Securities Investor Protection Corporation; Notice of Filing of Proposed Bylaw Changes Relating to SIPC Member Assessments, 3986-3992 [2020-01023]

Download as PDF 3986 Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NYSENAT–2020–01 on the subject line. Paper Comments • Send paper comments in triplicate to: Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. jbell on DSKJLSW7X2PROD with NOTICES All submissions should refer to File Number SR–NYSENAT–2020–01. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NYSENAT–2020–01 and should be submitted on or before February 13, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.27 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–01030 Filed 1–22–20; 8:45 am] BILLING CODE 8011–01–P 27 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 17:13 Jan 22, 2020 Jkt 250001 SECURITIES AND EXCHANGE COMMISSION [Release No. SIPA–179; File No. SIPC–2019– 02] Securities Investor Protection Corporation; Notice of Filing of Proposed Bylaw Changes Relating to SIPC Member Assessments January 16, 2020. Pursuant to Section 3(e)(1) of the Securities Investor Protection Act of 1970 (‘‘SIPA’’),1 on November 19, 2019 the Securities Investor Protection Corporation (‘‘SIPC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed bylaw changes relating to SIPC member assessments. Pursuant to section 3(e)(1)(B) of SIPA, the Commission finds that these proposed bylaw changes involve a matter of such significant public interest that public comment should be obtained.2 Therefore, pursuant to section 3(e)(2)(A) of SIPA, the Commission is publishing this notice to solicit comment from interested persons on the proposed bylaw changes.3 In its filing with the Commission, SIPC included statements concerning the purpose of and statutory basis for the proposed bylaw changes as described below, which description has been substantially prepared by SIPC. I. SIPC’s Statement of the Purpose of, and Statutory Basis for, SIPC Proposed Bylaw Changes Relating to SIPC Member Assessments Pursuant to Section 3(e)(1) of SIPA, SIPC hereby submits for filing with the Commission proposed amendments to Article 6 of the SIPC Bylaws (‘‘Bylaws’’). Article 6 relates to the assessments that SIPC imposes upon its members. As revised, Article 6 would maintain assessments at the current rate of 0.15 percent of a member’s net operating revenue from the securities business until SIPC’s unrestricted net assets reach $5 billion.4 ‘‘Unrestricted net assets’’ are comprised primarily of the amount in the SIPC Fund at year end, minus the estimated cost to complete pending liquidation proceedings, as reflected in SIPC’s most recent audited Statement of Financial Position. Once the aforementioned condition is met, 1 15 U.S.C. 78ccc(e)(1). U.S.C. 78ccc(e)(1)(B). 3 15 U.S.C. 78ccc(e)(2)(A). 4 ‘‘Net operating revenues from the securities business’’ is ‘‘gross revenues from the securities business less interest and dividend expenses, and includes those clarifications as are set forth in the SIPC assessment forms and instructions.’’ SIPC Bylaw Article 6, Section 1(a)(3)(g) [sic]. 2 15 PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 SIPC would commission a study to consider the adequacy of the SIPC Fund, and would do so every four years thereafter. The study would analyze a variety of factors, as set forth in the proposed amended Bylaw. After consideration of the study and the report thereon, and after consultation with the Commission and selfregulatory organizations, SIPC could increase or decrease, within certain limits, the appropriate assessment rate in order to maintain the Fund and effect SIPA’s purposes. Pursuant to SIPA Section 78ddd(c)(2), SIPC has consulted with self-regulatory organizations with respect to the proposed amendments. SIPC has determined that the changes are necessary and appropriate to maintain the SIPC Fund. Background SIPC is a non-profit member organization created in 1970 under SIPA, for the protection of customers of member broker-dealers placed in liquidation under SIPA. With some exceptions set by statute, all registered securities brokers or dealers are members of SIPC. SIPC protects the customers of member firms in liquidation under SIPA. Among other things, SIPC advances funds to satisfy the claims of customers. Each customer is protected by SIPC up to $500,000 against the loss of missing cash and/or securities entrusted by the customer to the broker. The $500,000 includes a limit of up to $250,000 where the allowed claim is for cash only. The advances by SIPC come from a ‘‘Fund’’ that SIPC administers. The Fund largely is comprised of assessments paid to SIPC by its members. The Fund also is used to pay the administrative expenses of a liquidation proceeding where the debtor’s general estate is insufficient, and to finance the day-to-day operations of SIPC. The Assessment Bylaw Article 6 of the Bylaws now imposes a yearly assessment rate of 0.15% of net operating revenues from the member’s securities business (‘‘NOR’’) where the balance of the SIPC Fund is less than $2.5 billion and will remain at that amount for six months or more. If the SIPC Fund has reached $2.5 billion but SIPC’s unrestricted net asset amount is less than $2.5 billion, then the yearly assessment rate is .15% of NOR. Once the unrestricted net assets total at least $2.5 billion, then the assessment rate is a minimum assessment of .02% of NOR. Currently, SIPC’s only sources of funding are its Fund and a possible Government loan. To ensure that SIPC E:\FR\FM\23JAN1.SGM 23JAN1 Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices SIPC’s resources must enhance investor confidence. Given the risks described above, and remaining vigilant regarding the uncertainties in an everchanging marketplace, SIPC believes that in order for its mission of customer protection to succeed, SIPC must maintain a robust Fund. administration of the liquidation proceeding, impose upon SIPC a duty to take a responsible approach to calculating both the size of the SIPC Fund, and the reasonableness of an assessment rate that maintains and promotes adequate funding. As SIPC has witnessed over the past decade, risks abound—from a large firm failure with encumbered assets, to a Ponzi scheme with significant losses to customers, to risks presented by a cybersecurity attack or the use of digital assets. Assessing the adequacy of the Fund is especially challenging because the cost of a liquidation does not necessarily correlate with any traditional measure of financial exposure for broker-dealers. Instead, the Fund’s adequacy depends largely on member firms’ compliance with customer protection or net capital rules, the probability of which is challenging to quantify. The initial SIPC Fund totaled $77.6 million.5 In 1992, SIPC’s Board (‘‘the Board’’) raised the target balance of the SIPC Fund to $1 billion, and the SIPC Fund reached that amount in 1996. The Board last sought to augment the size of the Fund in 2009, when, following the commencement of the liquidation proceedings of Lehman Brothers Inc. (‘‘LBI’’), and Bernard L. Madoff Investment Securities LLC (‘‘BLMIS’’), the assessment rate was revised to cause the Fund to grow to $2.5 billion. The financial crisis of 2008, and the ensuing liquidation proceedings of LBI and BLMIS, revealed clearly the need for SIPC to increase the Fund balance. Although the LBI liquidation proceeding ultimately did not require SIPC to advance funds to satisfy claims, or pay for expenses of administration, any future failure of a global enterprise and its broker-dealer affiliate could have a very different outcome for SIPC. For example, had funds sought by LBI been encumbered overseas, or had LBI been reducing artificially its segregated customer reserve requirement through otherwise legal complex transactions, that may have imposed significant demands on the SIPC Fund. The liquidation proceeding of BLMIS has required SIPC to make the largest aggregate advance in its history. In statistical terms, the amount is more than 100 standard deviations greater than the amounts advanced by SIPC in all of its previous cases.7 Today, an event statistically comparable to BLMIS would require advances to customers amounting to between $4 billion and $5 billion. SIPC faces risks beyond those posed by large Ponzi schemes or a credit crisis. These additional risks, many of which are hard to quantify, include, for example, technology-related failures, such as a cyberattack on a large SIPC member that restricts access by customers to their assets; or risks stemming from the delay in computing a broker-dealer’s reserve requirement. For example, SEC Rule 15c3–3, 17 CFR 240.15c3–3, which governs the protection of customer assets, requires a broker-dealer to compute its cash reserve requirement on a weekly, not daily, basis. Although a number of SIPC members voluntarily rebalance their cash reserves on a daily basis, a large SIPC member that does not might not have enough cash in its Rule 15c3–3(e) reserve account due to an increase in its net cash obligations following its last required reserve computation. Another factor underscoring SIPC concerns is the potential risk to the solvency of the SIPC Fund under the Orderly Liquidation provisions of the Dodd Frank Act, Title II. Dodd-Frank creates an important role for SIPC in the event of the failure of a covered, large complex securities broker-dealer that presents systemic risk. Under DoddFrank, SIPC is designated as trustee for the liquidation of the broker-dealer under SIPA. 12 U.S.C. 5385(A). As trustee, SIPC must determine and satisfy claims against the broker-dealer consistent with SIPA. 12 U.S.C. 5385(D). While the FDIC has expressed a preference to use Dodd-Frank to intervene at the holding company 5 Comprised of member assessments of $9.6 million, the transfer of $3 million from the American Stock Exchange, Inc. trust fund, and confirmed lines of credit totaling $65 million. 