[Federal Register Volume 81, Number 172 (Tuesday, September 6, 2016)]
[Notices]
[Pages 61263-61265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21269]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. SIPA-178; File No. SIPC-2016-02]


Securities Investor Protection Corporation: Order Approving a 
Proposed Bylaw Change Relating to SIPC Fund Assessments on SIPC Members

August 30, 2016.
    On May 2, 2016, the Securities Investors Protection Corporation 
(``SIPC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed bylaw change pursuant to section 3(e)(1) of 
the Securities Investor Protection Act of 1970 (``SIPA'') \1\ relating 
to assessments on SIPC member broker-dealers.\2\ On May 27, 2016, SIPC 
consented to a 60-day extension of time before the proposed bylaw 
change takes effect pursuant to section 3(e)(1) of SIPA.\3\ Pursuant to 
section 3(e)(1)(B) of SIPA, the Commission found that the proposed 
bylaw change involved a matter of such significant public interest that 
public comment should be obtained.\4\ This meant that the Commission 
could require the proposed bylaw change to be treated under the 
procedures in section 3(e)(2) of SIPA applicable to a proposed SIPC 
rule change.\5\ Consequently, pursuant to section 3(e)(2)(A) of 
SIPA,\6\ notice requesting comment on the proposed bylaw change was 
published in the Federal Register on June 20, 2016.\7\ The Commission 
received one comment regarding the proposal.\8\ This order approves the 
proposed bylaw change under section 3(e)(2) of SIPA.\9\
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    \1\ 15 U.S.C. 78ccc(e)(1).
    \2\ See letter dated May 2, 2016 from Josephine Wang, Secretary, 
SIPC, to Brent J. Fields, Secretary, Commission.
    \3\ 15 U.S.C. 78ccc(e)(1). This section provides that a proposed 
bylaw change shall take effect thirty days after the date of the 
filing of a copy thereof with the Commission, or upon such later 
date as SIPC may designate or such earlier date as the Commission 
may determine unless: (1) The Commission, by notice to SIPC setting 
forth the reasons therefor, disapproves such proposed bylaw change 
as being contrary to the public interest or contrary to the purposes 
of SIPA; or (2) the Commission finds that such proposed bylaw change 
involves a matter of such significant public interest that public 
comment should be obtained, in which case it may, after notifying 
SIPC in writing of such finding, require that the procedures set 
forth in section 3(e)(2) of SIPA be followed with respect to such 
proposed bylaw change, in the same manner as if such proposed bylaw 
change were a proposed SIPC rule change.
    \4\ 15 U.S.C. 78ccc(e)(1)(B).
    \5\ See 15 U.S.C. 78ccc(e)(1)(B); 15 U.S.C. 78ccc(e)(2).
    \6\ 15 U.S.C. 78ccc(e)(2)(A).
    \7\ See Securities Investor Protection Corporation; Notice of 
Filing of Proposed Bylaw Amendment Relating to Assessment of SIPC 
Members, Release No. SIPA-177 (June 15, 2016), 81 FR 39986 (June 20, 
2016).
    \8\ See email dated June 17, 2016 from Jay Lanstein, Chief 
Executive Officer, Cantella & Co., Inc., available at https://www.sec.gov/comments/sipc-2016-02/sipc201602-1.htm.
    \9\ See 15 U.S.C. 78ccc(e)(2).
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I. Description of the Proposed Bylaw Change

A. Background

    SIPA requires SIPC, by bylaw, to impose assessments upon its member 
broker-dealers as, after consultation with self-regulatory 
organizations, SIPC may deem necessary and appropriate to establish and 
maintain a broker-dealer liquidation fund administered by SIPC (the 
``SIPC Fund'') from which all expenditures by SIPC are to be made, 
including funds used to facilitate the liquidation of broker-
dealers.\10\ Pursuant to this authority, SIPC collects annual 
assessments from its members.\11\ The amount of the annual assessment 
is prescribed by SIPA and the SIPC bylaws and is a percentage of the 
member broker-dealer's net operating revenues from its securities 
business.\12\
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    \10\ 15 U.S.C. 78ddd. SIPC stated that it solicited the views of 
self-regulatory organizations regarding the proposed bylaw change. 
See email dated July 22, 2016 from Josephine Wang, Secretary, SIPC, 
to Brent J. Fields, Secretary, Commission.
    \11\ 15 U.S.C. 78ddd(d)(2)(C).
    \12\ See 15 U.S.C. 78ddd(d); Bylaws of the Securities Investor 
Protection Corporation, Article 6, available at http://www.sipc.org/about-sipc/statute-and-rules/bylaws. Net operating revenues from the 
securities business are gross revenues from the securities business, 
as defined in section 16(9) of SIPA, 15 U.S.C. 78lll(9), less total 
interest and dividend expense, but not exceeding total interest and 
dividend income. See Article 6; SIPC Form SIPC-6, available at 
http://www.sipc.org/Content/media/filing-forms/SIPC-6-20130830.PDF.
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    Article 6 of the SIPC bylaws (``Article 6'') currently provides for 
an assessment rate of \1/4\ of one percent until the SIPC Fund reaches 
$2.5 billion and SIPC determines that the Fund will remain at or above 
$2.5 billion for at least six months. Once that determination is made, 
the assessment rate falls to the minimum assessment permitted under 
SIPA, which is 0.02 percent.\13\ Article 6 also provides that the 
assessment rate is \1/4\ of one percent if it is reasonably likely that 
the balance of the Fund will fall below $2.5 billion and remain at less 
than $2.5 billion for six months or more.
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    \13\ 15 U.S.C. 78ddd(c)(2).
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    SIPC represented in its proposed bylaw change filing that it 
continues to examine whether the Fund ``target balance'' of $2.5 
billion is adequate for SIPC to carry out its mission of customer 
protection, and that it wished to ensure that at a minimum, and to the 
extent possible, the Fund does not fall below $2.5 billion. SIPC 
indicated that it believed it was prudent to consider not only the size 
of the Fund over a six-month period, but also SIPC's actual 
expenditures and its projected expenditures from the Fund over a longer 
term. In addition, SIPC stated that the size of the Fund is more likely 
to stay at or above the target balance if there is a more gradual 
reduction in assessment rates before the minimum assessment rate is 
imposed. Finally, SIPC stated that such measures would make less likely 
sudden changes in the assessment rate while giving SIPC members some 
relief in the amount of the assessment that they owe.

