in whole or in part will
utilize the determinations made by SIPC, as trustee, with respect to
customer status, claims for net equity, claims for customer name
securities, and whether property held by the covered broker-dealer
qualifies as customer property.\187\ A claimant may seek a de novo
judicial review of any claim that is disallowed in whole or in part by
the receiver, including but not limited to any claim disallowed in
whole or part based upon any determination made by SIPC.\188\
---------------------------------------------------------------------------
\181\ See 12 CFR 380.64(c) and 17 CFR 302.104(c). See also 12
U.S.C. 5390(a)(3)(A)(i).
\182\ See 15 U.S.C. 5390(a)(3)(A).
\183\ See 12 CFR 380.64(c) and 17 CFR 302.104(c). See also 12
U.S.C. 5390(a)(5)(B).
\184\ See 12 CFR 380.64(c) and 17 CFR 302.104(c).
\185\ See 15 U.S.C. 78fff-2.
\186\ See 12 CFR 380.64(c) and 17 CFR 302.104(c).
\187\ Id.
\188\ See 12 CFR 380.64(d) and 17 CFR 302.104(d) (``The claimant
may seek a judicial determination of any claim disallowed, in whole
or in part, by the Corporation as receiver, including any claim
disallowed based upon any determination(s) made by SIPC as trustee .
. . by the appropriate district or territorial court of the United
States . . . .''). See also 12 U.S.C. 5390(a)(4)-(5).
---------------------------------------------------------------------------
F. Additional Sections of the Rule
In addition to the previously discussed sections, the Agencies have
included sections in the final rule addressing: (1) The priorities for
unsecured claims against a covered broker-dealer; \189\ (2) the
administrative expenses of SIPC; \190\ and (3) QFCs.\191\ The Dodd-
Frank Act sets forth special priorities for the payment of claims of
general unsecured creditors of a covered broker-dealer, which are
addressed in the final rule's section on priorities for unsecured
claims against a covered broker-dealer.\192\ The priorities for
unsecured claims against a covered broker-dealer include claims for
unsatisfied net equity of a customer and certain administrative
expenses of the receiver and SIPC.\193\ The priorities set forth in the
final rule express the cumulative statutory requirements set forth in
Title II.\194\ First, the priorities provide that the administrative
expenses of SIPC as trustee for a covered broker-dealer will be
reimbursed pro rata with administrative expenses of the receiver for
the covered broker-dealer.\195\ Second, the amounts paid by the
Corporation as receiver to customers or SIPC will be reimbursed on a
pro rata basis with amounts owed to the United States, including
amounts borrowed from the U.S. Treasury for the orderly liquidation
fund.\196\ Third, the amounts advanced by SIPC for the satisfaction of
customer net equity claims will be reimbursed subsequent to amounts
owed to the United States, but before all other claims.\197\
---------------------------------------------------------------------------
\189\ The priorities for unsecured claims against a covered
broker-dealer section appears in 12 CFR 380.65 for purposes of the
Corporation and 17 CFR 302.105 for purposes of the Commission. The
rule text for both agencies is identical.
\190\ The SIPC administrative expenses section appears in 12 CFR
380.66 for purposes of the Corporation and 17 CFR 302.106 for
purposes of the Commission. The rule text for both agencies is
identical.
\191\ The QFC section appears in 12 CFR 380.67 for purposes of
the Corporation and 17 CFR 302.107 for purposes of the Commission.
The rule text for both agencies is identical.
\192\ See 12 U.S.C. 5390(b)(6) (providing the priority of
expenses and unsecured claims in the orderly liquidation of SIPC
members).
\193\ See 12 CFR 380.65 and 17 CFR 302.105.
\194\ See 12 U.S.C. 5390(b)(6) (providing the priority of
expenses and unsecured claims in the orderly liquidation of SIPC
members). See also 12 CFR 380.65 and 17 CFR 302.105.
\195\ See 12 CFR 380.65(a) and 17 CFR 302.105(a). See also 12
U.S.C. 5390(b)(6)(A).
\196\ See 12 CFR 380.65(b) and 17 CFR 302.105(b). See also 12
U.S.C. 5390(b)(6)(B); 12 U.S.C. 5390(n) (establishing the ``orderly
liquidation fund'' available to the Corporation to carry out the
authorities granted to it under Title II).
\197\ See 12 CFR 380.65(c) and 17 CFR 302.105(c). See also 12
U.S.C. 5390(b)(6)(C).
---------------------------------------------------------------------------
Title II provides that SIPC is entitled to recover administrative
expenses incurred in performing its responsibilities under section 205
on an equal basis with the Corporation.\198\ Title II also sets forth a
description of the administrative expenses of the receiver.\199\ In
order to provide additional clarity as to the types of administrative
expenses that SIPC will be entitled to recover in connection with its
role as trustee for the covered broker-dealer, the final rule provides
that SIPC, in connection with its role as trustee for the covered
broker-dealer, has the authority to ``utilize the services of private
persons, including private attorneys, accountants, consultants,
advisors, outside experts and other third party professionals.'' The
section further provides SIPC with an allowed administrative expense
claim with respect to any amounts paid by SIPC for services provided by
these persons if those services are ``practicable, efficient and cost-
effective.'' \200\ The definition of administrative expenses of SIPC in
the final rule conforms to both the definition of administrative
expenses of the Corporation as receiver and the costs and expenses of
administration reimbursable to SIPC as trustee in the liquidation of a
broker-dealer under SIPA.\201\ Specifically, the definition includes
``the costs and expenses of such attorneys, accountants, consultants,
advisors, outside experts and other third parties, and other proper
expenses that would be allowable to a third party trustee under 15
U.S.C. 78eee(b)(5)(A), including the costs and expenses of SIPC
employees that would be allowable pursuant to 15 U.S.C. 78fff(e).''
\202\ The definition excludes advances from SIPC to satisfy customer
claims for net equity because the Dodd-Frank Act specifies that those
advances are treated differently than administrative expenses with
respect to the priority of payment.\203\
---------------------------------------------------------------------------
\198\ See 12 U.S.C. 5390(b)(6)(A). The regulation governing the
Corporation's administrative expenses in its role as receiver under
Title II is located at 12 CFR 380.22.
\199\ See 12 U.S.C. 5381(a)(1).
\200\ See 12 CFR 380.66(a) and 17 CFR 302.106(a).
\201\ See 12 CFR 380.66(a) and 17 CFR 302.106(a). See also 12
U.S.C. 5381(a)(1) (defining administrative expenses of the
receiver); 15 U.S.C. 78eee(5) (providing for compensation for
services and reimbursement of expenses).
\202\ See 12 CFR 380.66(a) and 17 CFR 302.106(a). See also 15
U.S.C. 78eee(b)(5)(A); 15 U.S.C. 78fff(e).
\203\ See 12 CFR 380.66(b) and 17 CFR 302.106(b) (defining the
term administrative expenses of SIPC). See also 12 U.S.C.
5390(b)(6)(C) (stating SIPC's entitlement to recover any amounts
paid out to meet its obligations under section 205 and under SIPA).
---------------------------------------------------------------------------
Lastly, the final rule's section on QFCs states that QFCs are
governed in accordance with Title II.\204\ Paragraph (b)(4) of section
205 of the Dodd-Frank Act states: ``Notwithstanding any provision of
[SIPA] . . . the rights and obligations of any party to a qualified
financial contract (as the term is defined in section 210(c)(8)) to
which a covered broker or dealer for which the Corporation has been
appointed receiver is a party shall be governed exclusively by section
210, including the limitations and restrictions contained in section
210(c)(10)(B).'' \205\ Paragraph (c)(8)(A) of section 210 states that,
``no person shall be stayed or prohibited from exercising--(i) any
right that such person has to cause the termination, liquidation, or
acceleration of any qualified financial contract with a covered
financial company which arises upon the date of appointment of the
[[Page 53658]]
Corporation as receiver for such covered financial company or at any
time after such appointment; (ii) any right under any security
agreement or arrangement or other credit enhancement related to one or
more qualified financial contracts described in clause (i); or (iii)
any right to offset or net out any termination value, payment amount,
or other transfer obligation arising under or in connection with one or
more contracts or agreements described in clause (i), including any
master agreement for such contracts or agreements.'' \206\ Paragraph
(c)(10)(B)(i)(I)-(II) of section 210 provides in pertinent part that a
person who is a party to a QFC with a covered financial company may not
exercise any right that such person has to terminate, liquidate, or net
such contract under paragraph (c)(8)(A) of section 210 solely by reason
of or incidental to the appointment under Title II of the Corporation
as receiver for the covered financial company: (1) Until 5:00 p.m.
eastern time on the business day following the date of the appointment;
or (2) after the person has received notice that the contract has been
transferred pursuant to paragraph (c)(9)(A) of section 210.\207\ The
final rule reflects these statutory directives and states: ``The rights
and obligations of any party to a qualified financial contract to which
a covered broker or dealer is a party shall be governed exclusively by
12 U.S.C. 5390, including the limitations and restrictions contained in
12 U.S.C. 5390(c)(10)(B), and any regulations promulgated thereunder.''
\208\
---------------------------------------------------------------------------
\204\ See 12 CFR 380.67 and 17 CFR 302.107.
\205\ See 12 U.S.C. 5385(b)(4) (``Notwithstanding any provision
of [SIPA] . . . the rights and obligations of any party to a
qualified financial contract . . . to which a covered broker or
dealer . . . is a party shall be governed exclusively by section 210
[of the Dodd-Frank Act]'').
\206\ See 12 U.S.C. 5390(c)(8)(A).
\207\ See 12 U.S.C. 5390(c)(10)(B).
\208\ See 12 CFR 380.67 and 17 CFR 302.107.
---------------------------------------------------------------------------
IV. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 \209\ (``PRA'') states that no
agency may conduct or sponsor, nor is the respondent required to
respond to, an information collection unless it displays a currently
valid Office of Management and Budget (``OMB'') control number. The
final rule clarifies the process for the orderly liquidation of a
covered broker-dealer under Title II of the Dodd-Frank Act. The final
rule addresses only the process to be used in the liquidation of the
covered broker-dealer and does not create any new, or revise any
existing, collection of information pursuant to the PRA. Consequently,
no information has been submitted to the OMB for review.
---------------------------------------------------------------------------
\209\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
V. Economic Analysis
A. Introduction and General Economic Considerations
The Agencies are jointly adopting this rule to implement provisions
applicable to the orderly liquidation of covered broker-dealers
pursuant to section 205(h) of the Dodd-Frank Act in a manner that
protects market participants by clearly establishing expectations and
equitable treatment for customers and creditors of failed broker-
dealers, as well as other market participants. The Agencies are mindful
of the expected costs and benefits of their respective rules. The
following economic analysis seeks to identify and consider the expected
benefits and costs as well as the expected effects on efficiency,
competition, and capital formation that would result from the final
rule. Overall, the Agencies believe that the primary benefit of the
final rule is to codify additional details regarding the process for
the orderly liquidation of failed broker-dealers pursuant to Title II,
which will provide additional structure and enable consistent
application of the process. Importantly, the final rule does not affect
the set of resolution options available to the Agencies in the event of
the failure of a broker-dealer, nor does it affect the range of
possible outcomes. The detailed analysis of the expected costs and
benefits associated with the final rule is discussed below.
The Dodd-Frank Act specifically provides that the FDIC may be
appointed receiver for a systemically important broker-dealer for
purposes of the orderly liquidation of the company using the powers and
authorities granted to the FDIC under Title II.\210\ Section 205 of the
Dodd-Frank Act sets forth a process for the orderly liquidation of
covered broker-dealers that is an alternative to the process under
SIPA, but incorporates many of the customer protection features of SIPA
into a Title II orderly liquidation. Congress recognized that broker-
dealers are different from other kinds of systemically important
financial companies in several ways, not the least of which is how
customers of a broker-dealer are treated in an insolvency proceeding
relating to the broker-dealer.\211\ Section 205 of the Dodd-Frank Act
is intended to address situations where the failure of a large broker-
dealer could have broader impacts on the stability of the United States
financial system. The financial crisis of 2007-2009 and the ensuing
economic recession resulted in the failure of many financial entities.
