Securities Investor Protection Corporation; Order Approving the Determination of the Board of Directors of the Securities Investor Protection Corporation Not to Adjust for Inflation the Standard Maximum Cash Advance Amount and Notice of the Standard Maximum Cash Advance Amount

CourtSecurities And Exchange Commission
Citation86 FR 16651
Record Number2021-06493
Publication Date30 March 2021
Federal Register, Volume 86 Issue 59 (Tuesday, March 30, 2021)
[Federal Register Volume 86, Number 59 (Tuesday, March 30, 2021)]
                [Notices]
                [Pages 16651-16652]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2021-06493]
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                SECURITIES AND EXCHANGE COMMISSION
                [Release No. SIPA-184; File No. SIPC-2021-01]
                Securities Investor Protection Corporation; Order Approving the
                Determination of the Board of Directors of the Securities Investor
                Protection Corporation Not to Adjust for Inflation the Standard Maximum
                Cash Advance Amount and Notice of the Standard Maximum Cash Advance
                Amount
                March 25, 2021.
                I. Background
                 On January 5, 2021, the Securities Investor Protection Corporation
                (``SIPC'') filed with the Securities and Exchange Commission
                (``Commission''), under sections 9(e)(1) and 3(e)(2)(A) of the
                Securities Investor Protection Act of 1970 (``SIPA''),\1\ notification
                that SIPC's Board of Directors (the ``SIPC Board'') had determined that
                the standard maximum cash advance amount available to satisfy customer
                claims for cash in a SIPA liquidation proceeding would remain at
                $250,000 beginning January 1, 2022, and for the five-year period
                immediately thereafter. The Commission published for comment notice of
                the SIPC Board's determination in the Federal Register on February 2,
                2021.\2\ The Commission did not receive any comments. The Commission
                today is approving, by order, the SIPC Board's determination. The
                Commission is also publishing notice that the standard maximum cash
                advance amount will remain $250,000 beginning January 1, 2022, and for
                the five-year period immediately thereafter.
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                 \1\ 15 U.S.C. 78fff-3(e)(1) and 15 U.S.C. 78ccc(e)(2)(A),
                respectively.
                 \2\ See Securities Investor Protection Corporation, Release No.
                SIPA-183 (Jan. 27, 2021), 86 FR 7900 (Feb. 2, 2021) (File No. SIPC-
                2021-01). The notice sets forth SIPC's statement of the purpose and
                statutory basis of the determination of the SIPC Board not to adjust
                the standard maximum cash advance amount for inflation, which was
                attached to a letter from SIPC to the Commission, dated January 5,
                2021.
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                 The Dodd-Frank Wall Street Reform and Consumer Protection Act (the
                ``Dodd-Frank Act'') \3\ amended SIPA to raise the ``standard maximum
                cash advance amount'' from $100,000 to $250,000 per customer.\4\ The
                amendments to SIPA aligned that amount with the maximum insurance
                amount provided by the Federal Deposit Insurance Corporation (``FDIC'')
                to customers of a failed bank. The Dodd-Frank Act also amended SIPA to
                require the SIPC Board of Directors to determine, no later than January
                1, 2011, and every five years thereafter, whether an inflation
                adjustment to the standard maximum cash advance amount available to
                satisfy customer claims in a SIPA liquation proceeding is
                appropriate.\5\ Any adjustment to the standard maximum cash advance
                amount takes effect on January 1 of the year immediately succeeding the
                calendar year in which the adjustment is made.\6\ The SIPC Board's
                determination on whether to make an adjustment is subject to Commission
                approval as provided under section 3(e)(2) of SIPA.\7\ The Commission
                must publish notice of the standard maximum cash advance amount in the
                Federal Register no later than April 5 of any calendar year in which
                SIPC is required to determine whether an inflation adjustment is
                appropriate.\8\
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                 \3\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
                 \4\ In a liquidation of a broker-dealer performed under SIPA, a
                fund of customer property is established for priority distribution
                to customers ahead of all other creditors. Each customer is entitled
                to a pro rata share of the customer property to the extent of the
                customer's net equity in the customer's account. If the amount of
                customer property is insufficient to satisfy a customer's net equity
                claim, SIPC advances money to satisfy the claim up to $500,000 per
                customer, of which up to $250,000 (i.e., the standard maximum cash
                advance amount) can be used to satisfy a claim for cash. See 15
                U.S.C. 78fff-3.
                 \5\ 15 U.S.C. 78fff-3(e)(1). In 2016, the Board determined to
                maintain the standard maximum cash advance amount at $250,000, which
                was approved by the Commission. See Securities Investor Protection
                Corporation, Release No. SIPA-174 (Feb. 22, 2016), 81 FR 9561 (Feb.
                25, 2016) and Securities Investor Protection Corporation, Release
                No. SIPA-176 (March 30, 2016), 81 FR 19250 (April 4, 2016).