6 SIPC’s last credit agreement, a $500 million, 3yr. revolving credit facility, expired March 1, 2010. 7 In addition, the amounts advanced by SIPC in the BLMIS liquidation are more than 107 times greater than the average advance of the ten next largest SIPC cases. General Statement of Basis and Purpose of Proposed Changes There is no scientific basis for determining the exact adequacy of the SIPC Fund. Nevertheless, SIPC’s statutory obligation to protect customers of failed firms, and in certain cases, to pay the costs and expenses of As the graph above reveals, before the liquidation of BLMIS in 2008, SIPC’s Fund balance had doubled roughly every ten years. In addition, during those years and until 2010, SIPC had a substantial confirmed private line of credit.6 Due to the high cost and/or unavailability, SIPC no longer has the private line of credit. The Risk Landscape VerDate Sep<11>2014 17:13 Jan 22, 2020 Jkt 250001 PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 Historical Perspective E:\FR\FM\23JAN1.SGM 23JAN1 EN23JA20.001</GPH> has sufficient independent resources to carry out its purposes (thus obviating the need to borrow from the Federal Government), SIPC has determined to keep the assessment rate at 0.15% of NOR until SIPC’s unrestricted net assets total $5 billion. This 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. jbell on DSKJLSW7X2PROD with NOTICES 3987 3988 Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices level,8 the law nevertheless remains available to liquidate a systemically important broker-dealer. Mechanism for Setting the Assessment Rate Once the unrestricted net asset amount is $5 billion, SIPC would, as it often has in the past,9 commission a study to review the adequacy of the SIPC Fund. In the ordinary course, SIPC would commission the study every four years. The study would entail consideration of such factors as the overall state of the SIPC Fund, current and projected financial market conditions and trends, historic and perceived risks and threats to the viability of the SIPC Fund, any undue burden on members, or members’ of Systemically Important Financial Institutions: The Single Point of Entry Strategy, 78 FR 76614 (Dec. 18, 2013). 9 At various times, the size of SIPC’s Fund has been independently reviewed. See, e.g., GAO Report, The Regulatory Framework Has Minimized SIPC’s Losses, September 1992; Review of SIPC Risk Profile and Practices, Fitch Risk Management, 2003; Loss Modeling and Capital Reserve Adequacy Study, Algorithmics Inc., 2008; Task Force Recommendation Analysis: Methodology and Summary of Results, Opera Solutions LLC, 2013. jbell on DSKJLSW7X2PROD with NOTICES 8 Resolution VerDate Sep<11>2014 17:13 Jan 22, 2020 Jkt 250001 customers, and other factors deemed appropriate by the SIPC Board. Upon consideration of the results of the study and the report thereon that would issue, and after consultation with the Commission and one or more selfregulatory organizations, SIPC would set the appropriate assessment rate necessary to maintain the Fund and satisfy SIPA’s purposes. Other provisions of SIPC Bylaw Article 6 are unchanged such as the rate when the Fund is less than $150 million, or less than $100 million, or the circumstances under which the rate imposed can be more than 1⁄2 of 1% of gross revenues from the securities business but not more than 1% thereof.10 These provisions largely track the requirements under SIPA Sections 78ddd(c)(3)(B) and 78ddd(d)(1)(A) and B. Given not only the risks described above, but the risk to members that, by statute, a significant event could cause assessment rates immediately to jump to at least 0.50% of gross revenues from the securities business and possibly be as high as 1%, SIPC submits that 10 ‘‘Gross revenues from the securities business’’ is defined in SIPA Section 78lll(9). PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 growing the Fund at a consistent pace lessens any negative impact on members, with the attendant benefit of reaching $5 billion sooner. Barring unforeseen sizeable expenditures, SIPC estimates that at the current yearly assessment rate of .15% of NOR, SIPC’s unrestricted net assets, as reflected in SIPC’s audited Statement of Financial Position, would be $5 billion by no later than December 31, 2026. If SIPC did nothing to address the adequacy of the Fund or the assessment rate, then at a rate of 0.02% per annum, which would be the assessment under the current version of the Assessment Bylaw, the $5 billion balance would not be reached until the year 2040. Impact on Members Adopting the modifications proposed by SIPC should have a limited impact on member firms. As the chart below reveals, based on 2018 data, SIPC staff estimates that two-thirds of the total difference in annual assessments under the proposed assessment rate structure would be paid by only 30 members for which the difference in the assessment payment would amount, on average, only to .091% of their total revenue. E:\FR\FM\23JAN1.SGM 23JAN1 In the above chart, column 1 refers to the difference in amount that a brokerdealer would pay as a result of being assessed at a rate of .15% instead of .02%. Column 2 is the number of broker-dealers impacted at that amount. Column 3 is the percentage that the broker-dealers at a certain level represent relative to the total number of broker-dealers. Column 4 is the total additional amount paid by all brokerdealers at a given level. Column 5 is the percentage that the payments reflect relative to all payments. Column 6 is the percentage that the payments represent, on average, relative to the brokerdealers’ revenue. Thus, an assessment rate of .15%, as opposed to .02%, would cause the largest 30 SIPC members to pay approximately $172 million more out of their approximately $213 billion in VerDate Sep<11>2014 17:13 Jan 22, 2020 Jkt 250001 revenue. This increase amounts to approximately 8/100 of 1% of such members’ revenue, and represents 2⁄3 of the total impact on all members. More than half of SIPC members would see an increase of less than $2,500 in the amount of their annual assessment, with more than 20% of members paying a difference of less than $100. In other words, the impact of modifying the assessment structure on both the total assessment burden, and the distribution of the assessment burden, among individual broker-dealers, would be comparatively limited. Proposed Technical Changes Clarification of Role of Collection Agent In addition to the above, SIPC proposes to amend that portion of the Assessment Bylaw relating to Collection PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 3989 of General Assessments (SIPC Bylaw Article 6, Section 1(c)). Under SIPA Section 78iii(a), each selfregulatory organization (‘‘SRO’’) may act as the collection agent for SIPC to collect assessments payable by members for which the SRO is the examining authority. However, SIPA does not mandate that SIPC use a collection agent to collect assessments, and SIPA does not restrict collection exclusively to collection agents. See, e.g., SIPA Section 78ddd(c)(1) (‘‘Each member of SIPC shall pay to SIPC, or the collection agent for SIPC . . . . [emphasis added]’’). Furthermore, under SIPA Section 78ccc(b)(8), since SIPC has the power 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,’’ SIPC has the general authority E:\FR\FM\23JAN1.SGM 23JAN1 EN23JA20.002</GPH> jbell on DSKJLSW7X2PROD with NOTICES Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices 3990 Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices directly to collect assessments. Indeed, for more than 20 years—since the mid1990s—members have paid assessments directly to SIPC. Where members have failed to pay their assessments, SIPC has referred the delinquency to Commission staff and currently brings the matter to the attention of FINRA for collection. In keeping with current practice, and in light of technological developments and capabilities that have continued to improve considerably, the proposed bylaw removes the provision that requires members to pay assessments to collection agents. The proposed Bylaw amendment re-letters the provisions that follow current Bylaw Article 6, Section 1(c). The re-lettered provisions include current Section 1(d) of Bylaw