Liquidity problems that initially began at a small set of firms quickly
spread as uncertainty about which institutions were solvent increased,
triggering broader market disruptions, including a general loss of
liquidity, distressed asset sales, and system-wide redemption runs by
some participants.\212\ The final rule seeks to implement the orderly
liquidation provisions of the Dodd-Frank Act in a manner that is
designed to help reduce both the likelihood and the severity of
financial market disruptions that could result from the failure of a
covered broker-dealer.
---------------------------------------------------------------------------
\210\ See 12 U.S.C. 5382, 12 U.S.C. 5383, and 12 U.S.C. 5384.
\211\ See 12 U.S.C. 5385 (orderly liquidation of covered brokers
and dealers).
\212\ See Brunnermeier, M. (2009), Deciphering the Liquidity and
Credit Crunch 2007-2008, Journal of Economic Perspectives 23, 77-
100.
---------------------------------------------------------------------------
In the case of a failing broker-dealer, the broker-dealer customer
protection regime is primarily composed of SIPA and the Exchange Act,
as administered by SIPC and the Commission. Among other Commission
financial responsibility rules, Rule 15c3-3 specifically protects
customer funds and securities held by a broker-dealer and essentially
forbids broker-dealers from using customer assets to finance any part
of their businesses unrelated to servicing securities customers.\213\
With respect to SIPA, and as a general matter, in the event that a
broker-dealer enters into a SIPA liquidation, customers' cash and
securities held by the broker-dealer are returned to customers on a
pro-rata basis.\214\ If the broker-dealer does not have sufficient
funds to satisfy customer net equity claims, SIPC advances may be used
to supplement the distribution, up to a ceiling of $500,000 per
customer, including a maximum of $250,000 for cash claims.\215\ When
applicable, SIPC or a SIPA trustee will return securities that are
registered in the customer's name or are in the process of being
registered directly to each customer.\216\ An integral component of the
broker-dealer customer protection regime is that, under SIPA, customers
have preferred status relative to general creditors with respect to
customer property and customer name securities.\217\ SIPC or a SIPA
trustee may sell or transfer customer accounts to another SIPC
[[Page 53659]]
member in order for the customers to regain access to their accounts in
an expedited fashion.\218\
---------------------------------------------------------------------------
\213\ See Net Capital Requirements for Brokers and Dealers,
Exchange Act Release No. 21651 (January 11, 1985), 50 FR 2690, 2690
(January 18, 1985). See also Broker-Dealers; Maintenance of Certain
Basic Reserves, Exchange Act Release No. 9856 (November 10, 1972),
37 FR 25224, 25224 (November 29, 1972).
\214\ See 15 U.S.C. 78fff-2(b).
\215\ See 15 U.S.C. 78fff-3(a).
\216\ See 15 U.S.C. 78fff-2(c).
\217\ See 15 U.S.C. 78fff(a).
\218\ See 15 U.S.C. 78fff-2(f).
---------------------------------------------------------------------------
Title II of the Dodd-Frank Act supplemented the customer protection
regime for broker-dealers. As described above in more detail, in the
event a covered broker-dealer fails, Title II provides the FDIC with a
broad set of tools to help ensure orderly liquidation, including the
ability to transfer all assets and liabilities held by a broker-
dealer--not just customer assets--to a bridge broker-dealer, as well as
the ability to borrow from the U.S. Treasury to facilitate the orderly
liquidation should the need arise.\219\ Upon the commencement of an
orderly liquidation under Title II, the FDIC is appointed the receiver
of the broker-dealer and SIPC is appointed as the trustee for the
liquidation process. The FDIC is given the authority to form and fund a
bridge broker-dealer,\220\ which would facilitate a quick transfer of
customer accounts to a solvent broker-dealer and therefore would
accelerate reinstated access to customer accounts.\221\ To further
reduce the risk of such a run on a failed broker-dealer, Title II
imposes an automatic one-business day stay on certain activities by the
counterparties to QFCs, so as to provide the FDIC an opportunity to
inform counterparties that the covered broker-dealer's liabilities were
transferred to and assumed by the bridge broker-dealer.\222\
---------------------------------------------------------------------------
\219\ Under a SIPA liquidation, the Commission is authorized to
make loans to SIPC should SIPC lack sufficient funds. In addition,
to fund these loans, the Commission is authorized to borrow up to
$2.5 billion from the U.S. Treasury. See 15 U.S.C. 78ddd(g)-(h).
\220\ See 12 CFR 380.63 and 17 CFR 302.103 (regarding the FDIC's
power to ``organize one or more bridge brokers or dealers with
respect to a covered broker or dealer'').
\221\ See Section III.D.2 on the FDIC's power to transfer
accounts to a bridge broker-dealer.
\222\ See Section III.F on the additional sections of the
adopted rule that relate to qualified financial contracts.
---------------------------------------------------------------------------
The final rule is designed to implement the provisions of section
205 so that an orderly liquidation can be carried out for certain
broker-dealers with efficiency and predictability and the intended
benefits of orderly liquidation, as established by the Dodd-Frank Act,
on the overall economy can be realized. Specifically, the final rule
implements the framework for the liquidation of covered broker-dealers
and includes definitions for key terms such as customer, customer
property, customer name securities, net equity, and bridge broker-
dealer. It sets forth three major processes regarding the orderly
liquidation--the process of initiating the orderly liquidation
(including the appointment of receiver and trustee and the notice and
application for protective decree), the process of account transfers to
the bridge broker-dealer, and the claims process for customers and
other creditors. While establishing orderly liquidation generally,
section 205 does not specifically provide the details of such
processes.
The final rule provides several clarifications to the provisions in
the statute. For example, under Title II, the FDIC has authority to
transfer any assets without obtaining any approval, assignment, or
consents.\223\ The final rule further provides that the transfer to a
bridge broker-dealer of any account, property, or asset is not
determinative of customer status, nor that the property so transferred
qualifies as customer property or customer name securities.\224\ The
final rule also clarifies terms such as the venue for filing the
application for a protective decree and the filing date.\225\
---------------------------------------------------------------------------
\223\ See 12 CFR 380.63 and 17 CFR 302.103.
\224\ These determinations will be made by SIPC in accordance
with SIPA. See 12 CFR 380.64(a)(1) and 17 CFR 302.104 (explaining
``SIPC, as trustee for a covered broker or dealer, shall determine
customer status . . .'').
\225\ See 12 CFR 380.62 and 17 CFR 302.102.
---------------------------------------------------------------------------
In addition, the final rule clarifies the process for transferring
assets to the bridge broker-dealer, which should help expedite customer
access to their respective accounts. For example, the final rule
provides that allocations to customer accounts at the bridge broker-
dealer may initially be derived from estimates based upon the books and
records of the covered broker-dealer or other information deemed
relevant by the Corporation in consultation with SIPC.\226\ This means
that customers may potentially access their accounts more
expeditiously, before the time-consuming record reconciliation process
concludes.
---------------------------------------------------------------------------
\226\ See 12 CFR 380.63(d) and 17 CFR 302.103(d).
---------------------------------------------------------------------------
Therefore, overall, the Agencies believe that the primary benefit
of the final rule is to codify additional details regarding the process
for the orderly liquidation of covered broker-dealers, which will
provide additional structure and enable consistent application of the
process. Importantly, the final rule does not affect the set of
resolution options available to the Agencies upon failure of a covered
broker-dealer, nor does it affect the range of possible outcomes. In
the absence of the final rule, the Commission, the Board and the
Secretary could still determine that an orderly liquidation under Title
II is appropriate, and the FDIC would still have broad authority to
establish a bridge broker-dealer and transfer all assets and
liabilities held by the failed entity.\227\ However, in the absence of
the final rule, uncertainty could arise regarding the definitions
(e.g., the applicable filing date or the nature of the application for
a protective decree) and the claims process, which could cause delays
and undermine the goals of the statute. By establishing a uniform
process for the orderly resolution of a broker-dealer, the final rule
should improve the orderly liquidation process while implementing the
statutory requirements so that orderly liquidations can be carried out
with efficiency and predictability. Such efficiency and predictability
in the orderly liquidation process should generally minimize confusion
over the status of customer accounts and property and conserve
resources that otherwise would have to be expended in resolving delays
in the claims process or in connection with any potential litigation
that could arise from delays. There has not been a liquidation of a
broker-dealer under Title II in the interim that would clarify and
bring certainty to the process.
---------------------------------------------------------------------------
\227\ See 12 U.S.C. 5383(a)(1)(B).
---------------------------------------------------------------------------
The discussion below elaborates on the likely expected costs and
benefits of the final rule and its expected potential impact on
efficiency, competition, and capital formation, as well as potential
alternatives.
B. Economic Baseline
To assess the economic impact of the final rule, the Agencies are
using section 205 of the Dodd-Frank Act as the economic baseline which
specifies provisions for the orderly liquidation of certain large
broker-dealers. Section 205(h) directs the Agencies, in consultation
with SIPC, jointly to issue rules to fully implement the section.\228\
Although no implementing rules are currently in place, the statutory
requirements of section 205 of the Dodd-Frank Act are self-effectuating
and currently in effect. Therefore, the appropriate baseline is the
orderly liquidation authority in place pursuant to section 205 without
any implementation rules issued by the Agencies.
---------------------------------------------------------------------------
\228\ 12 U.S.C. 5385(h).
---------------------------------------------------------------------------
1. SIPC's Role
Section 205 provides that upon the appointment of the FDIC as
receiver for a covered broker-dealer, the FDIC shall appoint SIPC as
trustee for the liquidation of the covered broker-dealer
[[Page 53660]]
under SIPA without need for any approval.\229\ Upon its appointment as
trustee, SIPC shall promptly file with a federal district court an
application for protective decree, the terms of which will jointly be
determined by SIPC and the Corporation, in consultation with the
Commission.\230\ Section 205 also provides that SIPC shall have all of
the powers and duties provided by SIPA except with respect to assets
and liabilities transferred to the bridge broker-dealer.\231\ The
determination of claims and the liquidation of assets retained in the
receivership of the covered broker-dealer and not transferred to the
bridge financial company shall be administered under SIPA.\232\
---------------------------------------------------------------------------
\229\ 12 U.S.C. 5385(a).
\230\ See 12 U.S.C. 5385(a)(2).
\231\ 12 U.S.C. 5385. See also 12 CFR 380.64(a) and 17 CFR
302.104(a) (regarding SIPC's role as trustee).
\232\ Id.
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2. The Corporation's Power To Establish Bridge Broker-Dealers
Section 205 of the Dodd-Frank Act does not contain specific
provisions regarding bridge broker-dealers. However, section 210 of the
Dodd-Frank Act provides that, in connection with an orderly
liquidation, the FDIC has the power to form one or more bridge
financial companies, including bridge broker-dealers with respect to a
covered broker-dealer.\233\ Under Title II, the FDIC has the authority
to transfer any asset or liability held by the covered financial
company without obtaining any approval, assignment, or consent with
respect to such transfer.\234\ Title II further provides that any
customer of a covered broker-dealer whose account is transferred to a
bridge financial company shall have all rights and privileges under
section 205(f) of the Dodd-Frank Act and SIPA that such customer would
have had if the account were not transferred.\235\
---------------------------------------------------------------------------
\233\ See 12 U.S.C. 5390(h)(1)(A). See also 12 U.S.C.
5390(h)(2)(H).
\234\ 12 U.S.C. 5390(a)(1)(G).
\235\ See 12 U.S.C. 5390(h)(2)(H)(iii).
---------------------------------------------------------------------------
3. Satisfaction of Customer Claims
Section 205(f) of the Dodd-Frank Act requires that all obligations
of a covered broker-dealer or bridge broker-dealer to a customer
relating to, or net equity claims based on, customer property or
customer name securities must be promptly discharged in a manner and in
an amount at least as beneficial to the customer as would have been the
case had the broker-dealer been liquidated in a SIPA proceeding.\236\
---------------------------------------------------------------------------
\236\ See 12 U.S.C. 5385(f)(1).