                 \6\ 15 U.S.C. 78fff-3(e)(4).
                 \7\ See 15 U.S.C. 78ccc(e)(2); 15 U.S.C. 78fff-3(e)(1).
                 \8\ 15 U.S.C. 78fff-3(e)(3)(A).
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                II. Determination of the SIPC Board Not to Adjust the Standard Maximum
                Cash Advance Amount
                 As described above, SIPC filed with the Commission notification
                that the SIPC Board had determined not to raise the standard maximum
                cash advance amount above $250,000, and thereby maintain it at that
                level beginning January 1, 2022, and for the five-year period
                immediately thereafter. In its filing, SIPC stated that applying the
                formula prescribed by SIPA in this instance would have increased the
                standard maximum cash advance amount by $40,000 and that the SIPC Board
                weighed the factors it considered in making its determination against
                an increase of that amount. For the reasons discussed below, the SIPC
                Board determined not to make the inflation adjustment.
                 The SIPC Board is required to consider the following criteria under
                SIPA: (1) The overall state of the fund and the economic conditions
                affecting members of SIPC; (2) the potential problems affecting members
                of SIPC; and (3) such other factors as the SIPC Board may determine
                appropriate.\9\ In its filing, SIPC stated that the SIPC Board
                considered the projected growth of the SIPC Fund,\10\ including the
                target amount for the SIPC Fund of $5 billion, the assessment rate
                imposed on SIPC members, and the potential impact of an inflation
                adjustment on the SIPC Fund. According to the filing, the Board also
                considered SIPC's experience with respect to: (1) SIPC advances in past
                and present; (2) amounts generated from assessments on member broker-
                dealers; and (3) projected returns on SIPC investments. According to
                the filing, based on these factors, the SIPC Board concluded that the
                SIPC fund is positioned to remain on a steady growth path for the
                foreseeable future, barring any unforeseen catastrophic event, and that
                any increase in the cash limit of SIPA protection would not appreciably
                benefit customers.
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                 \9\ 15 U.S.C. 78fff-3(e)(5).
                 \10\ SIPC is required to establish and administer a broker-
                dealer liquidation fund (the ``SIPC Fund'') from which all
                expenditures by SIPC are to be made, including funds used to
                facilitate the liquidation of broker-dealers. See 15 U.S.C. 78ddd.
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                 The filing states that the SIPC Board also considered the
                relationship between the amount of the SIPC standard maximum cash
                advance amount and the standard maximum amount of protection afforded
                by the FDIC to customers of a failed bank, noting both the current
                equivalency between SIPA's maximum cash advance amount and the
                ``standard maximum deposit insurance amount'' that fixes the limit on
                bank deposit insurance under the Federal Deposit Insurance Act (both at
                $250,000), and that increases to the limit of protection for cash
                claims under SIPA historically have moved in lockstep with increases in
                FDIC deposit insurance. According to the filing, the SIPC Board
                concluded that an inflation adjustment to the SIPA maximum cash advance
                amount without a corresponding adjustment to the FDIC standard maximum
                deposit insurance amount would result in an
                [[Page 16652]]
                unprecedented divergence between the two.
                 Further, the filing avers that the SIPC Board also considered that,
                of the more than 770,000 allowed claims in completed or substantially
                completed liquidation proceedings as of year-end 2019, the unsatisfied
                portion of cash claims amounted to $25 million. More than half of that
                amount involved only three claims. In the seven SIPA proceedings
                initiated since 2010, only one cash claim remains unsatisfied.
                 Finally, the filing notes that the SIPC Board also considered that
                customer free credit balances at brokerage firms have not increased
                over the last five years in line with inflation, as firms have
                increasingly utilized sweep programs \11\ to move customer free credit
                balances from broker-dealers to banks. The filing also states that the
                SIPC Board considered views of the staffs of the Commission, the FDIC,
                and the Financial Industry Regulatory Authority, as reported to the
                SIPC staff and as further reported by the SIPC staff to the SIPC Board.
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                 \11\ A ``sweep program'' is a service proved by a broker-dealer
                where it offers to its customer the option to automatically transfer
                free credit balances of cash in the securities account of the
                customer to either a money market fund product as described in Rule
                2a-7 under the Investment Company Act of 1940 or an account at a
                bank whose deposits are insured by the FDIC. See 17 CFR 240.15c3-
                3(a)(17).
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                 According to the filing, after considering these factors, the SIPC
                Board concluded that, on balance, an adjustment to the standard maximum
                cash advance amount was not appropriate, and determined that the
                standard maximum cash advance amount should remain at $250,000 per
                customer.