Article 6 (Report by Collection Agents). Section 1(d) requires the SROs to report in writing to SIPC as to any member from which the SRO has or has not been successful in collecting payment. In this manner, SIPC can stay informed as to any member that continues to be delinquent and refer the member, as needed, to the Commission for further action under SIPA Section 78jjj(a). jbell on DSKJLSW7X2PROD with NOTICES Elimination of Interest Payment Period on Past-Due Payments Currently, the SIPC Bylaw provides that if a member’s assessment payment has not been received within 15 days of the due date, 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 is also presently working on the development of a portal through which, among other things, members can file assessment forms. The creation by SIPC of the means by which members can make immediate payment obviates the need for a grace period. II. Need for Public Comment Section 3(e)(1) of SIPA provides that the SIPC Board must file a copy of any proposed bylaw change with the Commission, accompanied by a concise general statement of the basis and purpose of the proposed bylaw change.11 The proposed bylaw change will become effective thirty days after the date of filing with the Commission or upon such later date as SIPC may designate or such earlier date as the Commission may determine unless: (A) The Commission, by notice to SIPC setting forth the reasons for such action, disapproves the proposed bylaw change as being contrary to the public interest or contrary to the purposes of SIPA; or (B) the Commission finds that the 11 15 U.S.C. 78ccc(e)(1). VerDate Sep<11>2014 17:13 Jan 22, 2020 Jkt 250001 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 for SIPC proposed rule changes in section 3(e)(2) of SIPA be followed with respect to the proposed bylaw change.12 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. In light of this fact and that the bylaw change provides for a modified calculation of the assessment rate and a change to collection practices, the Commission finds, pursuant to section 3(e)(1)(B) of SIPA,13 that the proposed bylaw change involves a matter of such significant public interest that public comment should be obtained and is requiring that the procedures applicable to SIPC proposed rule changes in section 3(e)(2) of SIPA 14 be followed. As required by section 3(e)(1)(B) of SIPA,15 the Commission has notified SIPC of this finding in writing. III. Date of Effectiveness of the Proposed Bylaw Changes and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register, or within such longer period (A) 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 (B) as to which SIPC consents, the Commission shall: (i) By order approve such proposed bylaw changes; or (ii) institute proceedings to determine whether such proposed bylaw changes should be disapproved.16 IV. Text of Proposed Bylaw Change The text of the proposed bylaw changes is provided below. Proposed new language is in italics; proposed deletions are in brackets. ARTICLE 6 ASSESSMENTS Section 1. General (a) Amount of Assessment (1) The amount of each member’s assessment for the member’s fiscal year shall be the product of the assessment rate established by SIPC for that fiscal year and either the member’s gross [or 12 15 U.S.C. 78ccc(e)(1). U.S.C. 78ccc(e)(1)(B). 14 15 U.S.C. 78ccc(e)(2). 15 15 U.S.C. 78ccc(e)(1)(B). 16 15 U.S.C. 78ccc(e)(2)(B). 13 15 PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 net ]revenues or net operating revenues from the securities business, as follows: (A) [The assessment rate shall be onefourth (1⁄4) of one (1) percent per annum of net operating revenues from the member’s securities business for each calendar year or part thereof unless SIPC determines that the balance of the SIPC Fund, as defined in Section 4(a)(2) of the Act, exclusive of confirmed lines of credit, will remain at or above $2.5 billion for six months or more] If at any time SIPC determines that SIPC’s unrestricted net assets are: (i) Less than $5.0 billion but not less than $2.5 billion, and are reasonably likely to remain less than $5.0 billion but not less than $2.5 billion, the amount of each member’s assessment shall be 0.15 percent per annum of net operating revenues from the member’s securities business for each calendar year or part thereof.[has aggregated a balance of $2.5 billion, and] (ii) less than $2.5 billon, the amount of each member’s assessment shall be one-fourth (1⁄4) of one (1) percent per annum of net operating revenues from the member’s securities business for each calendar year or part thereof. (B) Notwithstanding anything herein to the contrary, if at any time SIPC determines that the balance of the SIPC Fund aggregates or is reasonably likely to aggregate: (i) Less than $150,000,000—the amount of each member’s assessment shall be at an amount to be determined by SIPC, but in no case shall the amount of each member’s assessment be less than an assessment rate of one-fourth (1⁄4) of one (1) percent per annum of such member’s gross revenues from the securities business. (ii) less than $100,000,000—the amount of each member’s assessment shall be at an amount to be determined by SIPC, but in no case shall the amount of each member’s assessment be less than an assessment rate of one-half (1⁄2) of one (1) percent per annum of such member’s gross revenues from the securities business. (iii) The amount of each member’s assessment shall not exceed one-half (1⁄2) of one (1) percent per annum of such member’s gross revenues from the securities business, unless SIPC determines that a rate in excess of onehalf (1⁄2) of one (1) percent during any twelve (12) month period will not have a material adverse effect on the financial condition of its members or their customers. No assessment made pursuant to this section 1(a)(1) shall require payments during any such period that exceed in the aggregate one (1) percent of any member’s gross E:\FR\FM\23JAN1.SGM 23JAN1 jbell on DSKJLSW7X2PROD with NOTICES Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices revenues from the securities business for such period. [Notwithstanding the provisions of Section 1(a)(1)(A) herein, if SIPC determines that the balance of the SIPC Fund, as defined in Section 4(a)(2) of the Act, exclusive of confirmed lines of credit, (i) has aggregated $2.5 billion, and (ii) will remain at or above $2.5 billion for six months or more, but SIPC’s unrestricted net assets, as reflected in SIPC’s most recent audited Statement of Financial Position, are less than $2.5 billion, the assessment rate shall be 0.15 percent per annum of net operating revenues from the member’s securities business for each calendar year or part thereof.](C) SIPC shall commission a study (‘‘Study’’) every four years to examine the adequacy of the balance of SIPC’s unrestricted net assets and the SIPC Fund and the appropriate assessment rate that is necessary to fulfill the purposes of the Act. The Study will examine the overall state of SIPC’s unrestricted net assets and Fund balances, current and projected financial market conditions and trends, historic and perceived risks and threats to the viability of SIPC’s unrestricted net assets and Fund, any undue burden on members or members’ customers, and such other factors as the Board determines. The Study shall result in a report (‘‘Report’’) to be furnished to SIPC. The first Study shall be commissioned when SIPC reasonably anticipates that SIPC’s unrestricted net assets have reached a total of $5.0 billion. [If SIPC determines that the balance of the SIPC Fund, as defined in Section 4(a)(2) of the Act, exclusive of confirmed lines of credit, has aggregated $2.5 billion or more, and will remain at or above $2.5 billion for six months or more, and SIPC’s unrestricted net assets, as reflected in SIPC’s most recent audited Statement of Financial Position, are at or above $2.5 billion, members shall pay a minimum assessment, which shall be 0.02 percent of the net operating revenues from the securities business for each calendar year or part thereof.](D) Without limitation of SIPC’s authority under 15 U.S.C. 78ccc and 78ddd to set assessments, if SIPC determines that SIPC’s unrestricted net assets are $5.0 billion or more and are reasonably likely to remain above $5.0 billion, and after review of the information contained in the last Report at such time, and after consultation with the Securities and Exchange Commission and self-regulatory organizations, SIPC may not more than once in any four-year period, increase or decrease the assessment rate by up to, but not more than, twenty-five percent VerDate Sep<11>2014 17:13 Jan 22, 2020 Jkt 250001 (25%) of the rate in effect at that time. [Anything to the contrary herein notwithstanding, if at any time SIPC determines that the balance of the SIPC Fund, as defined in Section 4(a)(2) of the Act, exclusive of confirmed lines of credit, aggregates or is reasonably likely to aggregate: (i) Less than $2.5 billion and will likely remain less than $2.5 billion for a period of six (6) months or more—the amount of each member’s assessment