---------------------------------------------------------------------------
4. Treasury Report
On February 21, 2018, the Treasury Department published a report on
the orderly liquidation authority and bankruptcy reform \237\
(``Treasury Report'') pursuant to the Presidential Memorandum issued on
April 21, 2017.\238\ Among other things, the Treasury Report
recommended retaining the orderly liquidation authority as an emergency
tool for use only under extraordinary circumstances.\239\ The Treasury
Report also recommended specific reforms to the orderly liquidation
authority to eliminate opportunities for ad hoc disparate treatment of
similarly situated creditors, reinforce existing taxpayer protections,
and strengthen judicial review.\240\ While some of these reforms relate
to Title II of the Dodd-Frank Act, the Treasury Report did not
recommend against implementing Section 205.\241\
---------------------------------------------------------------------------
\237\ See Report to the President of the United States Pursuant
to the Presidential Memorandum Issued April 21, 2017: Orderly
Liquidation Authority and Bankruptcy Reform (Feb. 21, 2018).
(``Treasury Report'') (available at https://home.treasury.gov/sites/default/files/2018-02/OLA_REPORT.pdf).
\238\ See Presidential Memorandum for the Secretary of the
Treasury, Orderly Liquidation Authority (Apr. 21, 2017) (available
at https://www.govinfo.gov/content/pkg/DCPD-201700266/pdf/DCPD-201700266.pdf).
\239\ See Treasury Report at 2.
\240\ See ibid. at 1-2.
\241\ Ibid. Appendix A at 44-45.
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C. Expected Benefits, Costs and Effects on Efficiency, Competition, and
Capital Formation
1. Expected Benefits
a. Overall Expected Benefits
The key expected benefit of the final rule is that it creates a
more structured framework to implement section 205 of the Dodd-Frank
Act, so that the orderly liquidation of a covered broker-dealer can be
carried out with efficiency and predictability if the need arises. As
discussed in the economic baseline, section 205 provides parameters for
the orderly liquidation of covered broker-dealers, while the final rule
implements these statutory parameters. The final rule first provides
definitions for certain key terms including customer, customer
property, customer name securities, net equity, and bridge broker-
dealer, among others.\242\ It then sets forth three major processes
regarding the orderly liquidation: The process of initiating the
orderly liquidation,\243\ the process of account transfers to the
bridge broker-dealer,\244\ and the claims process for customers and
other creditors.\245\
---------------------------------------------------------------------------
\242\ See 12 CFR 380.60 and 17 CFR 302.100.
\243\ See 12 CFR 380.61-380.62, 17 CFR 302.101-302.102.
\244\ See 12 CFR 380.63 and 17 CFR 302.103.
\245\ See 12 CFR 380.64 and 17 CFR 302.104.
---------------------------------------------------------------------------
First, besides incorporating the statutory requirement of
appointing SIPC as the trustee for covered broker-dealers, the final
rule provides a more detailed process for notice and application for
protective decree. It provides clarification for the venue in which the
notice and application for a decree is to be filed.\246\ It clarifies
the definition of the filing date if the notice and application is
filed on a date other than the appointment date.\247\ And finally, it
includes a non-exclusive list of notices drawn from other parts of
Title II to inform the relevant parties of the initiation of the
orderly liquidation process and what they should expect.\248\
---------------------------------------------------------------------------
\246\ See 12 CFR 380.62(a) and 17 CFR 302.102.
\247\ Id.
\248\ See 12 CFR 380.62(b) and 17 CFR 302.102(b).
---------------------------------------------------------------------------
Second, the final rule sets forth the process to establish one or
more bridge broker-dealers and to transfer accounts, property, and
other assets held by a covered broker-dealer to such bridge broker-
dealers, pursuant to Title II.\249\ Section 205 of the Dodd-Frank Act
does not specifically provide for such a process. The final rule
specifies that the Corporation may transfer any account, property, or
asset held by a covered broker-dealer (including customer and non-
customer accounts, property and assets) to a bridge broker-dealer as
the Corporation deems necessary, based on the FDIC's authority under
Title II to transfer any assets without obtaining any approval,
assignment, or consents.\250\ The transfer to a bridge broker-dealer of
any account, property or asset is not determinative of customer
status.\251\ The determinations of customer status are to be made by
SIPC as trustee in accordance with SIPA.\252\ As discussed above, given
the preferred status of customers, litigation has been brought on
customer status under SIPA (e.g., repo counterparties' claims of
customer status under SIPA). \253\ Since the Corporation may transfer
both customer and non-customer accounts, property, and assets held by a
covered broker-dealer to a bridge broker-dealer according to the
statute, some non-customer creditors may mistakenly interpret such a
transfer as conferring customer status on them in the absence of a
final rule (especially since in a SIPA
[[Page 53661]]
proceeding only customer assets are transferred). Such mistaken beliefs
could give rise to litigation over customer status. The clarification
in the final rule stresses that customer status is determined by SIPC
separately from the decision to transfer an asset to a bridge broker-
dealer, and could thus help prevent confusion concerning whether other
creditors whose assets have also been transferred should be treated as
customers. This clarification may mitigate a potential increase in
litigation costs, although the economic benefit of such mitigation is
likely to be de minimis.
---------------------------------------------------------------------------
\249\ See 12 CFR 380.63 and 17 CFR 302.103.
\250\ See 12 CFR 380.63(e) and 17 CFR 302.103(e).
\251\ See 12 CFR 380.64(a) and 17 CFR 302.104(a).
\252\ See 12 CFR 380.64(a) and 17 CFR 302.104(a) as proposed.
\253\ See, e.g., In re Lehman Brothers Inc., 492 B.R. 379
(Bankr. S.D.N.Y. 2013), aff'd, 506 B.R. 346.
---------------------------------------------------------------------------
Regarding the account transfers to bridge broker-dealers, in
addition to the provisions on the specifics of a transfer (e.g., the
calculation of customer net equity, the assumption of the net equity
claim by the bridge broker-dealer and the allocation of customer
property), the final rule further provides that allocations to customer
accounts at the bridge broker-dealer may initially be derived from
estimates based upon the books and records of the covered broker-dealer
or other information deemed relevant by the Corporation in consultation
with SIPC.\254\ Given that it could be time-consuming to reconcile the
broker-dealer's records with the records of other parties, this
provision may speed up the allocation of customer property to the
customer accounts at the bridge broker-dealer, thus providing customers
quicker access to their accounts.
---------------------------------------------------------------------------
\254\ See 12 CFR 380.63(d) and 17 CFR 302.103(d).
---------------------------------------------------------------------------
Third, the final rule also addresses the claims process for
customers and other creditors.\255\ The final rule implements the
statute's requirement that the trustee's allocation to a customer shall
be in an amount and manner, including form and timing, which is at
least as beneficial as such customer would have received under a SIPA
proceeding, as required by section 205(f).\256\ In addition, the final
rule further addresses certain procedural aspects of the claims
determination process, such as the publication and mailing of notices
to creditors, the notice of the appointment of the FDIC and SIPC, the
claims bar date, and expedited relief.
---------------------------------------------------------------------------
\255\ See 12 CFR 380.64 and 17 CFR 302.104.
\256\ See 12 CFR 380.64(a)(4) and 17 CFR 302.104(a)(4).
---------------------------------------------------------------------------
In summary, the final rule will provide interested parties with
details on the implementation of the orderly liquidation process. By
providing for a uniform process, the final rule could improve the
efficiency and predictability of the orderly liquidation process. Under
the baseline scenario, in absence of the final rule, uncertainty may
arise because various parties may interpret the statutory requirements
differently. For example, under the baseline, the repo counterparties
of the broker-dealer may not understand that the transfer of the rights
and obligations under their contracts to the bridge broker-dealer is
not determinative of customer status, because such a transfer to
another broker-dealer is only available for customers under a SIPA
proceeding. That is, repo counterparties of the broker-dealer may
mistakenly believe that the transfer of rights and obligations implies
customer status and may thus inappropriately manage their exposures to
the broker dealer once orderly liquidation is initiated. Moreover, repo
counterparties might choose to take advantage of ambiguity under the
baseline scenario because under SIPA, customers have preferred status
relative to general creditors with respect to customer property and
customer name securities. The final rule provides that the transfer of
accounts to a bridge broker-dealer is not determinative of customer
status, and that such status is determined by SIPC in accordance with
SIPA. Uncertainty regarding matters such as customer status could
result in litigation and delays in the claims process if orderly
liquidation were to be commenced with respect to a covered broker-
dealer. Therefore, the structure provided by the final rule could
conserve resources that otherwise would have to be expended in settling
such litigation and resolving delays that may arise, creating a more
efficient process for enabling orderly liquidation. Moreover, under the
baseline scenario, uncertainties about how customer claims would be
handled might lead some customer claimants to reduce exposure if doubts
about a broker-dealer's viability arise, by withdrawing free credit
balances. Similarly, uncertainties about initiation of orderly
liquidations and the process of transferring assets to the bridge
broker-dealer might lead creditors to reduce repo and derivatives
exposure before such actions are warranted. Such uncertainties, if they
were to persist, could undermine the broader benefits that orderly
liquidation could provide to financial stability. In this sense, the
processes set forth by the final rule could help realize the economic
benefits of section 205.
b. Benefits to Affected Parties
The Agencies believe that the final rule provides benefits
comparable to those under the baseline scenario to relevant parties
such as customers, creditors, and counterparties. To the extent that it
provides additional guidance on procedural matters, the final rule may
reduce potential uncertainty, thereby providing for a more efficient
and predictable orderly liquidation process. Therefore, the Agencies
believe the final rule will improve the orderly liquidation process and
provide benefits beyond the statute, although such benefits are likely
to be incremental.
The Agencies believe that the final rule will be beneficial to
customers.\257\ The final rule states that the bridge broker-dealer
will undertake the obligations of a covered broker-dealer with respect
to each person holding an account transferred to the bridge broker-
dealer. This will provide customers with transferred accounts assurance
that they will receive the same legal protection and status as a
customer of a broker-dealer that is subject to liquidation outside of
Title II.\258\ Further, under the final rule, the transfer of non-
customer assets to a bridge broker-dealer will not imply customer
status for these assets. The clarification in the final rule stresses
that customer status is determined by SIPC separately from the decision
to transfer an asset to a bridge broker-dealer, and could thus help
prevent confusion concerning whether other creditors whose assets have
also been transferred should be treated as customers. This
clarification may mitigate a potential increase in litigation costs,
although the economic benefit of such mitigation is likely to be de
minimis. To the extent that the clarification reduces delays in the
return of customer assets to customers, because it reduces the
likelihood of litigation, the final rule would be beneficial to
customers. Finally, the final rule also provides that allocations to
customer accounts at the bridge broker-dealer may initially be derived
from estimates based on the books and records of the covered broker-
dealer.\259\ This provision could help facilitate expedited customer
access to their respective accounts, as customers will not have to wait
for a
[[Page 53662]]
final reconciliation of the broker-dealer's records with other parties'
records.\260\
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\257\ See Section II.D.1 discussing the preferred status of
customer claims. See also 12 CFR 380.65(a)(1) and 17 CFR
302.105(a)(1) (explaining that ``SIPC . . . shall determine customer
status . . .'').
\258\ See 12 CFR 380.63(d) and 17 CFR 302.103(d) (``With respect
to each account transferred to the bridge broker or dealer pursuant
to paragraph (b), the bridge broker or dealer shall undertake the
obligations of a broker or dealer only with respect to property
transferred to and held by the bridge broker or dealer and allocated
to the account as provided in section 380.64(a)(3) [for purposes of
the FDIC and section 302.104(a)(3) for purposes of the SEC],
including any customer property and any advances from SIPC.'').
\259\ See 12 CFR 380.63(d) and 17 CFR 302.103(d).
\260\ See 12 CFR 380.63(e) and 17 CFR 302.103(e). See also 15
U.S.C. 78eee(b)(2)(C)(i)-(ii).
---------------------------------------------------------------------------
Additionally, the Agencies believe the final rule will yield
benefits to both secured and unsecured creditors, as it clarifies the
manner in which creditor claims could be transferred to a bridge
broker-dealer. The Agencies believe that such clarification will reduce
the likelihood of delayed access to creditor assets transferred from a
covered broker-dealer.