B. The Proposed Amendments

    With these considerations in mind, SIPC proposed to modify Article 
6 in two respects. First, SIPC proposed to impose an intermediary 
assessment rate that would apply when the balance of the SIPC Fund is 
expected to be $2.5 billion for at least six months but SIPC's 
unrestricted net assets--a measure of net assets that takes into 
account the anticipated cost of ongoing customer protection 
proceedings--are less than $2.5 billion, as reflected in its most 
recent audited Statement of Financial Position.\14\ Secondly, SIPC 
proposed to

[[Page 61264]]

lengthen the time period with respect to when a change in assessments 
becomes effective after notice of the change is published.
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    \14\ See, e.g., SIPC, 2015 Annual Report at 20, available at 
http://www.sipc.org/Content/media/annual-reports/2015-annual-report.pdf (audited statement of financial position reporting 
unrestricted net assets of $1,622,910,520).
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1. Imposition of an Intermediary Assessment Rate
    When large SIPA liquidation proceedings are pending that require 
sizeable advances by SIPC, the SIPC Fund could remain at or above the 
$2.5 billion target level for six months, but then fall significantly 
below that amount as additional advances are made. Under Article 6, 
once the Fund reaches the $2.5 billion target level and is projected to 
remain at or above that amount for six months or more, SIPC could 
change the assessment rate from \1/4\ of one percent to 0.02 percent. 
On the other hand, because projected expenditures in pending 
proceedings could reasonably cause the balance of the SIPC Fund to be 
less than $2.5 billion for six months or more, SIPC alternatively could 
require that the assessment rate remain at \1/4\ of one percent. SIPC 
proposed to amend Article 6 to provide clarity as to what actions it 
might take when the Fund reaches the $2.5 billion target level, to 
maintain the SIPC Fund at or above the target balance of $2.5 billion, 
and to offer some relief in the amount of the assessment that member 
broker-dealers must pay while reducing the likelihood of sudden changes 
in the rates.
    Under the proposed bylaw change, when the SIPC Fund reaches $2.5 
billion and is projected to be at $2.5 billion for six months or more, 
SIPC would consider the balance of its unrestricted net assets, as 
reflected in its most recent audited Statement of Financial 
Position.\15\ Specifically, SIPC could impose an annual assessment rate 
of 0.15 percent of a member's net operating revenues from the 
securities business if: (1) The amount of the SIPC Fund were at $2.5 
billion or more; (2) SIPC determined that the Fund will remain at or 
above $2.5 billion for at least six months; but (3) SIPC's unrestricted 
net assets were less than $2.5 billion, as reflected in its most recent 
audited Statement of Financial Condition.
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    \15\ Among other items included in the calculation of 
unrestricted net assets is a provision for trustees' estimated costs 
to complete ongoing customer protection proceedings. See, e.g., 
SIPC, 2015 Annual Report at 20.
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2. Amendment of the Effective Date of a Change in the Assessment
    SIPC also proposed to amend Article 6 with respect to when a change 
in assessments becomes effective. Currently, Article 6 provides that a 
change in assessments is to occur on the first day of the month 
following the date on which SIPC announces a change in the assessment 
and continue until SIPC provides otherwise (``Notice Provision''). 
Under current practice, the SIPC Board of Directors in the ordinary 
course determines the rate of assessment at its September meeting. The 
Board's determination is announced shortly thereafter, and is made 
effective the first day of the following month.
    SIPC proposed to amend the Notice Provision in order to give its 
member broker-dealers earlier notice of the assessment rate for the 
following year. Under the proposal, an assessment rate would be 
effective on the first day of the year following the date on which SIPC 
announces its determination. Consequently, under the current practice 
where the assessment is determined at a September meeting of the Board, 
an assessment rate would be effective on January 1 of the new year. 
However, the proposal recognizes that there may be emergency situations 
when the need for an assessment rate to become effective is more 
immediate. In that case, the assessment rate would be effective on the 
date announced by SIPC provided that the exigency of the circumstances 
so warrants.