shall be at an assessment rate of onefourth (1⁄4) of one (1) percent per annum of net operating revenue. (ii) less than $150,000,000—the amount of each member’s assessment shall be at an amount to be determined by SIPC, but in no case shall the amount of each member’s assessment be less than an assessment rate of one-fourth (1⁄4) of one (1) percent per annum of such member’s gross revenues from the securities business. (iii) less than $100,000,000—the amount of each member’s assessment shall be at an amount to be determined by SIPC, but in no case shall the amount of each member’s assessment be less than an assessment rate of one-half (1⁄2) of one (1) percent per annum of such member’s gross revenues from the securities business. (iv) The amount of each member’s assessment shall not exceed one-half (1⁄2) of one (1) percent per annum of such member’s gross revenues from the securities business, unless SIPC determines that a rate in excess of onehalf (1⁄2) of one (1) percent during any twelve (12) month period will not have a material adverse effect on the financial condition of its members or their customers. No assessment made pursuant to this section 1(a)(1) shall require payments during any such period that exceed in the aggregate one (1) percent of any member’s gross revenues from the securities business for such period.] (E) Any minimum assessment imposed upon each member of SIPC shall be 0.02 percent of the net operating revenues from the securities business of such member for each calendar year or part thereof. (2) Any change in assessments made in accordance with Section 1(a)(1) herein shall commence on the first day of the year following the date on which SIPC announces its determination, or on such other date if the exigency of the circumstances so warrants in SIPC’s determination, and continue until such time as SIPC provides otherwise. (3) Commencing on the first day of the month following the date on which SIPC borrows moneys pursuant to Section 4(f) or Section 4(g) of the Act, PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 3991 and continuing while any such borrowing is outstanding and until such further time as SIPC provides otherwise, the amount of each member’s assessment shall be at an assessment rate of not less than one-half (1⁄2) of one (1) percent per annum of such member’s gross revenues from the securities business. (b) Payments. Assessments shall be payable at such times and in such manner as may be determined by SIPC’s Vice President—Finance with the approval of the Chairman. [(c) Collection of General Assessments. Each member of the Corporation who is a member of a selfregulatory organization shall pay assessments to its collection agent. In the case of members who are not members of any self-regulatory organization, assessments shall be paid directly to the Corporation.] [(d)](c) Report by Collection Agents. Within 45 days after each due date, each self-regulatory organization that acts as[which is the] collection agent for SIPC shall submit a written report to SIPC[ the Corporation] as to any entity [for whom it acts as collection agent ]whose filing or assessment payment has not been received. [(e)](d) Interest on Assessments. If all or any part of an assessment payable under Section 4 of the Act has not been timely received[ by the collection agent within 15 days after the due date thereof], the member shall pay, in addition to the amount of the assessment, interest at the rate of 20% per annum on the unpaid portion of the assessment for each day it has been overdue. If any broker or dealer has incorrectly filed a claim for exclusion from membership in the Corporation, such broker or dealer shall pay, in addition to assessments due, interest at the rate of 20% per annum on the unpaid assessment for each day it has not been paid since the date on which it should have been paid. [(f) Gross Revenues. The term ‘‘gross revenues from the securities business’’ includes the revenues in the definition of gross revenues from the securities business set forth in the applicable sections of the Act.] Section 2. Overpayments If the final annual reconciliation filed by a terminated member reflects an assessment overpayment carried forward that exceeds $150.00, SIPC may refund such excess to the member upon receipt of the member’s written request therefor and after [the member’s ]SIPC [collection agent ]has confirmed [to SIPC ]that all of the member’s SIPC assessment form filings and payments E:\FR\FM\23JAN1.SGM 23JAN1 3992 Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices and reports required by SEC Rule 17a– 5 covering periods through the termination date have been reviewed and accepted. Section 3. Interpretation of Terms (a) For purposes of calculating assessments[ this article]: [(a)](i) The term ‘‘securities in trading accounts’’ shall mean securities held for sale in the ordinary course of business and not identified as having been held for investment. [(b)](ii) The term ‘‘securities in investment accounts’’ shall mean securities that are clearly identified as having been acquired for investment in accordance with provisions of the Internal Revenue Code applicable to dealers in securities. [(c)](iii) The term ‘‘fees and other income from such other categories of the securities business’’ shall mean all revenue related either directly or indirectly to the securities business except revenue included in Section 16(9)(A)–(K) and revenue specifically excepted in Section 4(c)(3)(C). (b) For purposes of this Article: (i) Gross Revenues. The term ‘‘gross revenues from the securities business’’ includes the revenues in the definition of gross revenues from the securities business set forth in the applicable sections of the Act. (ii) Net Operating Revenues. The term ‘‘net operating revenues from the securities business’’ means gross revenues from the securities business less interest and dividend expenses, and includes those clarifications as are set forth in the SIPC assessment forms and instructions. (iii) SIPC Fund or Fund. The term ‘‘SIPC Fund’’ or ‘‘Fund’’ is as defined in Section 4(a)(2) of the Act, exclusive of confirmed lines of credit. (iv) SIPC’s unrestricted net assets. The term ‘‘SIPC’s unrestricted net assets’’ means the lesser of SIPC’s unrestricted net assets as reflected in SIPC’s most recent audited Statement of Financial Position or reasonably expected by SIPC to be reflected in its next audited Statement of Financial Position. V. Solicitation of Comments jbell on DSKJLSW7X2PROD with NOTICES Interested persons are invited to submit written data, views, and arguments concerning the foregoing by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/other.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SIPC–2019–02 on the subject line. VerDate Sep<11>2014 17:13 Jan 22, 2020 Jkt 250001 Paper Comments • Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All comments should refer to File Number SIPC–2019–02. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/other.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed bylaw changes that are filed with the Commission, and all written communications relating to the proposed bylaw changes between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Commission. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SIPC–2019–02, and should be submitted on or before February 13, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–01023 Filed 1–22–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–88004; File No. SR– NASDAQ–2020–003] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Amend Rule 4121(b) January 17, 2020. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1, and Rule 19b–4 thereunder,2 notice is hereby given that on January 14, 2020, The Nasdaq Stock Market LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I and II, below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Rule 4121(b) concerning the resumption of trading following a Level 3 marketwide circuit breaker halt. The text of the proposed rule change is available on the Exchange’s website at https://nasdaq.cchwallstreet.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend Rule 4121(b) concerning the resumption of trading following a Level 3 marketwide circuit breaker halt. The Exchange is proposing this rule change in conjunction with other national securities exchanges and the Financial Industry Regulatory Authority (‘‘FINRA’’). Rule 4121 provides a methodology for determining when to halt trading in all stocks due to extraordinary market volatility (i.e., market-wide circuit breakers). The market-wide circuit breaker mechanism (‘‘MWCB’’) under Rule 4121 was approved by the 1 15 17 17 PO 00000 CFR 200.30–3(f)(2)(i); 17 CFR 200.30–3(f)(3). Frm 00102 Fmt 4703 Sfmt 4703 2 17 E:\FR\FM\23JAN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 23JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 15 (Thursday, January 23, 2020)]
[Notices]
[Pages 3986-3992]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-01023]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. SIPA-179; File No. SIPC-2019-02]