2. Expected Costs
While the final rule ensures that in an orderly liquidation all
customer claims are satisfied in a manner and in an amount at least as
beneficial to them as would have been the case in a SIPA liquidation,
orderly liquidation does entail a different treatment of QFC
counterparties. Under SIPA, certain QFC counterparties may exercise
specified contractual rights regardless of an automatic stay.\261\ In
contrast, Title II imposes an automatic one-day stay on certain
activities by QFC counterparties,\262\ which may limit the ability of
these counterparties to terminate contracts or exercise any rights
against collateral. The stay will remain in effect if the QFC contracts
are transferred to a bridge broker-dealer. While these provisions may
impose costs, the Agencies' baseline subsumes these costs because they
are a consequence of the statute and are already in effect.
---------------------------------------------------------------------------
\261\ See 15 U.S.C. 78eee(b)(2)(C)(i)-(ii). See also Letter from
Michael E. Don, Deputy General Counsel of SIPC to Robert A. Portnoy,
Deputy Executive Director and General Counsel of the Public
Securities Association, (February 4, 1986) (repurchase agreements);
Letter from Michael E. Don to J. Eugene Marans, Cleary, Gottlieb,
Steen & Hamilton, (August 29, 1988) (securities lending
transactions); Letter from Michael E. Don to James D. McLaughlin,
Director of the American Bankers Association, (October 30, 1990)
(securities lending transactions secured by cash collateral or
supported by letters of credit); Letter from Michael E. Don to John
G. Macfarlane, III, Chairman, Repo Committee, Public Securities
Association, (February 19, 1991) (securities lending transactions
secured by cash collateral or supported by letters of credit);
Letter from Michael E. Don, President of SIPC to Seth Grosshandler,
Cleary, Gottlieb, Steen & Hamilton, (February 14, 1996) (repurchase
agreements falling outside the Code definition of ``repurchase
agreement''); and Letter from Michael E. Don to Omer Oztan, Vice
President and Assistant General Counsel of the Bond Market
Association, (June 25, 2002) (repurchase agreements).
\262\ See 12 CFR 380.67 and 17 CFR 302.107 (``The rights and
obligations of any party to a qualified financial contract to which
a covered broker or dealer is a party shall be governed exclusively
by 12 U.S.C. 5390, including the limitations and restrictions
contained in 12 U.S.C. 5390(c)(10)(B), and any regulations
promulgated thereunder.'').
---------------------------------------------------------------------------
In addition, as discussed above, the final rule could benefit
customers by allowing the allocations to customer accounts at the
bridge broker-dealer to be derived from estimates based on the books
and records of the covered broker-dealer. Such a process may accelerate
customers' access to their accounts, as they will not have to wait for
a final account reconciliation to access their accounts. As provided
for in the final rule, the calculation of allocations of customer
property to customer accounts will be refined as additional information
becomes available. The Agencies believe that initial allocations will
be made conservatively, which, with the backstop of the availability of
SIPC advances to customers in accordance with the requirements of SIPA,
should minimize the possibility of an over-allocation to any customer.
To the extent that initial estimates of allocations to some customers
are excessive, it is possible that customer funds may need to be
reallocated after customers initially gain access to their accounts,
resulting in additional costs for customers. Thus, this particular
aspect of the final rule is a trade-off between expedited access to
customer funds and the possibility of subsequent reallocation. The
costs associated with subsequent reallocation may vary significantly
depending on broker-dealer systems and the specific events. In the
preamble, the Agencies acknowledged that they lacked data that would
allow them to estimate the costs associated with subsequent
reallocation. Commenters on the proposal did not provide information
that would help the Agencies estimate these costs. For these reasons,
the Agencies believe the costs associated with subsequent reallocation
cannot be quantified at this time. However, as noted above, the
Agencies believe initial allocations will be made conservatively, which
would minimize the possibility of an over-allocation to any customer
and mitigate potential costs and uncertainty associated with allocation
refinements.
3. Expected Effects on Efficiency, Competition, and Capital Formation
The Commission and the Corporation have assessed the expected
effects arising from the final rule on efficiency, competition, and
capital formation. As discussed above, the Agencies believe the primary
economic benefit of the final rule will be that it provides details on
the implementation of section 205 of the Dodd-Frank Act, so that the
orderly liquidation of a covered broker-dealer can be carried out with
efficiency and predictability if the need arises. This structure could
reduce uncertainty about the treatment of customer and creditor claims
in an orderly liquidation, conserving resources and creating a more
efficient process relative to orderly liquidation under the baseline.
In the absence of the final rule, uncertainty about the treatment
of claims could encourage customers and creditors to reduce exposure to
a broker-dealer facing financial distress, exacerbating the liquidity
problems of the broker-dealer. These liquidity problems could drain
cash from the broker-dealer and weaken its ability to meet its
financial obligations to the point where the broker-dealer has to be
liquidated, even if the broker-dealer's business is still viable and
profitable. Such an outcome is inefficient if the value realized from
the liquidation of the broker-dealer is less than the value of the
broker-dealer as a going concern. Additionally, such an outcome would
be inefficient if the assets held by the covered broker-dealer were
sold at fire sale prices in the process of trying to meet extraordinary
liquidity demands. By clarifying the orderly liquidation process, the
final rule could further reduce the likelihood of customers and
creditors reducing their exposures to a broker-dealer facing financial
distress, thereby further reducing the likelihood that the broker-
dealer faces liquidity problems. This, in turn may reduce the
likelihood of the inefficient liquidation of the broker-dealer.
In the absence of the final rule, creditors of a financially
distressed broker-dealer that happen to hold the broker-dealer's assets
as collateral might rapidly sell those collateral assets if they are
uncertain about the treatment of their claims in an orderly liquidation
under the statute. To the extent that the rapid selling of collateral
assets by creditors generates large declines in the prices of those
assets and creates a wedge between the prices of those assets and their
intrinsic values--values based on the size and riskiness of asset cash
flows--price efficiency could be reduced. A reduction in the price
efficiency of collateral assets may dissuade other market participants
from trading those collateral assets for hedging or investment purposes
because they are concerned that the assets' prices may not accurately
reflect their intrinsic values. By clarifying the treatment of creditor
claims in an orderly liquidation, the final rule could promote the
price efficiency of collateral assets by reducing the likelihood of
rapid collateral asset sales.
Beyond these identified potential effects, the Agencies believe
that the additional effects of the final rule on efficiency,
competition, and capital formation will be linked to the existence
[[Page 53663]]
of an orderly liquidation process itself, which is part of the
baseline, and is an option available to regulatory authorities today.
The Agencies' analysis of the effects of an orderly liquidation process
on efficiency, competition, and capital formation focuses on those
effects that derive from the process and structure created by the final
rule, but not those that are due to the underlying statute, which is
part of the economic baseline. By establishing a structured framework,
the final rule sets clearer expectations for relevant parties and
therefore could help reduce potential uncertainty and contribute to
efficiency and liquidity as described above. Relative to the baseline
scenario, where orderly liquidation exists as an option for regulatory
authorities but without the framework provided in the final rule,
having a structured process in place as a response to a potential
crisis could also allow broker-dealers to more readily attract funding,
thus facilitating capital formation.
D. Alternatives Considered
As described above, Title II establishes a process by which a
covered broker-dealer would be placed into orderly liquidation.
Furthermore, orderly liquidation is available as an option to
regulators today, and the final rule does not affect the set of
resolution options available to the Agencies, nor does it affect the
range of possible outcomes. As an alternative to this final rule, the
Agencies could rely on a very limited rule that focuses on defining key
terms, in conjunction with statutory provisions, to implement Section
205. However, the Agencies believe this alternative approach would
result in orderly liquidations, if any, that are less efficient and
less predictable, and that would fail to achieve the benefits of the
final rule described above. In particular, the absence of the
provisions of the final rule outlining the process for notice and
application for a protective decree, the process for establishing a
bridge broker-dealer, and the process governing the transfer of
accounts, property, and other assets held by the covered broker-dealer
to the bridge broker-dealer, could lead to inconsistent application of
the statutory provisions. Such inconsistency could cause delays in the
liquidation process and increase the likelihood of litigation over
issues such as customer status, increasing costs for customers and
creditors without corresponding benefits.
E. Comments on the Proposed Rule
As discussed in Section II supra, six comment letters were
submitted to the FDIC and the SEC on the proposed rule. Three are from
individuals (the ``Individual Letters''), one is from students in a law
school financial markets and corporate law clinic (the ``Legal Clinic
Letter''), one is from a group that states it is a ``group of concerned
citizens, activists, and financial professionals that works to ensure
that financial regulators protect the interests of the public'' (the
``OSEC Letter''), and one is a joint letter from three trade groups
representing various segments of the financial services industry (the
``Joint Letter'').\263\ Three of the letters (Law Clinic Letter, OSEC
Letter, and Joint Letter) provided comments that relate to the economic
analysis of this rule. This section addresses those comments.
---------------------------------------------------------------------------
\263\ See comments to File No. S7-02-16 (available at: https://www.sec.gov/comments/s7-02-16/s70216.htm).
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1. The Law Clinic Letter
The Law Clinic Letter addresses two specific situations in which
the commenter believes the application of the proposed rule might in
some manner or on some facts have the possibility of delaying or
obstructing consumer access to property in a Title II liquidation of a
covered broker-dealer. First, in this commenter's view, the discretion
provided to SIPC under the proposed rule to use estimates for the
initial allocation of assets to customer accounts at the bridge broker-
dealer is too broad and may result in over-allocations to these
accounts to the detriment of other customers when the overpayments are
recalled. In particular, the commenter opines that a conservative
initial allocation intended to minimize the possibility of an over-
allocation to any customer and mitigate potential costs and uncertainty
associated with allocation refinements is ``too vague and is not
codified in the rule itself.'' Further, the commenter asserts as
``irresponsible'' the Agencies' decision to base customer allocations
on the books and records of the covered broker-dealer without fully
understanding the potential costs to customers. The commenter also
pointed out that the Agencies lack the data demonstrating that delays
experienced by customers in accessing their accounts actually
constitute an actionable problem. The commenter requests that the
Agencies modify the final rule to make it clear that estimates may be
used only when the liquidated entity acts in bad faith to impede the
reconciliation process.
The Agencies believe the commenter has misunderstood the discussion
of anticipated costs as a justification for the provision of the
proposed rule. The justification for the provision, as stated in the
preamble, is to ensure that customers receive the assets held for their
customer accounts, together with SIPC payments, if any, as quickly as
is practicable. Returning customer assets to customers as quickly as
possible is important for a number of reasons. For example, customers
may depend financially on these assets or may need access in order to
be able to de-risk positions or re-hedge positions. It is for these and
other similar reasons that the trustees in SIPA liquidations have
utilized estimates to allow partial access to customer accounts before
a final reconciliation is possible. Although the circumstances of a
particular orderly liquidation may make this process difficult, the
Agencies would endeavor to provide customers prompt access to their
accounts to the extent possible based upon estimates while that
reconciliation is being completed. As a result, the Agencies have made
no changes in the final rule as a result of this comment.
In response to the commenter's concern that the notion of a
conservative initial allocation is vague and not codified in the
proposed rule, the Agencies believe that the orderly liquidations of
different covered broker-dealers would likely occur under different
circumstances. A prescriptive definition of conservative initial
allocation that is codified may not be appropriate for the orderly
liquidations of covered broker-dealers under all circumstances.
Therefore, the Agencies have chosen not to define or to codify a
conservative initial allocation in the final rule.
The Agencies reject the commenter's assertion that the Agencies
decided to allow estimates of customer allocations to be based on the
books and records of the covered broker-dealer without fully
understanding the potential costs to customers. In the preamble, the
Agencies not only addressed the potential costs associated with this
allocation approach, but also the mitigation of such costs.
Specifically, the Agencies acknowledged that to the extent that initial
estimates of allocations to some customers are excessive, it is
possible that customer funds may need to be reallocated after customers
initially gain access to their accounts, which could result in costs
for customers.\264\ Further, the Agencies recognized that these costs
may vary significantly depending on broker-dealer systems and the
specific events and acknowledged that the lack of data
[[Page 53664]]
prevented a quantification of these costs. In the preamble, the
Agencies also expressed the preliminary belief that initial allocations
would be conservative and would minimize the possibility of an over-
allocation to any customer and mitigate potential costs and uncertainty
associated with allocation refinements. None of the commenters provided
information to support a different conclusion. Therefore, the Agencies
believe that due consideration has been given to the potential costs
that customers might incur under the allocation approach that is based
on the books and records of the covered broker-dealer.
