[Federal Register Volume 85, Number 114 (Friday, June 12, 2020)]
[Notices]
[Pages 35960-35961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12733]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. SIPA-182; File No. SIPC-2019-02]


Securities Investor Protection Corporation; Order Approving 
Proposed Bylaw Change Relating to SIPC Member Assessments

June 9, 2020.
    Pursuant to Section 3(e)(1) of the Securities Investor Protection 
Act of 1970 (``SIPA''),\1\ the Securities Investor Protection 
Corporation (``SIPC'') filed with the Securities and Exchange 
Commission (``Commission'') on November 19, 2019 proposed bylaw changes 
relating to annual assessments on its broker-dealer members. On 
December 10, 2019, SIPC consented to a 90-day extension of time before 
the proposed bylaw changes would take effect pursuant to Section 
3(e)(1) of SIPA.\2\ Pursuant to Section 3(e)(1)(B) of SIPA, the 
Commission found that the proposed bylaw changes involved a matter of 
such significant public interest that public comment should be 
obtained.\3\ Consequently, pursuant to Section 3(e)(2)(A) of SIPA,\4\ a 
notice soliciting comment on the proposed bylaw changes was published 
in the Federal Register on January 30, 2020.\5\ On February 24, 2020, 
SIPC consented to an extension until May 14, 2020, and on April 1, 
2020, SIPC consented to an additional extension until June 15, 2020, 
for the Commission to approve or institute proceedings to determine 
whether the proposed bylaw change should be disapproved.\6\ The 
Commission received no comments regarding the proposed bylaw changes. 
For the reasons described below, the Commission finds that the proposed 
bylaw changes are in the public interest and consistent with the 
purposes of SIPA.\7\ Therefore, this order approves the proposed bylaw 
changes under Section 3(e)(2) of SIPA.\8\
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    \1\ 15 U.S.C. 78ccc(e)(1).
    \2\ See id.
    \3\ See 15 U.S.C. 78ccc(e)(1)(B).
    \4\ See 15 U.S.C. 78ccc(e)(2)(A).
    \5\ See Securities Investor Protection Corporation; Notice of 
Filing of Proposed Bylaw Changes Relating to SIPC Member 
Assessments; Correction, Release No. SIPA-179A (Jan. 24, 2020), 85 
FR 5519 (Jan. 30, 2020) (``Notice'').
    \6\ See 15 U.S.C. 78ccc(e)(2)(B).
    \7\ See 15 U.S.C. 78ccc(e)(2)(D).
    \8\ See 15 U.S.C. 78ccc(e)(2).
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I. Description of the Proposed Bylaw Changes