Securities Investor Protection Corporation; Notice of Filing of 
Proposed Bylaw Changes Relating to SIPC Member Assessments

January 16, 2020.
    Pursuant to Section 3(e)(1) of the Securities Investor Protection 
Act of 1970 (``SIPA''),\1\ on November 19, 2019 the Securities Investor 
Protection Corporation (``SIPC'') filed with the Securities and 
Exchange Commission (``Commission'') proposed bylaw changes relating to 
SIPC member assessments. Pursuant to section 3(e)(1)(B) of SIPA, the 
Commission finds that these proposed bylaw changes involve a matter of 
such significant public interest that public comment should be 
obtained.\2\ Therefore, pursuant to section 3(e)(2)(A) of SIPA, the 
Commission is publishing this notice to solicit comment from interested 
persons on the proposed bylaw changes.\3\
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    \1\ 15 U.S.C. 78ccc(e)(1).
    \2\ 15 U.S.C. 78ccc(e)(1)(B).
    \3\ 15 U.S.C. 78ccc(e)(2)(A).
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    In its filing with the Commission, SIPC included statements 
concerning the purpose of and statutory basis for the proposed bylaw 
changes as described below, which description has been substantially 
prepared by SIPC.

I. SIPC's Statement of the Purpose of, and Statutory Basis for, SIPC 
Proposed Bylaw Changes Relating to SIPC Member Assessments

    Pursuant to Section 3(e)(1) of SIPA, SIPC hereby submits for filing 
with the Commission proposed amendments to Article 6 of the SIPC Bylaws 
(``Bylaws''). Article 6 relates to the assessments that SIPC imposes 
upon its members.
    As revised, Article 6 would maintain assessments at the current 
rate of 0.15 percent of a member's net operating revenue from the 
securities business until SIPC's unrestricted net assets reach $5 
billion.\4\ ``Unrestricted net assets'' are comprised primarily of the 
amount in the SIPC Fund at year end, minus the estimated cost to 
complete pending liquidation proceedings, as reflected in SIPC's most 
recent audited Statement of Financial Position. Once the aforementioned 
condition is met, SIPC would commission a study to consider the 
adequacy of the SIPC Fund, and would do so every four years thereafter. 
The study would analyze a variety of factors, as set forth in the 
proposed amended Bylaw. After consideration of the study and the report 
thereon, and after consultation with the Commission and self-regulatory 
organizations, SIPC could increase or decrease, within certain limits, 
the appropriate assessment rate in order to maintain the Fund and 
effect SIPA's purposes.
---------------------------------------------------------------------------

    \4\ ``Net operating revenues from the securities business'' is 
``gross revenues from the securities business less interest and 
dividend expenses, and includes those clarifications as are set 
forth in the SIPC assessment forms and instructions.'' SIPC Bylaw 
Article 6, Section 1(a)(3)(g) [sic].
---------------------------------------------------------------------------

    Pursuant to SIPA Section 78ddd(c)(2), SIPC has consulted with self-
regulatory organizations with respect to the proposed amendments. SIPC 
has determined that the changes are necessary and appropriate to 
maintain the SIPC Fund.