---------------------------------------------------------------------------
\264\ Ibid.
---------------------------------------------------------------------------
The Agencies disagree with the Law Clinic's suggestion that the
Agencies lack the data demonstrating that delays experienced by
customers in accessing their accounts constitute an actionable problem.
In the preamble,\265\ the Agencies relied on experience with SIPA
liquidations to ascertain that delays experienced by customers in
accessing their accounts are a problem during the liquidation of a
broker-dealer. The experience with SIPA liquidations constitutes
relevant data that informs the Agencies' deliberations in this
rulemaking. While costs incurred by customers who experience delays
could also help demonstrate that such delays constitute an actionable
problem, the Agencies do not have the data to quantify such costs,
which are likely associated with the lost investment and consumption
opportunities that would result if customers could not access their
accounts quickly. Because customers typically do not report such
forgone opportunities, the Agencies do not have the data to quantify
the costs incurred by customers who experience delays in accessing
their accounts.
---------------------------------------------------------------------------
\265\ See 81 FR at 10804.
---------------------------------------------------------------------------
2. The OSEC Letter
The OSEC Letter generally supports the proposed rule and outlines
several benefits to the proposed rule, recognizing that the proposed
rule relied upon the established framework for liquidations under SIPA
in describing the orderly liquidation claims process. The commenter
highlights one perceived difference between the SIPA process and the
process described in the proposed rule, however and suggests that the
rule would be improved by increasing the amount of time that customers
have to file claims. The OSEC Letter states that the proposed rule
tracks section 8(a)(3) of SIPA by mandating that customer claims for
net equity be filed within 60 days after the date the notice to
creditors to file claims is first published, while general creditors of
the covered broker-dealer have up to six months to file their claims
and have a good faith exception for late filings. The OSEC Letter also
suggests that the proposed rule be used as an opportunity to reduce
moral hazard by imposing restrictions on executive compensation at
broker-dealers. The OSEC letter states that the proposed rule ``fails
to adequately penalize senior management, employees, and advisors who
are complicit in producing the covered broker dealer's financial
instability.'' The OSEC Letter supports the establishment of a bridge
broker-dealer and suggests that the FDIC consider and encourage the
establishment of multiple bridge entities to limit over-concentration
and interconnectedness risk.
While the Agencies appreciate the comments raised in the OSEC
Letter, the Agencies have not made changes in the final rule as a
result of these comments. First, the OSEC Letter has misconstrued the
proposed rule with respect to the time allowed for claims. The proposed
rule provides that all creditors--customers as well as general
unsecured creditors--have the opportunity to file claims within time
frames consistent with the requirements of SIPA and of the Dodd-Frank
Act. Under the proposed rule, customers would have the same six-month
period to file claims as all other creditors and have an exception for
late filings comparable to the SIPA good faith exception. However,
under both SIPA and the proposed rule, if a customer files his claim
within 60 days after the date the notice to creditors to file claims is
first published, the customer is assured that its net equity claim will
be paid, in kind, from customer property or, to the extent such
property is insufficient, from SIPC funds. If the customer files a
claim after the 60 days, the claim need not be paid with customer
property and, to the extent such claim is paid by funds advanced by
SIPC, it would be satisfied in cash or securities or both as SIPC
determines is most economical to the estate. Therefore, the Agencies
have made no changes in the final rule as a result of the comment.
The OSEC Letter also suggests that the proposed rule be used as an
opportunity to reduce moral hazard by imposing restrictions on
executive compensation at broker-dealers. The OSEC Letter states that
the proposed rule ``fails to adequately penalize senior management,
employees, and advisors who are complicit in producing the covered
broker dealer's financial instability.'' Restrictions on execution
compensation are outside the scope of the rulemaking requirement of
section 205(h) of the Dodd-Frank Act.\266\ Therefore, the Agencies have
chosen not to act on the commenter's suggestion. Regarding the
commenter's suggestion that the FDIC consider and encourage the
establishment of multiple bridge entities to limit over-concentration
and interconnectedness risk, the Agencies note that both the Dodd-Frank
Act and the proposed rule permit the FDIC to establish multiple bridge
broker-dealers in a Title II orderly liquidation and therefore the
Agencies have made no changes in the final rule as a result of the
comment.
---------------------------------------------------------------------------
\266\ Section 956 of the Dodd-Frank Act requires the appropriate
Federal regulators to prescribe regulations or guidelines with
respect to incentive-based payment arrangements and other matters
relating to executive compensation. 12 U.S.C. 5641.
---------------------------------------------------------------------------
3. The Joint Letter
The Joint Letter is generally supportive of the proposed rule but
states that certain portions of the proposed rule would benefit from
additional clarification, either through additional rulemaking or
interpretive statements.
The Joint Letter states that the proposed rule is likely to have an
extremely narrow scope of application and calls into question the
necessity of the proposed rule. In the preamble to the proposed rule,
the Agencies specifically acknowledged the limited circumstances in
which the rule would be applied. However, the Dodd-Frank Act requires
the Agencies jointly to issue rules to implement section 205 of the
Act. The Agencies believe that the clarifications provided by the final
rule will prove valuable should a broker-dealer ever be subject to a
Title II orderly liquidation and therefore the Agencies are
promulgating this final rule.
The Joint Letter also notes the concern that the proposed rule
could create, rather than reduce, uncertainty because the proposed rule
does not repeat the full statutory text of section 205(a) that SIPC
will act ``as trustee for the liquidation under the Securities Investor
Protection Act . . .'' [emphasis added.].
The proposed rule clarifies that, although the trustee will make
certain determinations, such as the allocation of customer property, in
accordance with the relevant definitions under SIPA, the orderly
liquidation of the covered broker-dealer is in fact pursuant to a
proceeding under the Dodd-Frank Act, rather than a process under SIPA.
The Agencies acknowledge that the reference to a liquidation ``under
SIPA'' in section 205 of the statute may create
[[Page 53665]]
ambiguity. The purpose of the rulemaking required by section 205(h) of
the Dodd-Frank Act is to clarify these provisions and provide a
framework for implementing a Title II orderly liquidation of a broker-
dealer. Thus, in the preamble to the proposed rule, the Agencies
explained that the omission of the reference to the appointment of SIPC
as a trustee for a liquidation ``under [SIPA]'' is intended to make
clear that the rule applies to an orderly liquidation of a covered
broker-dealer under the Dodd-Frank Act, not a SIPA proceeding.\267\ The
proposed rule seeks to eliminate the confusion caused by referring to a
``liquidation under [SIPA]'' in the Dodd-Frank Act when there is, in
fact, no proceeding under SIPA and the broker-dealer is being
liquidated under Title II, while implementing the statutory objective
that the protections afforded to customers under SIPA are recognized in
the Title II process. Therefore, the Agencies have made no changes in
the final rule as a result of this comment.
---------------------------------------------------------------------------
\267\ See Section III.B. See also 12 U.S.C. 5383(b)(2).
---------------------------------------------------------------------------
VI. Regulatory Analysis and Procedures
A. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') generally requires that,
in connection with a final rulemaking, an agency prepare and make
available for public comment a final regulatory flexibility analysis
describing the impact of the proposed rule on small entities.\268\
However, a regulatory flexibility analysis is not required if the
agency certifies that the proposal will not have a significant economic
impact on a substantial number of small entities. The Small Business
Administration (SBA) has defined ``small entities'' to include broker-
dealers if their annual receipts do not exceed $41.5 million.\269\ For
the reasons described below and under section 605(b) of the RFA, the
Agencies certify that the final rule will not have a significant
economic impact on a substantial number of small entities. The final
rule clarifies rules and procedures for the orderly liquidation of a
covered broker-dealer under Title II. A covered broker-dealer is a
broker-dealer that is subject to a systemic risk determination by the
Secretary pursuant to section 203 of the Dodd-Frank Act, 12 U.S.C.
5383, and thereafter is to be liquidated under Title II. The Agencies
do not believe that a broker-dealer that would be considered a small
entity for purposes of the RFA would ever be the subject of a systemic
risk determination by the Secretary. Therefore, the Agencies are not
aware of any small entities that would be affected by the final rule.
As such, the final rule would not affect, and would impose no burdens
on, small entities.
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\268\ 5 U.S.C. 601 et seq.
\269\ The SBA defines a Securities Brokerage (NAICS 523120) as a
small entity if it garners annual receipts of $41.5 million or less.
See 13 CFR 121.201 as amended by Small Business Size Standards:
Adjustment of Monetary-Based Size Standards for Inflation, 84 FR
34261 (July 18, 2019) (effective August 19, 2019).
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B. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \270\ requires federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The FDIC has sought to present the
rule in a simple and straightforward manner. The FDIC invited comments
on how to make the proposed rule easier to understand. No comments
addressing this issue were received.
---------------------------------------------------------------------------
\270\ Public Law 106-102, 113 Stat. 1338, 1471.
---------------------------------------------------------------------------
VII. Other Matters
If any of the provisions of the final rule, or the application
thereof to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given effect
without the invalid provision or application.
Pursuant to the Congressional Review Act,\271\ the Office of
Information and Regulatory Affairs (OIRA) has designated this rule as a
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------
\271\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------
VIII. Statutory Authority
The final rule is being promulgated pursuant to section 205(h) of
the Dodd-Frank Act. Section 205(h) of the Dodd-Frank Act requires the
Corporation and the Commission, in consultation with SIPC, jointly to
issue rules to implement section 205 of the Dodd-Frank Act concerning
the orderly liquidation of covered broker-dealers.
List of Subjects
12 CFR Part 380
Holding companies, Insurance.
17 CFR Part 302
Brokers, Claims, Customers, Dealers, Financial companies, Orderly
liquidation.
Federal Deposit Insurance Corporation
12 CFR Part 380
Authority and Issuance
For the reasons stated in the preamble, the Federal Deposit
Insurance Corporation amends 12 CFR part 380 as follows:
PART 380--ORDERLY LIQUIDATION AUTHORITY
0
1. The authority citation for part 380 is revised to read as follows:
Authority: 12 U.S.C. 5385(h); 12 U.S.C. 5389; 12 U.S.C.
5390(s)(3); 12 U.S.C. 5390(b)(1)(C); 12 U.S.C. 5390(a)(7)(D); 12
U.S.C. 5381(b); 12 U.S.C. 5390(r); 12 U.S.C. 5390(a)(16)(D).
0
2. Add subpart D to part 380, consisting of Sec. Sec. 380.60 through
380.67, to read as follows:
Subpart D--Orderly Liquidation of Covered Brokers or Dealers
Sec.
380.60 Definitions.
380.61 Appointment of receiver and trustee for covered broker or
dealer.
380.62 Notice and application for protective decree for covered
broker or dealer.
380.63 Bridge broker or dealer.
380.64 Claims of customers and other creditors of a covered broker
or dealer.
380.65 Priorities for unsecured claims against a covered broker or
dealer.
380.66 Administrative expenses of SIPC.
380.67 Qualified Financial Contracts.
Sec. 380.60 Definitions.
For purposes of this subpart D, the following terms are defined as
follows:
Appointment date. The term appointment date means the date of the
appointment of the Corporation as receiver for a covered financial
company that is a covered broker or dealer. This date shall constitute
the filing date as that term is used in SIPA.
Bridge broker or dealer. The term bridge broker or dealer means a
new financial company organized by the Corporation in accordance with
12 U.S.C. 5390(h) for the purpose of resolving a covered broker or
dealer.
Commission. The term Commission means the Securities and Exchange
Commission.
Covered broker or dealer. The term covered broker or dealer means a
covered financial company that is a qualified broker or dealer.
Customer. The term customer of a covered broker or dealer shall
have the same meaning as in 15 U.S.C. 78lll(2) provided that the
references therein to debtor shall mean the covered broker or dealer.