II. Comments Received

    The Commission received one comment regarding the proposal.\16\ The 
commenter stated that the SIPC assessment rate ``should be lowered as 
soon as the SIPC fund reaches its target balance, rather than waiting 
potentially a full year.'' The commenter also stated that the proposed 
reductions in the assessment rate should be further reduced and that 
unless there is ``another major crisis'' the flat fee assessment should 
be reinstated. The commenter further stated that since under the 
proposal SIPC can immediately raise assessments when warranted and SIPC 
can borrow from the Treasury if necessary, extracting ``unnecessary 
fees'' presents a financial burden to customers of firms that pass the 
assessments to their customers.
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    \16\ See email dated June 17, 2016 from Jay Lanstein, Chief 
Executive Officer, Cantella & Co., Inc., available at https://www.sec.gov/comments/sipc-2016-02/sipc201602-1.htm.
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    On July 22, 2016, SIPC filed with the Commission a response to the 
comment.\17\ With regard to the comment that the assessment rate should 
be lowered as soon as the SIPC Fund reaches its target balance, SIPC 
stated that it believes that lowering the assessment rate gradually 
``balances the financial interests of its members with the need for 
robust reserves that are vital to SIPC's mission.'' In addition, SIPC 
stated that ``with a gradual reduction in rates, the Fund is more 
likely to stay above the current target balance.'' With regard to the 
comment that assessments should be further reduced and that SIPC 
extracts ``unnecessary fees,'' SIPC stated that ``in 20 of its 45 years 
of operation, most recently from 1996 to March 2009, assessments were 
the minimum allowed by statute, ranging from $25 to $150 annually.'' 
SIPC further stated that ``even since the financial crisis of 2008, 
SIPC has assessed its members at only a fraction of the maximum 
percentage legally permissible.'' SIPC also stated that ``relating its 
assessment needs to its net assets instead of to the balance of the 
SIPC Fund, offers a more realistic and accurate starting point for 
measuring potential future needs.'' Accordingly, SIPC stated that it 
``believes it prudent to consider booked liabilities in addition to the 
size of the Fund in determining the appropriate assessment rate.'' With 
regard to the comment that SIPC should reinstate a flat fee assessment, 
SIPC stated that ``absent legislative change, SIPC may no longer assess 
a `flat fee' minimum as suggested by the comment'' because ``SIPA 
section 78ddd(d)(1)(C) was amended in 2010 to provide for a minimum 
assessment no greater than 0.02 percent of the gross revenues from the 
securities business of SIPC members.''
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    \17\ See email dated July 22, 2016 from Josephine Wang, 
Secretary, SIPC, to Brent J. Fields, Secretary, Commission.
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III. Commission Findings

    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.\18\ The Commission finds, pursuant to section 3(e)(2)(D) of SIPA, 
that the proposed bylaw change is in the public interest and consistent 
with the purposes of SIPA.\19\
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    \18\ 15 U.S.C. 78ccc(e)(2)(D).
    \19\ 15 U.S.C. 78ccc(e)(2)(D).
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    The SIPC Fund, which is built from assessments on its members and 
the interest earned on the Fund, is used for the protection of 
customers of members liquidated under SIPA to maintain investor 
confidence in the securities markets.\20\ In order to reduce the

[[Page 61265]]

likelihood that the SIPC Fund does not fall below the $2.5 billion 
target, the Commission believes that, in setting the assessment rate, 
it is appropriate to consider not only the size of the Fund over a six-
month period, but SIPC's actual expenditures and its projected 
expenditures from the Fund over a longer term. In addition, the 
Commission believes that the size of the Fund is more likely to remain 
at or above the target level if there is a more gradual reduction in 
rates before the minimum assessment rate is imposed. Finally, the 
Commission believes that the proposed bylaw change would give SIPC 
members appropriate relief in the amount of assessment that they owe 
while maintaining the assessment rate at a level that is designed to 
keep the fund at the target level. Further, the Commission notes that 
the Fund plays a critical role in protecting customers of failed 
broker-dealer.
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    \20\ See, e.g., Securities Investor Protection Corporation; 
Notice of Filing of Proposed Bylaw Amendment Relating to Assessment 
of SIPC Members, Release No. SIPA-177 (June 15, 2016), 81 FR 39986, 
39988 (June 20, 2016).
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    In addition, the Commission believes that the proposed amendment to 
the Notice Provision will provide SIPC member broker-dealers with 
earlier notice of the assessment rate for the following year but also 
allow for more prompt changes to the assessment level when merited in 
certain emergency situations.

IV. Conclusion

    IT IS THEREFORE ORDERED, pursuant to section 3(e)(2) of SIPA, that 
the proposed bylaw change is approved.\21\
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    \21\ 15 U.S.C. 78ccc(e)(2).

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    By the Commission.

    Dated: August 30, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016-21269 Filed 9-2-16; 8:45 am]
 BILLING CODE 8011-01-P