Background

    SIPC is a non-profit member organization created in 1970 under 
SIPA, for the protection of customers of member broker-dealers placed 
in liquidation under SIPA. With some exceptions set by statute, all 
registered securities brokers or dealers are members of SIPC. SIPC 
protects the customers of member firms in liquidation under SIPA. Among 
other things, SIPC advances funds to satisfy the claims of customers. 
Each customer is protected by SIPC up to $500,000 against the loss of 
missing cash and/or securities entrusted by the customer to the broker. 
The $500,000 includes a limit of up to $250,000 where the allowed claim 
is for cash only. The advances by SIPC come from a ``Fund'' that SIPC 
administers. The Fund largely is comprised of assessments paid to SIPC 
by its members. The Fund also is used to pay the administrative 
expenses of a liquidation proceeding where the debtor's general estate 
is insufficient, and to finance the day-to-day operations of SIPC.

The Assessment Bylaw

    Article 6 of the Bylaws now imposes a yearly assessment rate of 
0.15% of net operating revenues from the member's securities business 
(``NOR'') where the balance of the SIPC Fund is less than $2.5 billion 
and will remain at that amount for six months or more. If the SIPC Fund 
has reached $2.5 billion but SIPC's unrestricted net asset amount is 
less than $2.5 billion, then the yearly assessment rate is .15% of NOR. 
Once the unrestricted net assets total at least $2.5 billion, then the 
assessment rate is a minimum assessment of .02% of NOR.
    Currently, SIPC's only sources of funding are its Fund and a 
possible Government loan. To ensure that SIPC

[[Page 3987]]

has sufficient independent resources to carry out its purposes (thus 
obviating the need to borrow from the Federal Government), SIPC has 
determined to keep the assessment rate at 0.15% of NOR until SIPC's 
unrestricted net assets total $5 billion. This 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.

General Statement of Basis and Purpose of Proposed Changes

    There is no scientific basis for determining the exact adequacy of 
the SIPC Fund. Nevertheless, SIPC's statutory obligation to protect 
customers of failed firms, and in certain cases, to pay the costs and 
expenses of administration of the liquidation proceeding, impose upon 
SIPC a duty to take a responsible approach to calculating both the size 
of the SIPC Fund, and the reasonableness of an assessment rate that 
maintains and promotes adequate funding.
    As SIPC has witnessed over the past decade, risks abound--from a 
large firm failure with encumbered assets, to a Ponzi scheme with 
significant losses to customers, to risks presented by a cybersecurity 
attack or the use of digital assets. Assessing the adequacy of the Fund 
is especially challenging because the cost of a liquidation does not 
necessarily correlate with any traditional measure of financial 
exposure for broker-dealers. Instead, the Fund's adequacy depends 
largely on member firms' compliance with customer protection or net 
capital rules, the probability of which is challenging to quantify.
    SIPC's resources must enhance investor confidence. Given the risks 
described above, and remaining vigilant regarding the uncertainties in 
an ever-changing marketplace, SIPC believes that in order for its 
mission of customer protection to succeed, SIPC must maintain a robust 
Fund.

Historical Perspective

    The initial SIPC Fund totaled $77.6 million.\5\ In 1992, SIPC's 
Board (``the Board'') raised the target balance of the SIPC Fund to $1 
billion, and the SIPC Fund reached that amount in 1996. The Board last 
sought to augment the size of the Fund in 2009, when, following the 
commencement of the liquidation proceedings of Lehman Brothers Inc. 
(``LBI''), and Bernard L. Madoff Investment Securities LLC (``BLMIS''), 
the assessment rate was revised to cause the Fund to grow to $2.5 
billion.
---------------------------------------------------------------------------

    \5\ Comprised of member assessments of $9.6 million, the 
transfer of $3 million from the American Stock Exchange, Inc. trust 
fund, and confirmed lines of credit totaling $65 million.
[GRAPHIC] [TIFF OMITTED] TN23JA20.001

    As the graph above reveals, before the liquidation of BLMIS in 
2008, SIPC's Fund balance had doubled roughly every ten years. In 
addition, during those years and until 2010, SIPC had a substantial 
confirmed private line of credit.\6\ Due to the high cost and/or 
unavailability, SIPC no longer has the private line of credit.
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    \6\ SIPC's last credit agreement, a $500 million, 3-yr. 
revolving credit facility, expired March 1, 2010.
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The Risk Landscape

    The financial crisis of 2008, and the ensuing liquidation 
proceedings of LBI and BLMIS, revealed clearly the need for SIPC to 
increase the Fund balance. Although the LBI liquidation proceeding 
ultimately did not require SIPC to advance funds to satisfy claims, or 
pay for expenses of administration, any future failure of a global 
enterprise and its broker-dealer affiliate could have a very different 
outcome for SIPC. For example, had funds sought by LBI been encumbered 
overseas, or had LBI been reducing artificially its segregated customer 
reserve requirement through otherwise legal complex transactions, that 
may have imposed significant demands on the SIPC Fund.
    The liquidation proceeding of BLMIS has required SIPC to make the 
largest aggregate advance in its history. In statistical terms, the 
amount is more than 100 standard deviations greater than the amounts 
advanced by SIPC in all of its previous cases.\7\ Today, an event 
statistically comparable to BLMIS would require advances to customers 
amounting to between $4 billion and $5 billion.
---------------------------------------------------------------------------

    \7\ In addition, the amounts advanced by SIPC in the BLMIS 
liquidation are more than 107 times greater than the average advance 
of the ten next largest SIPC cases.
---------------------------------------------------------------------------

    SIPC faces risks beyond those posed by large Ponzi schemes or a 
credit crisis. These additional risks, many of which are hard to 
quantify, include, for example, technology-related failures, such as a 
cyberattack on a large SIPC member that restricts access by customers 
to their assets; or risks stemming from the delay in computing a 
broker-dealer's reserve requirement. For example, SEC Rule 15c3-3, 17 
CFR 240.15c3-3, which governs the protection of customer assets, 
requires a broker-dealer to compute its cash reserve requirement on a 
weekly, not daily, basis. Although a number of SIPC members voluntarily 
rebalance their cash reserves on a daily basis, a large SIPC member 
that does not might not have enough cash in its Rule 15c3-3(e) reserve 
account due to an increase in its net cash obligations following its 
last required reserve computation.
    Another factor underscoring SIPC concerns is the potential risk to 
the solvency of the SIPC Fund under the Orderly Liquidation provisions 
of the Dodd Frank Act, Title II. Dodd-Frank creates an important role 
for SIPC in the event of the failure of a covered, large complex 
securities broker-dealer that presents systemic risk. Under Dodd-Frank, 
SIPC is designated as trustee for the liquidation of the broker-dealer 
under SIPA. 12 U.S.C. 5385(A). As trustee, SIPC must determine and 
satisfy claims against the broker-dealer consistent with SIPA. 12 
U.S.C. 5385(D). While the FDIC has expressed a preference to use Dodd-
Frank to intervene at the holding company

[[Page 3988]]

level,\8\ the law nevertheless remains available to liquidate a 
systemically important broker-dealer.
---------------------------------------------------------------------------

    \8\ Resolution of Systemically Important Financial Institutions: 
The Single Point of Entry Strategy, 78 FR 76614 (Dec. 18, 2013).
---------------------------------------------------------------------------