Customer name securities. The term customer name securities shall
have the
[[Page 53666]]
same meaning as in 15 U.S.C. 78lll(3) provided that the references
therein to debtor shall mean the covered broker or dealer and the
references therein to filing date shall mean the appointment date.
Customer property. The term customer property shall have the same
meaning as in 15 U.S.C. 78lll(4) provided that the references therein
to debtor shall mean the covered broker or dealer.
Net equity. The term net equity shall have the same meaning as in
15 U.S.C. 78lll(11) provided that the references therein to debtor
shall mean the covered broker or dealer and the references therein to
filing date shall mean the appointment date.
Qualified broker or dealer. The term qualified broker or dealer
means a broker or dealer that:
(1) Is registered with the Commission under section 15(b) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o(b)); and
(2) Is a member of SIPC.
SIPA. The term SIPA means the Securities Investor Protection Act of
1970, 15 U.S.C. 78aaa-lll.
SIPC. The term SIPC means the Securities Investor Protection
Corporation.
Sec. 380.61 Appointment of receiver and trustee for covered broker
or dealer.
Upon the appointment of the Corporation as receiver for a covered
broker or dealer, the Corporation shall appoint SIPC to act as trustee
for the covered broker or dealer.
Sec. 380.62 Notice and application for protective decree for covered
broker or dealer.
(a) SIPC and the Corporation, upon consultation with the
Commission, shall jointly determine the terms of a notice and
application for a protective decree that will be filed promptly with
the Federal district court for the district within which the principal
place of business of the covered broker or dealer is located; provided
that if a case or proceeding under SIPA with respect to such covered
broker or dealer is then pending, then such notice and application for
a protective decree will be filed promptly with the Federal district
court in which such case or proceeding under SIPA is pending. If such
notice and application for a protective decree is filed on a date other
than the appointment date, such filing shall be deemed to have occurred
on the appointment date for the purposes of this subpart D.
(b) A notice and application for a protective decree may, among
other things, provide for notice:
(1) Of the appointment of the Corporation as receiver and the
appointment of SIPC as trustee for the covered broker or dealer; and
(2) That the provisions of Title II of the Dodd-Frank Act and any
regulations promulgated thereunder may apply, including without
limitation the following:
(i) Any existing case or proceeding with respect to a covered
broker or dealer under the Bankruptcy Code or SIPA shall be dismissed
effective as of the appointment date and no such case or proceeding may
be commenced with respect to a covered broker or dealer at any time
while the Corporation is receiver for such covered broker or dealer;
(ii) The revesting of assets in a covered broker or dealer to the
extent that they have vested in any entity other than the covered
broker or dealer as a result of any case or proceeding commenced with
respect to the covered broker or dealer under the Bankruptcy Code,
SIPA, or any similar provision of State liquidation or insolvency law
applicable to the covered broker or dealer; provided that any such
revesting shall not apply to assets held by the covered broker or
dealer, including customer property, transferred prior to the
appointment date pursuant to an order entered by the bankruptcy court
presiding over the case or proceeding with respect to the covered
broker or dealer;
(iii) The request of the Corporation as receiver for a stay in any
judicial action or proceeding (other than actions dismissed in
accordance with paragraph (b)(2)(i) of this section) in which the
covered broker or dealer is or becomes a party for a period of up to 90
days from the appointment date;
(iv) Except as provided in paragraph (b)(2)(v) of this section with
respect to qualified financial contracts, no person may exercise any
right or power to terminate, accelerate or declare a default under any
contract to which the covered broker or dealer is a party (and no
provision in any such contract providing for such default, termination
or acceleration shall be enforceable), or to obtain possession of or
exercise control over any property of the covered broker or dealer or
affect any contractual rights of the covered broker or dealer without
the consent of the Corporation as receiver of the covered broker or
dealer upon consultation with SIPC during the 90-day period beginning
from the appointment date; and
(v) The exercise of rights and the performance of obligations by
parties to qualified financial contracts with the covered broker or
dealer may be affected, stayed, or delayed pursuant to the provisions
of Title II of the Dodd-Frank Act (including 12 U.S.C. 5390(c)) and the
regulations promulgated thereunder.
Sec. 380.63 Bridge broker or dealer.
(a) The Corporation, as receiver for one or more covered brokers or
dealers or in anticipation of being appointed receiver for one or more
covered broker or dealers, may organize one or more bridge brokers or
dealers with respect to a covered broker or dealer.
(b) If the Corporation establishes one or more bridge brokers or
dealers with respect to a covered broker or dealer, then, subject to
paragraph (d) of this section, the Corporation as receiver for such
covered broker or dealer shall transfer all customer accounts and all
associated customer name securities and customer property to such
bridge brokers or dealers unless the Corporation determines, after
consultation with the Commission and SIPC, that:
(1) The customer accounts, customer name securities, and customer
property are likely to be promptly transferred to one or more qualified
brokers or dealers such that the use of a bridge broker or dealer would
not facilitate such transfer to one or more qualified brokers or
dealers; or
(2) The transfer of such customer accounts to a bridge broker or
dealer would materially interfere with the ability of the Corporation
to avoid or mitigate serious adverse effects on financial stability or
economic conditions in the United States.
(c) The Corporation, as receiver for such covered broker or dealer,
also may transfer any other assets and liabilities of the covered
broker or dealer (including non-customer accounts and any associated
property and any assets and liabilities associated with any trust or
custody business) to such bridge brokers or dealers as the Corporation
may, in its discretion, determine to be appropriate in accordance with,
and subject to the requirements of, 12 U.S.C. 5390(h), including 12
U.S.C. 5390(h)(1) and 5390(h)(5), and any regulations promulgated
thereunder.
(d) In connection with customer accounts transferred to the bridge
broker or dealer pursuant to paragraph (b) of this section, claims for
net equity shall not be transferred but shall remain with the covered
broker or dealer. Customer property transferred from the covered broker
or dealer, along with advances from SIPC, shall be allocated to
customer accounts at the bridge broker or dealer in accordance with
Sec. 380.64(a)(3). Such allocations initially
[[Page 53667]]
may be based upon estimates, and such estimates may be based upon the
books and records of the covered broker or dealer or any other
information deemed relevant in the discretion of the Corporation as
receiver, in consultation with SIPC, as trustee. Such estimates may be
adjusted from time to time as additional information becomes available.
With respect to each account transferred to the bridge broker or dealer
pursuant to paragraph (b) or (c) of this section, the bridge broker or
dealer shall undertake the obligations of a broker or dealer only with
respect to property transferred to and held by the bridge broker or
dealer, and allocated to the account as provided in Sec. 380.64(a)(3),
including any customer property and any advances from SIPC. The bridge
broker or dealer shall have no obligations with respect to any customer
property or other property that is not transferred from the covered
broker or dealer to the bridge broker or dealer. The transfer of
customer property to such an account shall have no effect on
calculation of the amount of the affected account holder's net equity,
but the value, as of the appointment date, of the customer property and
advances from SIPC so transferred shall be deemed to satisfy any such
claim, in whole or in part.
(e) The transfer of assets or liabilities held by a covered broker
or dealer, including customer accounts and all associated customer name
securities and customer property, assets and liabilities held by a
covered broker or dealer for any non-customer creditor, and assets and
liabilities associated with any trust or custody business, to a bridge
broker or dealer, shall be effective without any consent,
authorization, or approval of any person or entity, including but not
limited to, any customer, contract party, governmental authority, or
court.
(f) Any succession to or assumption by a bridge broker or dealer of
rights, powers, authorities, or privileges of a covered broker or
dealer shall be effective without any consent, authorization, or
approval of any person or entity, including but not limited to, any
customer, contract party, governmental authority, or court, and any
such bridge broker or dealer shall upon its organization by the
Corporation immediately and by operation of law--
(1) Be established and deemed registered with the Commission under
the Securities Exchange Act of 1934;
(2) Be deemed to be a member of SIPC; and
(3) Succeed to any and all registrations and memberships of the
covered broker or dealer with or in any self-regulatory organizations.
(g) Except as provided in paragraph (f) of this section, the bridge
broker or dealer shall be subject to applicable Federal securities laws
and all requirements with respect to being a member of a self-
regulatory organization and shall operate in accordance with all such
laws and requirements and in accordance with its articles of
association; provided, however, that the Commission may, in its
discretion, exempt the bridge broker or dealer from any such
requirements if the Commission deems such exemption to be necessary or
appropriate in the public interest or for the protection of investors.
(h) At the end of the term of existence of a bridge broker or
dealer, any proceeds that remain after payment of all administrative
expenses of such bridge broker or dealer and all other claims against
such bridge broker or dealer shall be distributed to the receiver for
the related covered broker or dealer.
Sec. 380.64 Claims of customers and other creditors of a covered
broker or dealer.
(a) Trustee's role. (1) SIPC, as trustee for a covered broker or
dealer, shall determine customer status, claims for net equity, claims
for customer name securities, and whether property of the covered
broker or dealer qualifies as customer property. SIPC, as trustee for a
covered broker or dealer, shall make claims determinations in
accordance with SIPA and with paragraph (a)(3) of this section, but
such determinations, and any claims related thereto, shall be governed
by the procedures set forth in paragraph (b) of this section.
(2) SIPC shall make advances in accordance with, and subject to the
limitations imposed by, 15 U.S.C. 78fff-3. Where appropriate, SIPC
shall make such advances by delivering cash or securities to the
customer accounts established at the bridge broker or dealer.
(3) Customer property held by a covered broker or dealer shall be
allocated as follows:
(i) First, to SIPC in repayment of advances made by SIPC pursuant
to 12 U.S.C. 5385(f) and 15 U.S.C. 78fff-3(c)(1), to the extent such
advances effected the release of securities which then were apportioned
to customer property pursuant to 15 U.S.C. 78fff(d);
(ii) Second, to customers of such covered broker or dealer, or in
the case that customer accounts are transferred to a bridge broker or
dealer, then to such customer accounts at a bridge broker or dealer,
who shall share ratably in such customer property on the basis and to
the extent of their respective net equities;
(iii) Third, to SIPC as subrogee for the claims of customers; and
(iv) Fourth, to SIPC in repayment of advances made by SIPC pursuant
to 15 U.S.C. 78fff-3(c)(2).
(4) The determinations and advances made by SIPC as trustee for a
covered broker or dealer under this subpart D shall be made in a manner
consistent with SIPC's customary practices under SIPA. The allocation
of customer property, advances from SIPC, and delivery of customer name
securities to each customer or to its customer account at a bridge
broker or dealer, in partial or complete satisfaction of such
customer's net equity claims as of the close of business on the
appointment date, shall be in a manner, including form and timing, and
in an amount at least as beneficial to such customer as would have been
the case had the covered broker or dealer been liquidated under SIPA.
Any claims related to determinations made by SIPC as trustee for a
covered broker or dealer shall be governed by the procedures set forth
in paragraph (b) of this section.
(b) Receiver's role. Any claim shall be determined in accordance
with the procedures set forth in 12 U.S.C. 5390(a)(2) through (5) and
the regulations promulgated by the Corporation thereunder, provided
however, that--
(1) Notice requirements. The notice of the appointment of the
Corporation as receiver for a covered broker or dealer shall also
include notice of the appointment of SIPC as trustee. The Corporation
as receiver shall coordinate with SIPC as trustee to post the notice on
SIPC's public website in addition to the publication procedures set
forth in Sec. 380.33.
(2) Procedures for filing a claim. The Corporation as receiver
shall consult with SIPC, as trustee, regarding a claim form and filing
instructions with respect to claims against the Corporation as receiver
for a covered broker or dealer, and such information shall be provided
on SIPC's public website in addition to the Corporation's public
website. Any such claim form shall contain a provision permitting a
claimant to claim status as a customer of the broker or dealer, if
applicable.