                III. Discussion and Commission Order
                 Section 3(e)(2)(A) of SIPA provides that the SIPC Board must file
                with the Commission any proposed amendment to a SIPC Rule.\12\ Section
                3(e)(2)(B) of SIPA provides that within thirty-five days of the date of
                publication of the notice of filing of a proposed rule change in the
                Federal Register, or within such longer period (1) as the Commission
                may designate of not more than ninety days after such date if it finds
                such longer period to be appropriate and publishes its reasons for so
                finding, or (2) as to which SIPC consents, the Commission shall: (i) By
                order approve such proposed rule change, or (ii) institute proceedings
                to determine whether such proposed rule change should be disapproved.
                Further, section 3(e)(2)(D) of SIPA provides that the Commission shall
                approve a proposed rule change if it finds that the proposed rule
                change is in the public interest and is consistent with the purposes of
                SIPA.\13\ The SIPC Board's determination to not adjust the standard
                maximum cash advance amount is subject to the approval of the
                Commission as provided under section 3(e)(2) of SIPA.\14\
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                 \12\ 15 U.S.C. 78ccc(e)(2)(A).
                 \13\ 15 U.S.C. 78ccc(e)(2)(D).
                 \14\ See 15 U.S.C. 78fff-3(e)(1).
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                 The Commission finds, pursuant to section 3(e)(2)(D) of SIPA, that
                the determination of the SIPC Board not to adjust for inflation the
                standard maximum cash advance amount of $250,000 beginning January 1,
                2022, and for the five-year period immediately thereafter is in the
                public interest and consistent with the purposes of SIPA. The
                Commission believes that maintaining the amount at $250,000 at this
                time, which keeps it aligned with the maximum amount of insurance
                provided by the FDIC, is in the public interest and consistent with the
                purposes of SIPA. Specifically, there could be unintended consequences
                resulting from raising the amount to a level that is higher than the
                maximum FDIC insurance amount, such as incentivizing investors to move
                additional funds to their brokerage accounts from bank accounts.
                Providing a higher level of SIPA coverage for cash deposits of broker-
                dealer customers could incentivize customers to deposit cash at broker-
                dealers for the purpose of holding cash at the broker-dealer, as
                opposed depositing the cash there for an investment purpose. This
                practice could raise questions about whether such deposits would be
                covered under SIPA, which provides ``customer'' status to those cash
                depositors who have made the deposit with a SIPC member broker-dealer
                for the purpose of purchasing securities.\15\ By maintaining the
                standard maximum cash advance amount at $250,000 and in line with the
                maximum FDIC insurance amount, the Commission believes that the
                incentive for a customer to use the broker-dealer account for the
                purpose of holding cash, as opposed to for the purpose of purchasing
                securities, will be less likely to arise, thereby minimizing the
                instances of such deposits not being covered under SIPA, which the
                Commission believes is in the public interest and consistent with the
                purposes of SIPA.
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                 \15\ See 15 U.S.C. 78lll(2)(B)(i) (Defining ``customer'' under
                SIPA).
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                 In addition, the Commission believes that the SIPC Board's
                consideration of its historical experience with advances and
                assessments and of the potential effect of any inflation adjustment on
                the SIPC Fund was a reasonable method for the SIPC Board to project
                potential future obligations owed to customers with claims for cash
                recognized under SIPA when the SIPC Board considered whether to raise
                the standard maximum cash advance amount. The Commission believes that
                this approach does not materially affect the customers of SIPC members
                and should minimize the potential for unnecessary increases to
                assessments on members and therefore is consistent with the public
                interest and consistent with the purposes of SIPA. Specifically, the
                Commission believes that maintaining the standard maximum cash advance
                amount at $250,000 is consistent with the public interest and with the
                purposes of SIPA in light of the statistics considered by the SIPC
                Board that indicated that customer claims for cash have been
                historically satisfied in full and the trend that customer credit
                balances at broker-dealers have not increased in recent years.
                 It is therefore ordered, pursuant to section 3(e)(2) of SIPA, that
                the determination by the SIPC Board that the standard maximum cash
                advance amount will remain at $250,000 beginning January 1, 2022, and
                for the five-year period immediately thereafter, be and hereby is
                approved.
                IV. Notice of the Standard Maximum Cash Advance Amount
                 Section 9(e)(3)(A) of SIPA requires that the Commission publish the
                standard maximum cash advance amount in the Federal Register no later
                than April 5 of any calendar year in which SIPC is required to
                determine whether an inflation adjustment is appropriate.\16\
                Accordingly, pursuant to section 9(e)(3)(A) of SIPA, the Commission is
                hereby providing notice that the standard maximum cash advance amount
                is $250,000 beginning January 1, 2022, and for the five-year period
                immediately thereafter.
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                 \16\ 15 U.S.C. 78fff-3(e)(3)(A).
                 By the Commission.
                J. Matthew DeLesDernier,
                Assistant Secretary.
                [FR Doc. 2021-06493 Filed 3-29-21; 8:45 am]
                BILLING CODE 8011-01-P
                

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