Mechanism for Setting the Assessment Rate

    Once the unrestricted net asset amount is $5 billion, SIPC would, 
as it often has in the past,\9\ commission a study to review the 
adequacy of the SIPC Fund. In the ordinary course, SIPC would 
commission the study every four years. The study would entail 
consideration of such factors as the overall state of the SIPC Fund, 
current and projected financial market conditions and trends, historic 
and perceived risks and threats to the viability of the SIPC Fund, any 
undue burden on members, or members' customers, and other factors 
deemed appropriate by the SIPC Board.
---------------------------------------------------------------------------

    \9\ At various times, the size of SIPC's Fund has been 
independently reviewed. See, e.g., GAO Report, The Regulatory 
Framework Has Minimized SIPC's Losses, September 1992; Review of 
SIPC Risk Profile and Practices, Fitch Risk Management, 2003; Loss 
Modeling and Capital Reserve Adequacy Study, Algorithmics Inc., 
2008; Task Force Recommendation Analysis: Methodology and Summary of 
Results, Opera Solutions LLC, 2013.
---------------------------------------------------------------------------

    Upon consideration of the results of the study and the report 
thereon that would issue, and after consultation with the Commission 
and one or more self-regulatory organizations, SIPC would set the 
appropriate assessment rate necessary to maintain the Fund and satisfy 
SIPA's purposes.
    Other provisions of SIPC Bylaw Article 6 are unchanged such as the 
rate when the Fund is less than $150 million, or less than $100 
million, or the circumstances under which the rate imposed can be more 
than \1/2\ of 1% of gross revenues from the securities business but not 
more than 1% thereof.\10\ These provisions largely track the 
requirements under SIPA Sections 78ddd(c)(3)(B) and 78ddd(d)(1)(A) and 
B.
---------------------------------------------------------------------------

    \10\ ``Gross revenues from the securities business'' is defined 
in SIPA Section 78lll(9).
---------------------------------------------------------------------------

    Given not only the risks described above, but the risk to members 
that, by statute, a significant event could cause assessment rates 
immediately to jump to at least 0.50% of gross revenues from the 
securities business and possibly be as high as 1%, SIPC submits that 
growing the Fund at a consistent pace lessens any negative impact on 
members, with the attendant benefit of reaching $5 billion sooner. 
Barring unforeseen sizeable expenditures, SIPC estimates that at the 
current yearly assessment rate of .15% of NOR, SIPC's unrestricted net 
assets, as reflected in SIPC's audited Statement of Financial Position, 
would be $5 billion by no later than December 31, 2026. If SIPC did 
nothing to address the adequacy of the Fund or the assessment rate, 
then at a rate of 0.02% per annum, which would be the assessment under 
the current version of the Assessment Bylaw, the $5 billion balance 
would not be reached until the year 2040.

Impact on Members

    Adopting the modifications proposed by SIPC should have a limited 
impact on member firms. As the chart below reveals, based on 2018 data, 
SIPC staff estimates that two-thirds of the total difference in annual 
assessments under the proposed assessment rate structure would be paid 
by only 30 members for which the difference in the assessment payment 
would amount, on average, only to .091% of their total revenue.

[[Page 3989]]

[GRAPHIC] [TIFF OMITTED] TN23JA20.002

    In the above chart, column 1 refers to the difference in amount 
that a broker-dealer would pay as a result of being assessed at a rate 
of .15% instead of .02%. Column 2 is the number of broker-dealers 
impacted at that amount. Column 3 is the percentage that the broker-
dealers at a certain level represent relative to the total number of 
broker-dealers. Column 4 is the total additional amount paid by all 
broker-dealers at a given level. Column 5 is the percentage that the 
payments reflect relative to all payments. Column 6 is the percentage 
that the payments represent, on average, relative to the broker-
dealers' revenue.
    Thus, an assessment rate of .15%, as opposed to .02%, would cause 
the largest 30 SIPC members to pay approximately $172 million more out 
of their approximately $213 billion in revenue. This increase amounts 
to approximately 8/100 of 1% of such members' revenue, and represents 
\2/3\ of the total impact on all members. More than half of SIPC 
members would see an increase of less than $2,500 in the amount of 
their annual assessment, with more than 20% of members paying a 
difference of less than $100. In other words, the impact of modifying 
the assessment structure on both the total assessment burden, and the 
distribution of the assessment burden, among individual broker-dealers, 
would be comparatively limited.

Proposed Technical Changes

Clarification of Role of Collection Agent
    In addition to the above, SIPC proposes to amend that portion of 
the Assessment Bylaw relating to Collection of General Assessments 
(SIPC Bylaw Article 6, Section 1(c)).
    Under SIPA Section 78iii(a), each self-regulatory organization 
(``SRO'') may act as the collection agent for SIPC to collect 
assessments payable by members for which the SRO is the examining 
authority. However, SIPA does not mandate that SIPC use a collection 
agent to collect assessments, and SIPA does not restrict collection 
exclusively to collection agents. See, e.g., SIPA Section 78ddd(c)(1) 
(``Each member of SIPC shall pay to SIPC, or the collection agent for 
SIPC . . . . [emphasis added]''). Furthermore, under SIPA Section 
78ccc(b)(8), since SIPC has the power 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,'' SIPC has the general authority

[[Page 3990]]

directly to collect assessments. Indeed, for more than 20 years--since 
the mid-1990s--members have paid assessments directly to SIPC. Where 
members have failed to pay their assessments, SIPC has referred the 
delinquency to Commission staff and currently brings the matter to the 
attention of FINRA for collection.
    In keeping with current practice, and in light of technological 
developments and capabilities that have continued to improve 
considerably, the proposed bylaw removes the provision that requires 
members to pay assessments to collection agents. The proposed Bylaw 
amendment re-letters the provisions that follow current Bylaw Article 
6, Section 1(c). The re-lettered provisions include current Section 
1(d) of Bylaw Article 6 (Report by Collection Agents). Section 1(d) 
requires the SROs to report in writing to SIPC as to any member from 
which the SRO has or has not been successful in collecting payment. In 
this manner, SIPC can stay informed as to any member that continues to 
be delinquent and refer the member, as needed, to the Commission for 
further action under SIPA Section 78jjj(a).
Elimination of Interest Payment Period on Past-Due Payments
    Currently, the SIPC Bylaw provides that if a member's assessment 
payment has not been received within 15 days of the due date, 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 is also presently working on 
the development of a portal through which, among other things, members 
can file assessment forms. The creation by SIPC of the means by which 
members can make immediate payment obviates the need for a grace 
period.

