SEC and FDIC Propose Rules for Orderly Liquidation of Large Broker-Dealers

By Jacquelyn Lumb

The SEC and the FDIC have jointly issued a rule proposal to provide for the orderly liquidation of large broker-dealers. The proposal would implement Section 205 of the Dodd-Frank Act, and is intended to ensure that customers are treated in a manner that is as beneficial as if the liquidation occurred under the Securities Investor Protection Act. SEC Chair Mary Jo White credited the FDIC and SIPC staff for their cooperation on the project. The comment period will be open for 60 days (Release No. 34-77157).

Recommendation for liquidation. Under Section 205, the Federal Reserve and the SEC are authorized to jointly issue a written recommendation to the Treasury, in consultation with the FDIC, for the orderly liquidation of a broker-dealer, including a broker-dealer that is the largest U.S. subsidiary of a financial company. The recommendation must discuss eight criteria and must be approved by at least a two-thirds majority of each agencys governing body. The Treasury would consider the recommendation and, in consultation with the President, would determine whether the broker-dealer poses a systemic risk and merits liquidation.

Bridge broker-dealers. If a covered broker-dealerone that is registered with the SEC and is a member of SIPCis placed into an orderly liquidation proceeding, the FDIC would be appointed the receiver. The FDIC would appoint SIPC as the trustee. Under the proposal, the FDIC could use a newly organized bridge broker-dealer for the liquidation, in which the customer accounts, securities, and property would be transferred to that entity. SIPC would determine claims and distribute assets in a manner consistent with SIPA.

The transfer of assets and liabilities to a bridge broker-dealer would enable the receiver to continue the broker-dealers operations and maximize the value of the assets by avoiding a forced or distressed sale. Continuing the broker-dealers operations also may help mitigate the impact of the failure on other market participants and minimize systemic risk.

The rule proposal provides clarification about the notice and application for a protective decree to be filed at the outset of the orderly liquidation; the transfer of customer accounts to the bridge broker or dealer; and the role of SIPC as trustee and the FDIC as receiver.

Title II proceeding. A Title II proceeding under the Dodd-Frank Act is conducted entirely outside of the bankruptcy courts, through an administrative process, with the FDIC acting as receiver. The 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.

Notice and application process. The statute grants authority to file the notice and application in any court of competent jurisdiction, but the proposed rule restricts the filing to specific courts to make it

easier for interested parties to know where it might be filed. Under the proposal, the notice and application must be filed with the federal district court in which the liquidation is pending, or if no SIPA liquidation is pending, with the federal district court for the district in which the broker-dealers principal place of business is located.

The process for determining and satisfying customer claims would be substantially similar to a SIPA proceeding, with customers cash and securities returned on a pro rata basis. If sufficient funds are not available to satisfy the net equity claims, the SIPC would supplement the distribution, up to $500,000 per customer, including a maximum of $250,000 for cash claims.

The release is No. 34-77157.