A. Member Assessment Rate

    SIPC administers a fund (``SIPC Fund'') that is financed through 
assessments on SIPC's broker-dealer members and interest on U.S. 
government securities held in the fund. The SIPC Fund is used to make 
advances (subject to limits) to trustees administering SIPA 
liquidations of failed broker-dealer members to cover customer claims 
for securities or cash that cannot be satisfied by customer property of 
the firm recovered by the trustee.\9\ The SIPC Fund also is used to pay 
the administrative expenses of a SIPA liquidation when the general 
estate of the failed broker-dealer member is insufficient to cover the 
expenses. Additionally, the SIPC Fund is used to finance the day-to-day 
operations of SIPC.
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    \9\ See 15 U.S.C. 78fff-3(a). Currently, the limits of 
protection are $500,000 per customer except that claims for cash are 
limited to $250,000 per customer.
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    Under Article 6 of SIPC's Bylaws, the annual assessment rate is a 
percent of each broker-dealer member's gross or net operating revenues 
from the securities business.\10\ Several variables relating to the 
balance and projected balance of the SIPC Fund and the balance of 
SIPC's unrestricted net assets determine whether the assessment rate is 
a percent of gross or net operating revenues and the amount of the 
percent multiplier (i.e., 0.50%, 0.25%, 0.15%, or 0.02% of gross or net 
revenues). For example, the current assessment rate is 0.15% of net 
operating revenues from the SIPC member's securities business for each 
calendar year or part thereof (``net operating revenue''). This 
assessment rate applies when SIPC determines that the SIPC Fund balance 
is $2.5 billion or more, will remain at or above $2.5 billion or more 
for at least six months, and SIPC's unrestricted net assets are less 
than $2.5 billion.\11\ This rate will drop to 0.02% of net operating 
revenues if SIPC determines that the SIPC Fund balance is $2.5 billion 
or more, will remain at or above $2.5 billion or more for at least six 
months, and SIPC's unrestricted net assets are equal to or greater than 
$2.5 billion.\12\
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    \10\ Section 16(9) of SIPA defines ``gross revenues from the 
securities business'' to mean the sum of a number of revenue items, 
including certain commissions on securities transactions, charges 
for executing or clearing securities transactions for other broker-
dealers, net realized gain from principal transactions in securities 
in trading accounts, net profits from the management of or 
participation in the underwriting or distribution of securities, and 
interest earned on customers' securities accounts. See 15 U.S.C. 
78lll(9). Article 6, section 1(g) of the SIPC Bylaws defines ``net 
operating revenues from the securities business'' as gross revenues 
from the securities business less interest and dividend expenses.
    \11\ See Article 6, section 1(a)(1)(B) of the SIPC Bylaws. 
SIPC's unrestricted net assets are SIPC's total assets (including 
the SIPC Fund) less liabilities, which include estimated costs to 
complete ongoing SIPA liquidations.
    \12\ See Article 6, section 1(a)(1)(C) of the SIPC Bylaws.
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    SIPC proposed to amend its bylaws so that an assessment rate of 
0.15% of a broker-dealer member's net operating revenues will remain in 
effect until SIPC's unrestricted net assets reach and are reasonably 
likely to remain above $5 billion, unless SIPC determines that its 
unrestricted net assets are less than $2.5 billion, in which case, the 
assessment rate would rise to 0.25% of a broker-dealer member's net 
operating revenues. In the event that SIPC reasonably anticipates that 
its unrestricted net assets have reached and are reasonably likely to 
remain above $5 billion, SIPC would commission a study to consider the 
adequacy of the SIPC Fund, and would do so every four years thereafter. 
After consideration of the study, and after consultation with the 
Commission and self-regulatory organizations (``SROs''), SIPC could 
increase or decrease the assessment rate by up to 25%.
    SIPC stated that the proposed bylaw change will accomplish a few 
things: (1) Provide a larger cushion for unknown contingencies; (2) 
reduce the potential volatility of member assessments during periods of 
economic downturn or individual member crisis; and (3) promote sound 
financial management in light of SIPC's statutory mission.\13\ 
Moreover, SIPC noted that the proposed bylaw changes should have a 
limited impact on member firms. SIPC estimated that approximately two-
thirds of the total difference in annual assessments resulting from the 
proposal would be paid by only 30 broker-dealer members and this would, 
on average, equal approximately 0.091% of their total revenue.
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    \13\ SIPC's full rationale for why the assessment rate should be 
adjusted in this manner is set forth in its narrative accompanying 
the proposed bylaw changes. See Notice, 85 FR at 5519-5523.
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B. Collection Agent

    Section 13(a) of SIPA provides that each SRO shall act as 
collection agent for SIPC to collect the assessments payable by broker-
dealer members for which the SRO is the examining authority.\14\ 
However, SIPC cites other sections of SIPA as supporting its authority 
to collect assessments directly.\15\ According to SIPC, broker-

[[Page 35961]]

dealer members have paid their assessments directly to SIPC for more 
than 20 years. In keeping with current practice, SIPC proposes a bylaw 
change to remove references to broker-dealer members paying assessments 
to collection agents.\16\
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    \14\ See 15 U.S.C. 78iii(a).
    \15\ See, e.g., 15 U.S.C. 78ddd(c)(1) (``Each member of SIPC 
shall pay to SIPC, or the collection agent for SIPC . . .'' an 
initial assessment) (emphasis added); 15 U.S.C. 78ccc(b)(8) (SIPC 
has the power ``to enter into contracts, to execute instruments, to 
incur liabilities, and to do any and all other acts and things as 
may be necessary or incidental to the conduct of its business and 
the exercise of all other rights and powers granted to SIPC by this 
chapter'').
    \16\ See Article 6, sections 1(c)-(e) of the SIPC Bylaws. Under 
the proposed bylaw change, section 1(c) would be deleted and 
sections 1(d) and 1(e) are re-designated sections 1(c) and 1(d), 
respectively.
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C. Elimination of Grace Period for Past-Due Payments

    Currently, the SIPC Bylaws provide that if a broker-dealer member's 
assessment payment has not been received within 15 days of the due date 
(the grace period), the stated interest rate for late payments applies 
to unpaid amounts. In January 2019, SIPC developed an internet payment 
portal, whereby members can pay SIPC directly online. SIPC also is 
working on the development of a portal through which, among other 
things, members can file assessment forms. SIPC stated that the 
creation of a mechanism for members to make immediate payment obviates 
the need for a grace period. SIPC proposed to amend the SIPC Bylaws to 
eliminate the 15 day grace period before interest begins accruing on 
past-due payments.\17\
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    \17\ See Article 6, section 1(e) of the SIPC Bylaws. Under the 
proposed bylaw change, section 1(e) is re-designated section 1(d).
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II. Comments Received

    The Commission received no comments regarding the proposal.