(3) Claims bar date. The Corporation as receiver shall establish a
claims bar date in accordance with 12 U.S.C. 5390(a)(2)(B)(i) and any
regulations promulgated thereunder by which date creditors of a covered
broker or dealer, including all customers of the covered broker or
dealer, shall present their claims, together with proof. The claims
[[Page 53668]]
bar date for a covered broker or dealer shall be the date following the
expiration of the six-month period beginning on the date a notice to
creditors to file their claims is first published in accordance with 12
U.S.C. 5390(a)(2)(B)(i) and any regulations promulgated thereunder. Any
claim filed after the claims bar date shall be disallowed, and such
disallowance shall be final, as provided by 12 U.S.C. 5390(a)(3)(C)(i)
and any regulations promulgated thereunder, except that a claim filed
after the claims bar date shall be considered by the receiver as
provided by 12 U.S.C. 5390(a)(3)(C)(ii) and any regulations promulgated
thereunder. In accordance with section 8(a)(3) of SIPA, 15 U.S.C.
78fff-2(a)(3), any claim for net equity filed more than sixty days
after the date the notice to creditors to file claims is first
published need not be paid or satisfied in whole or in part out of
customer property and, to the extent such claim is paid by funds
advanced by SIPC, it shall be satisfied in cash or securities, or both,
as SIPC, as trustee, determines is most economical to the receivership
estate.
(c) Decision period. The Corporation as receiver of a covered
broker or dealer shall notify a claimant whether it allows or disallows
the claim, or any portion of a claim or any claim of a security,
preference, set-off, or priority, within the 180-day period set forth
in 12 U.S.C. 5390(a)(3)(A) and any regulations promulgated thereunder
(as such 180-day period may be extended by written agreement as
provided therein) or within the 90-day period set forth in 12 U.S.C.
5390(a)(5)(B) and any regulations promulgated thereunder, whichever is
applicable. In accordance with paragraph (a) of this section, the
Corporation, as receiver, shall issue the notice required by this
paragraph (c), which shall utilize the determination made by SIPC, as
trustee, in a manner consistent with SIPC's customary practices in a
liquidation under SIPA, with respect to any claim for net equity or
customer name securities. The process established herein for the
determination, within the 180-day period set forth in 12 U.S.C.
5390(a)(3)(A) and any regulations promulgated thereunder (as such 180-
day period may be extended by written agreement as provided therein),
of claims by customers of a covered broker or dealer for customer
property or customer name securities shall constitute the exclusive
process for the determination of such claims, and any procedure for
expedited relief established pursuant to 12 U.S.C. 5390(a)(5) and any
regulations promulgated thereunder shall be inapplicable to such
claims.
(d) Judicial review. The claimant may seek a judicial determination
of any claim disallowed, in whole or in part, by the Corporation as
receiver, including any claim disallowed based upon any
determination(s) of SIPC as trustee made pursuant to Sec. 380.64(a),
by the appropriate district or territorial court of the United States
in accordance with 12 U.S.C. 5390(a)(4) or (5), whichever is
applicable, and any regulations promulgated thereunder.
Sec. 380.65 Priorities for unsecured claims against a covered broker
or dealer.
Allowed claims not satisfied pursuant to Sec. 380.63(d), including
allowed claims for net equity to the extent not satisfied after final
allocation of customer property in accordance with Sec. 380.64(a)(3),
shall be paid in accordance with the order of priority set forth in
Sec. 380.21 subject to the following adjustments:
(a) Administrative expenses of SIPC incurred in performing its
responsibilities as trustee for a covered broker or dealer shall be
included as administrative expenses of the receiver as defined in Sec.
380.22 and shall be paid pro rata with such expenses in accordance with
Sec. 380.21(c).
(b) Amounts paid by the Corporation to customers or SIPC shall be
included as amounts owed to the United States as defined in Sec.
380.23 and shall be paid pro rata with such amounts in accordance with
Sec. 380.21(c).
(c) Amounts advanced by SIPC for the purpose of satisfying customer
claims for net equity shall be paid following the payment of all
amounts owed to the United States pursuant to Sec. 380.21(a)(3) but
prior to the payment of any other class or priority of claims described
in Sec. 380.21(a)(4) through (11).
Sec. 380.66 Administrative expenses of SIPC.
(a) In carrying out its responsibilities, SIPC, as trustee for a
covered broker or dealer, may utilize the services of third parties,
including private attorneys, accountants, consultants, advisors,
outside experts, and other third party professionals. SIPC shall have
an allowed claim for administrative expenses for any amounts paid by
SIPC for such services to the extent that such services are available
in the private sector, and utilization of such services is practicable,
efficient, and cost effective. The term administrative expenses of SIPC
includes the costs and expenses of such attorneys, accountants,
consultants, advisors, outside experts, and other third party
professionals, and other expenses that would be allowable to a third
party trustee under 15 U.S.C. 78eee(b)(5)(A), including the costs and
expenses of SIPC employees that would be allowable pursuant to 15
U.S.C. 78fff(e).
(b) The term administrative expenses of SIPC shall not include
advances from SIPC to satisfy customer claims for net equity.
Sec. 380.67 Qualified Financial Contracts.
The rights and obligations of any party to a qualified financial
contract to which a covered broker or dealer is a party shall be
governed exclusively by 12 U.S.C. 5390, including the limitations and
restrictions contained in 12 U.S.C. 5390(c)(10)(B), and any regulations
promulgated thereunder.
Securities and Exchange Commission
17 CFR Part 302
Authority and Issuance
0
For the reasons stated in the preamble, the Securities and Exchange
Commission amends 17 CFR Chapter II by adding part 302 to read as
follows:
PART 302--ORDERLY LIQUIDATION OF COVERED BROKERS OR DEALERS
Sec.
302.100 Definitions.
302.101 Appointment of receiver and trustee for covered broker or
dealer.
302.102 Notice and application for protective decree for covered
broker or dealer.
302.103 Bridge broker or dealer.
302.104 Claims of customers and other creditors of a covered broker
or dealer.
302.105 Priorities for unsecured claims against a covered broker or
dealer.
302.106 Administrative expenses of SIPC.
302.107 Qualified Financial Contracts.
Authority: 12 U.S.C. 5385(h).
Sec. 302.100 Definitions.
For purposes of Sec. Sec. 302.100 through 302.107, the following
terms shall have the following meanings:
(a) Appointment date. The term appointment date means the date of
the appointment of the Corporation as receiver for a covered financial
company that is a covered broker or dealer. This date shall constitute
the filing date as that term is used in SIPA.
(b) Bridge broker or dealer. The term bridge broker or dealer means
a new financial company organized by the Corporation in accordance with
12 U.S.C. 5390(h) for the purpose of resolving a covered broker or
dealer.
(c) Commission. The term Commission means the Securities and
Exchange Commission.
(d) Covered broker or dealer. The term covered broker or dealer
means a
[[Page 53669]]
covered financial company that is a qualified broker or dealer.
(e) Customer. The term customer of a covered broker or dealer shall
have the same meaning as in 15 U.S.C. 78lll(2) provided that the
references therein to debtor shall mean the covered broker or dealer.
(f) Customer name securities. The term customer name securities
shall have the same meaning as in 15 U.S.C. 78lll(3) provided that the
references therein to debtor shall mean the covered broker or dealer
and the references therein to filing date shall mean the appointment
date.
(g) Customer property. The term customer property shall have the
same meaning as in 15 U.S.C. 78lll(4) provided that the references
therein to debtor shall mean the covered broker or dealer.
(h) Net equity. The term net equity shall have the same meaning as
in 15 U.S.C. 78lll(11) provided that the references therein to debtor
shall mean the covered broker or dealer and the references therein to
filing date shall mean the appointment date.
(i) Qualified broker or dealer. The term qualified broker or dealer
means a broker or dealer that (A) is registered with the Commission
under Section 15(b) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(b)); and (B) is a member of SIPC.
(j) SIPA. The term SIPA means the Securities Investor Protection
Act of 1970, 15 U.S.C. 78aaa-lll.
(k) SIPC. The term SIPC means the Securities Investor Protection
Corporation.
(l) Corporation. The term Corporation means the Federal Deposit
Insurance Corporation.
(m) Dodd-Frank Act. The term Dodd-Frank Act means the Dodd-Frank
Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124
Stat. 1376, enacted July 21, 2010.
Sec. 302.101 Appointment of receiver and trustee for covered broker
or dealer.
Upon the appointment of the Corporation as receiver for a covered
broker or dealer, the Corporation shall appoint SIPC to act as trustee
for the covered broker or dealer.
Sec. 302.102 Notice and application for protective decree for covered
broker or dealer.
(a) SIPC and the Corporation, upon consultation with the
Commission, shall jointly determine the terms of a notice and
application for a protective decree that will be filed promptly with
the Federal district court for the district within which the principal
place of business of the covered broker or dealer is located; provided
that if a case or proceeding under SIPA with respect to such covered
broker or dealer is then pending, then such notice and application for
a protective decree will be filed promptly with the Federal district
court in which such case or proceeding under SIPA is pending. If such
notice and application for a protective decree is filed on a date other
than the appointment date, such filing shall be deemed to have occurred
on the appointment date for the purposes of Sec. Sec. 302.100 through
302.107.
(b) A notice and application for a protective decree may, among
other things, provide for notice--
(1) Of the appointment of the Corporation as receiver and the
appointment of SIPC as trustee for the covered broker or dealer; and
(2) That the provisions of Title II of the Dodd-Frank Act and any
regulations promulgated thereunder may apply, including without
limitation the following:
(i) Any existing case or proceeding with respect to a covered
broker or dealer under the Bankruptcy Code or SIPA shall be dismissed
effective as of the appointment date and no such case or proceeding may
be commenced with respect to a covered broker or dealer at any time
while the Corporation is receiver for such covered broker or dealer;
(ii) The revesting of assets in a covered broker or dealer to the
extent that they have vested in any entity other than the covered
broker or dealer as a result of any case or proceeding commenced with
respect to the covered broker or dealer under the Bankruptcy Code,
SIPA, or any similar provision of State liquidation or insolvency law
applicable to the covered broker or dealer; provided that any such
revesting shall not apply to assets held by the covered broker or
dealer, including customer property, transferred prior to the
appointment date pursuant to an order entered by the bankruptcy court
presiding over the case or proceeding with respect to the covered
broker or dealer;
(iii) The request of the Corporation as receiver for a stay in any
judicial action or proceeding (other than actions dismissed in
accordance with paragraph (b)(i) of this section) in which the covered
broker or dealer is or becomes a party for a period of up to 90 days
from the appointment date;
(iv) Except as provided in paragraph (b)(v) of this section with
respect to qualified financial contracts, no person may exercise any
right or power to terminate, accelerate or declare a default under any
contract to which the covered broker or dealer is a party (and no
provision in any such contract providing for such default, termination
or acceleration shall be enforceable), or to obtain possession of or
exercise control over any property of the covered broker or dealer or
affect any contractual rights of the covered broker or dealer without
the consent of the Corporation as receiver of the covered broker or
dealer upon consultation with SIPC during the 90-day period beginning
from the appointment date; and
(v) The exercise of rights and the performance of obligations by
parties to qualified financial contracts with the covered broker or
dealer may be affected, stayed, or delayed pursuant to the provisions
of Title II of the Dodd-Frank Act (including 12 U.S.C. 5390(c)) and the
regulations promulgated thereunder.
Sec. 302.103 Bridge broker or dealer.
(a) The Corporation, as receiver for one or more covered brokers or
dealers or in anticipation of being appointed receiver for one or more
covered broker or dealers, may organize one or more bridge brokers or
dealers with respect to a covered broker or dealer.
(b) If the Corporation establishes one or more bridge brokers or
dealers with respect to a covered broker or dealer, then, subject to
paragraph (d) of this section, the Corporation as receiver for such
covered broker or dealer shall transfer all customer accounts and all
associated customer name securities and customer property to such
bridge brokers or dealers unless the Corporation determines, after
consultation with the Commission and SIPC, that:
(1) The customer accounts, customer name securities, and customer
property are likely to be promptly transferred to one or more qualified
brokers or dealers such that the use of a bridge broker or dealer would
not facilitate such transfer to one or more qualified brokers or
dealers; or
(2) The transfer of such customer accounts to a bridge broker or
dealer would materially interfere with the ability of the Corporation
to avoid or mitigate serious adverse effects on financial stability or
economic conditions in the United States.