III. Commission Findings

    Section 3(e) of SIPA sets forth the procedures for addressing 
proposed SIPC rules and bylaws.\18\ Pursuant to Section 3(e)(1)(B) of 
SIPA, the Commission found that the proposed bylaw changes involved a 
matter of such significant public interest that public comment should 
be obtained and required that the procedures applicable to SIPC 
proposed rule changes in section 3(e)(2) of SIPA be followed.\19\ 
Section 3(e)(2) of SIPA sets forth the procedures for proposed rules 
and provides that the Commission shall approve a proposed rule change 
if it finds the change is in the public interest and is consistent with 
the purposes of SIPA. As discussed below, 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.\20\
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    \18\ See 15 U.S.C. 78ccc(e).
    \19\ See Notice, 85 FR 5519.
    \20\ See 15 U.S.C. 78ccc(e)(2)(D).
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A. Member Assessments

    As described in further detail above, SIPC proposed to continue to 
charge its members an assessment rate of 0.15% of a member's net 
operating revenues from the securities business until SIPC's 
unrestricted net assets reach $5 billion (instead of $2.5 billion, as 
the SIPC Bylaws currently provide). Moreover, once the SIPC Fund 
reaches $5 billion, the proposal would enable SIPC to adjust the member 
assessment rate up or down by as much as 25% every four years following 
the completion of a study on the topic and after consulting with the 
Commission and with SROs.
    The SIPC Fund, which is built from assessments on its members and 
the interest earned on the SIPC Fund, is used for the protection of 
customers of members liquidated under SIPA to maintain investor 
confidence in the securities markets.\21\ The proposed bylaw change 
provides a larger cushion in the SIPC Fund for unknown contingencies 
and to promote sound financial management of the SIPC Fund in light of 
SIPC's statutory mission. The proposed bylaw change also reduces the 
potential volatility of member assessments during periods of economic 
downturn or individual member crisis, which should facilitate SIPC 
members' ability to plan for future payments of SIPC assessments. 
Moreover, SIPC's new limited authority to adjust the assessment rate, 
after a study and consultation with the Commission and the SROs, gives 
SIPC appropriate discretion to keep the SIPC Fund appropriately sized, 
while preserving oversight over the SIPC Board's activity.
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    \21\ See, e.g., Securities Investor Protection Corporation; 
Order Approving a Proposed Bylaw Change Relating to SIPC Fund 
Assessments on SIPC Members, Release No. SIPA-178 (Aug. 30, 2016), 
81 FR 61263, 61264 (Sept. 6, 2016).
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B. Collection Agent

    The SIPC Bylaws currently include references to the practice of 
SROs collecting assessments on behalf of SIPC as agents. These Bylaw 
sections relate to the provisions in SIPA establishing the authority of 
SROs to serve as collection agents on behalf of SIPC.\22\ However, 
other provisions of SIPA suggest that SIPC can collect assessments 
directly from members \23\ and grant broad reservations of power to 
SIPC.\24\ In addition, for over 20 years, SIPC has collected its member 
assessments directly rather than by using an SRO to serve as collection 
agent. Therefore, SIPC proposed bylaw changes to conform to current 
practice and to remove references that assumed SROs continued to act as 
collection agents on behalf of SIPC.
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    \22\ See 15 U.S.C. 78iii(a) (``[e]ach self-regulatory 
organization shall act as collection agent for SIPC . . .'').
    \23\ See 15 U.S.C. 78ddd(f) (referencing future assessments 
pledged by SIPC that are ``. . . thereafter received by SIPC, or any 
collection agent for SIPC . . .'')
    \24\ See 15 U.S.C. 78ccc(b) (granting SIPC the power, among 
other things, to enter into contracts, execute instruments, incur 
liabilities, and do any and all other acts and things as may be 
necessary or incidental to the conduct of its business).
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    The Commission believes that SIPC's proposed bylaw change will 
clarify to SIPC members and to the public that it collects member 
assessments directly rather than through an SRO. In finding that this 
proposed bylaw change is consistent with the public interest, the 
Commission notes that SIPC has developed an enhanced means to pay 
assessments through an internet portal and is continuing to develop an 
electronic means for members to file their assessment forms.

C. Elimination of Grace Period for Past-Due Payments

    SIPC also proposed to eliminate the 15 day grace period before 
interest begins accruing on past-due assessment payments. As described 
above, SIPC has recently developed an online payment portal, which 
should reduce the ambiguity about the date payment is received by SIPC 
if it is transmitted on a timely basis, thereby obviating the need for 
a grace period.

IV. Conclusion

    It is therefore ordered, pursuant to Section 3(e)(2) of SIPA, that 
the proposed bylaw change (SIPA 2019-02) is approved.\25\
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    \25\ See 15 U.S.C. 78ccc(e)(2).

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-12733 Filed 6-11-20; 8:45 am]
BILLING CODE 8011-01-P