(c) The Corporation, as receiver for such covered broker or dealer,
also may transfer any other assets and liabilities of the covered
broker or dealer (including non-customer accounts and any associated
property and any assets and liabilities associated with any trust or
custody business) to such bridge brokers or dealers as the Corporation
[[Page 53670]]
may, in its discretion, determine to be appropriate in accordance with,
and subject to the requirements of, 12 U.S.C. 5390(h), including 12
U.S.C. 5390(h)(1) and 5390(h)(5), and any regulations promulgated
thereunder.
(d) In connection with customer accounts transferred to the bridge
broker or dealer pursuant to paragraph (b) of this section, claims for
net equity shall not be transferred but shall remain with the covered
broker or dealer. Customer property transferred from the covered broker
or dealer, along with advances from SIPC, shall be allocated to
customer accounts at the bridge broker or dealer in accordance with
Sec. 302.104(a)(3). Such allocations initially may be based upon
estimates, and such estimates may be based upon the books and records
of the covered broker or dealer or any other information deemed
relevant in the discretion of the Corporation, as receiver, in
consultation with SIPC, as trustee. Such estimates may be adjusted from
time to time as additional information becomes available. With respect
to each account transferred to the bridge broker or dealer pursuant to
paragraph (b) or (c) of this section, the bridge broker or dealer shall
undertake the obligations of a broker or dealer only with respect to
property transferred to and held by the bridge broker or dealer, and
allocated to the account as provided in Sec. 302.104(a)(3), including
any customer property and any advances from SIPC. The bridge broker or
dealer shall have no obligations with respect to any customer property
or other property that is not transferred from the covered broker or
dealer to the bridge broker or dealer. The transfer of customer
property to such an account shall have no effect on calculation of the
amount of the affected accountholder's net equity, but the value, as of
the appointment date, of the customer property and advances from SIPC
so transferred shall be deemed to satisfy any such claim, in whole or
in part.
(e) The transfer of assets or liabilities held by a covered broker
or dealer, including customer accounts and all associated customer name
securities and customer property, assets and liabilities held by a
covered broker or dealer for any non-customer creditor, and assets and
liabilities associated with any trust or custody business, to a bridge
broker or dealer, shall be effective without any consent,
authorization, or approval of any person or entity, including but not
limited to, any customer, contract party, governmental authority, or
court.
(f) Any succession to or assumption by a bridge broker or dealer of
rights, powers, authorities, or privileges of a covered broker or
dealer shall be effective without any consent, authorization, or
approval of any person or entity, including but not limited to, any
customer, contract party, governmental authority, or court, and any
such bridge broker or dealer shall upon its organization by the
Corporation immediately and by operation of law--
(1) Be established and deemed registered with the Commission under
the Securities Exchange Act of 1934;
(2) Be deemed to be a member of SIPC; and
(3) Succeed to any and all registrations and memberships of the
covered broker or dealer with or in any self-regulatory organizations.
(g) Except as provided in paragraph (f) of this section, the bridge
broker or dealer shall be subject to applicable Federal securities laws
and all requirements with respect to being a member of a self-
regulatory organization and shall operate in accordance with all such
laws and requirements and in accordance with its articles of
association; provided, however, that the Commission may, in its
discretion, exempt the bridge broker or dealer from any such
requirements if the Commission deems such exemption to be necessary or
appropriate in the public interest or for the protection of investors.
(h) At the end of the term of existence of a bridge broker or
dealer, any proceeds that remain after payment of all administrative
expenses of such bridge broker or dealer and all other claims against
such bridge broker or dealer shall be distributed to the receiver for
the related covered broker or dealer.
Sec. 302.104 Claims of customers and other creditors of a covered
broker or dealer.
(a) Trustee's role. (1) SIPC, as trustee for a covered broker or
dealer, shall determine customer status, claims for net equity, claims
for customer name securities, and whether property of the covered
broker or dealer qualifies as customer property. SIPC, as trustee for a
covered broker or dealer, shall make claims determinations in
accordance with SIPA and with paragraph (a)(3) of this section, but
such determinations, and any claims related thereto, shall be governed
by the procedures set forth in paragraph (b) of this section.
(2) SIPC shall make advances in accordance with, and subject to the
limitations imposed by, 15 U.S.C. 78fff-3. Where appropriate, SIPC
shall make such advances by delivering cash or securities to the
customer accounts established at the bridge broker or dealer.
(3) Customer property held by a covered broker or dealer shall be
allocated as follows:
(i) First, to SIPC in repayment of advances made by SIPC pursuant
to 12 U.S.C. 5385(f) and 15 U.S.C. 78fff-3(c)(1), to the extent such
advances effected the release of securities which then were apportioned
to customer property pursuant to 15 U.S.C. 78fff(d);
(ii) Second, to customers of such covered broker or dealer, or in
the case that customer accounts are transferred to a bridge broker or
dealer, then to such customer accounts at a bridge broker or dealer,
who shall share ratably in such customer property on the basis and to
the extent of their respective net equities;
(iii) Third, to SIPC as subrogee for the claims of customers; and
(iv) Fourth, to SIPC in repayment of advances made by SIPC pursuant
to 15 U.S.C. 78fff-3(c)(2).
(4) The determinations and advances made by SIPC as trustee for a
covered broker or dealer under Sec. Sec. 302.100 through 302.107 shall
be made in a manner consistent with SIPC's customary practices under
SIPA. The allocation of customer property, advances from SIPC, and
delivery of customer name securities to each customer or to its
customer account at a bridge broker or dealer, in partial or complete
satisfaction of such customer's net equity claims as of the close of
business on the appointment date, shall be in a manner, including form
and timing, and in an amount at least as beneficial to such customer as
would have been the case had the covered broker or dealer been
liquidated under SIPA. Any claims related to determinations made by
SIPC as trustee for a covered broker or dealer shall be governed by the
procedures set forth in paragraph (b) of this section.
(b) Receiver's role. Any claim shall be determined in accordance
with the procedures set forth in 12 U.S.C. 5390(a)(2)-(5) and the
regulations promulgated by the Corporation thereunder, provided
however, that--
(1) Notice requirements. The notice of the appointment of the
Corporation as receiver for a covered broker or dealer shall also
include notice of the appointment of SIPC as trustee. The Corporation
as receiver shall coordinate with SIPC as trustee to post the notice on
SIPC's public website in addition to the publication procedures set
forth in 12 CFR 380.33.
(2) Procedures for filing a claim. The Corporation as receiver
shall consult with SIPC, as trustee, regarding a claim form and filing
instructions with respect to claims against the Corporation as
[[Page 53671]]
receiver for a covered broker or dealer, and such information shall be
provided on SIPC's public website in addition to the Corporation's
public website. Any such claim form shall contain a provision
permitting a claimant to claim status as a customer of the broker or
dealer, if applicable.
(3) Claims bar date. The Corporation as receiver shall establish a
claims bar date in accordance with 12 U.S.C. 5390(a)(2)(B)(i) and any
regulations promulgated thereunder by which date creditors of a covered
broker or dealer, including all customers of the covered broker or
dealer, shall present their claims, together with proof. The claims bar
date for a covered broker or dealer shall be the date following the
expiration of the six-month period beginning on the date a notice to
creditors to file their claims is first published in accordance with 12
U.S.C. 5390(a)(2)(B)(i) and any regulations promulgated thereunder. Any
claim filed after the claims bar date shall be disallowed, and such
disallowance shall be final, as provided by 12 U.S.C. 5390(a)(3)(C)(i)
and any regulations promulgated thereunder, except that a claim filed
after the claims bar date shall be considered by the receiver as
provided by 12 U.S.C. 5390(a)(3)(C)(ii) and any regulations promulgated
thereunder. In accordance with section 8(a)(3) of SIPA, 15 U.S.C.
78fff-2(a)(3), any claim for net equity filed more than sixty days
after the date the notice to creditors to file claims is first
published need not be paid or satisfied in whole or in part out of
customer property and, to the extent such claim is paid by funds
advanced by SIPC, it shall be satisfied in cash or securities, or both,
as SIPC, as trustee, determines is most economical to the receivership
estate.
(c) Decision period. The Corporation as receiver of a covered
broker or dealer shall notify a claimant whether it allows or disallows
the claim, or any portion of a claim or any claim of a security,
preference, set-off, or priority, within the 180-day period set forth
in 12 U.S.C. 5390(a)(3)(A) and any regulations promulgated thereunder
(as such 180-day period may be extended by written agreement as
provided therein) or within the 90-day period set forth in 12 U.S.C.
5390(a)(5)(B) and any regulations promulgated thereunder, whichever is
applicable. In accordance with paragraph (a) of this section, the
Corporation, as receiver, shall issue the notice required by this
paragraph (c), which shall utilize the determination made by SIPC, as
trustee, in a manner consistent with SIPC's customary practices in a
liquidation under SIPA, with respect to any claim for net equity or
customer name securities. The process established herein for the
determination, within the 180-day period set forth in 12 U.S.C.
5390(a)(3)(A) and any regulations promulgated thereunder (as such 180-
day period may be extended by written agreement as provided therein),
of claims by customers of a covered broker or dealer for customer
property or customer name securities shall constitute the exclusive
process for the determination of such claims, and any procedure for
expedited relief established pursuant to 12 U.S.C. 5390(a)(5) and any
regulations promulgated thereunder shall be inapplicable to such
claims.
(d) Judicial review. The claimant may seek a judicial determination
of any claim disallowed, in whole or in part, by the Corporation as
receiver, including any claim disallowed based upon any
determination(s) of SIPC as trustee made pursuant to Sec. 302.104(a),
by the appropriate district or territorial court of the United States
in accordance with 12 U.S.C. 5390(a)(4) or (5), whichever is
applicable, and any regulations promulgated thereunder.
Sec. 302.105 Priorities for unsecured claims against a covered broker
or dealer.
Allowed claims not satisfied pursuant to Sec. 302.103(d),
including allowed claims for net equity to the extent not satisfied
after final allocation of customer property in accordance with Sec.
302.104(a)(3), shall be paid in accordance with the order of priority
set forth in 12 CFR 380.21 subject to the following adjustments:
(a) Administrative expenses of SIPC incurred in performing its
responsibilities as trustee for a covered broker or dealer shall be
included as administrative expenses of the receiver as defined in 12
CFR 380.22 and shall be paid pro rata with such expenses in accordance
with 12 CFR 380.21(c).
(b) Amounts paid by the Corporation to customers or SIPC shall be
included as amounts owed to the United States as defined in 12 CFR
380.23 and shall be paid pro rata with such amounts in accordance with
12 CFR 380.21(c).
(c) Amounts advanced by SIPC for the purpose of satisfying customer
claims for net equity shall be paid following the payment of all
amounts owed to the United States pursuant to 12 CFR 380.21(a)(3) but
prior to the payment of any other class or priority of claims described
in 12 CFR 380.21(a)(4) through (11).
Sec. 302.106 Administrative expenses of SIPC.
(a) In carrying out its responsibilities, SIPC, as trustee for a
covered broker or dealer, may utilize the services of third parties,
including private attorneys, accountants, consultants, advisors,
outside experts, and other third party professionals. SIPC shall have
an allowed claim for administrative expenses for any amounts paid by
SIPC for such services to the extent that such services are available
in the private sector, and utilization of such services is practicable,
efficient, and cost effective. The term administrative expenses of SIPC
includes the costs and expenses of such attorneys, accountants,
consultants, advisors, outside experts, and other third party
professionals, and other expenses that would be allowable to a third
party trustee under 15 U.S.C. 78eee(b)(5)(A), including the costs and
expenses of SIPC employees that would be allowable pursuant to 15
U.S.C. 78fff(e).
(b) The term administrative expenses of SIPC shall not include
advances from SIPC to satisfy customer claims for net equity.
Sec. 302.107 Qualified Financial Contracts.
The rights and obligations of any party to a qualified financial
contract to which a covered broker or dealer is a party shall be
governed exclusively by 12 U.S.C. 5390, including the limitations and
restrictions contained in 12 U.S.C. 5390(c)(10)(B), and any regulations
promulgated thereunder.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on July 24, 2020.
James P. Sheesley,
Acting Assistant Executive Secretary.
Dated this 24th day of July, 2020.
By the Securities and Exchange Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-16468 Filed 8-28-20; 8:45 am]
BILLING CODE 6714-01-P; 8011-01-P