II. Need for Public Comment

    Section 3(e)(1) of SIPA provides that the SIPC Board must file a 
copy of any proposed bylaw change with the Commission, accompanied by a 
concise general statement of the basis and purpose of the proposed 
bylaw change.\11\ The proposed bylaw change will become effective 
thirty days after the date of filing with the Commission or upon such 
later date as SIPC may designate or such earlier date as the Commission 
may determine unless: (A) The Commission, by notice to SIPC setting 
forth the reasons for such action, disapproves the proposed bylaw 
change as being contrary to the public interest or contrary to the 
purposes of SIPA; or (B) the Commission finds that the 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 
for SIPC proposed rule changes in section 3(e)(2) of SIPA be followed 
with respect to the proposed bylaw change.\12\
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78ccc(e)(1).
    \12\ 15 U.S.C. 78ccc(e)(1).
---------------------------------------------------------------------------

    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. In light of this fact and that 
the bylaw change provides for a modified calculation of the assessment 
rate and a change to collection practices, the Commission finds, 
pursuant to section 3(e)(1)(B) of SIPA,\13\ that the proposed bylaw 
change involves a matter of such significant public interest that 
public comment should be obtained and is requiring that the procedures 
applicable to SIPC proposed rule changes in section 3(e)(2) of SIPA 
\14\ be followed. As required by section 3(e)(1)(B) of SIPA,\15\ the 
Commission has notified SIPC of this finding in writing.
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    \13\ 15 U.S.C. 78ccc(e)(1)(B).
    \14\ 15 U.S.C. 78ccc(e)(2).
    \15\ 15 U.S.C. 78ccc(e)(1)(B).
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III. Date of Effectiveness of the Proposed Bylaw Changes and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register, or within such longer period (A) 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 (B) as to which SIPC consents, the Commission shall: (i) By 
order approve such proposed bylaw changes; or (ii) institute 
proceedings to determine whether such proposed bylaw changes should be 
disapproved.\16\
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    \16\ 15 U.S.C. 78ccc(e)(2)(B).
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IV. Text of Proposed Bylaw Change

    The text of the proposed bylaw changes is provided below. Proposed 
new language is in italics; proposed deletions are in brackets.
ARTICLE 6
ASSESSMENTS
Section 1. General
    (a) Amount of Assessment
    (1) The amount of each member's assessment for the member's fiscal 
year shall be the product of the assessment rate established by SIPC 
for that fiscal year and either the member's gross [or net ]revenues or 
net operating revenues from the securities business, as follows:
    (A) [The assessment rate shall be one-fourth (\1/4\) of one (1) 
percent per annum of net operating revenues from the member's 
securities business for each calendar year or part thereof unless SIPC 
determines that the balance of the SIPC Fund, as defined in Section 
4(a)(2) of the Act, exclusive of confirmed lines of credit, will remain 
at or above $2.5 billion for six months or more] If at any time SIPC 
determines that SIPC's unrestricted net assets are:
    (i) Less than $5.0 billion but not less than $2.5 billion, and are 
reasonably likely to remain less than $5.0 billion but not less than 
$2.5 billion, the amount of each member's assessment shall be 0.15 
percent per annum of net operating revenues from the member's 
securities business for each calendar year or part thereof.[has 
aggregated a balance of $2.5 billion, and]
    (ii) less than $2.5 billon, the amount of each member's assessment 
shall be one-fourth (\1/4\) of one (1) percent per annum of net 
operating revenues from the member's securities business for each 
calendar year or part thereof.
    (B) Notwithstanding anything herein to the contrary, if at any time 
SIPC determines that the balance of the SIPC Fund aggregates or is 
reasonably likely to aggregate:
    (i) Less than $150,000,000--the amount of each member's assessment 
shall be at an amount to be determined by SIPC, but in no case shall 
the amount of each member's assessment be less than an assessment rate 
of one-fourth (\1/4\) of one (1) percent per annum of such member's 
gross revenues from the securities business.
    (ii) less than $100,000,000--the amount of each member's assessment 
shall be at an amount to be determined by SIPC, but in no case shall 
the amount of each member's assessment be less than an assessment rate 
of one-half (\1/2\) of one (1) percent per annum of such member's gross 
revenues from the securities business.
    (iii) The amount of each member's assessment shall not exceed one-
half (\1/2\) of one (1) percent per annum of such member's gross 
revenues from the securities business, unless SIPC determines that a 
rate in excess of one-half (\1/2\) of one (1) percent during any twelve 
(12) month period will not have a material adverse effect on the 
financial condition of its members or their customers. No assessment 
made pursuant to this section 1(a)(1) shall require payments during any 
such period that exceed in the aggregate one (1) percent of any 
member's gross

[[Page 3991]]

revenues from the securities business for such period.
    [Notwithstanding the provisions of Section 1(a)(1)(A) herein, if 
SIPC determines that the balance of the SIPC Fund, as defined in 
Section 4(a)(2) of the Act, exclusive of confirmed lines of credit, (i) 
has aggregated $2.5 billion, and (ii) will remain at or above $2.5 
billion for six months or more, but SIPC's unrestricted net assets, as 
reflected in SIPC's most recent audited Statement of Financial 
Position, are less than $2.5 billion, the assessment rate shall be 0.15 
percent per annum of net operating revenues from the member's 
securities business for each calendar year or part thereof.](C) SIPC 
shall commission a study (``Study'') every four years to examine the 
adequacy of the balance of SIPC's unrestricted net assets and the SIPC 
Fund and the appropriate assessment rate that is necessary to fulfill 
the purposes of the Act. The Study will examine the overall state of 
SIPC's unrestricted net assets and Fund balances, current and projected 
financial market conditions and trends, historic and perceived risks 
and threats to the viability of SIPC's unrestricted net assets and 
Fund, any undue burden on members or members' customers, and such other 
factors as the Board determines. The Study shall result in a report 
(``Report'') to be furnished to SIPC. The first Study shall be 
commissioned when SIPC reasonably anticipates that SIPC's unrestricted 
net assets have reached a total of $5.0 billion. [If SIPC determines 
that the balance of the SIPC Fund, as defined in Section 4(a)(2) of the 
Act, exclusive of confirmed lines of credit, has aggregated $2.5 
billion or more, and will remain at or above $2.5 billion for six 
months or more, and SIPC's unrestricted net assets, as reflected in 
SIPC's most recent audited Statement of Financial Position, are at or 
above $2.5 billion, members shall pay a minimum assessment, which shall 
be 0.02 percent of the net operating revenues from the securities 
business for each calendar year or part thereof.](D) Without limitation 
of SIPC's authority under 15 U.S.C. 78ccc and 78ddd to set assessments, 
if SIPC determines that SIPC's unrestricted net assets are $5.0 billion 
or more and are reasonably likely to remain above $5.0 billion, and 
after review of the information contained in the last Report at such 
time, and after consultation with the Securities and Exchange 
Commission and self-regulatory organizations, SIPC may not more than 
once in any four-year period, increase or decrease the assessment rate 
by up to, but not more than, twenty-five percent (25%) of the rate in 
effect at that time. [Anything to the contrary herein notwithstanding, 
if at any time SIPC determines that the balance of the SIPC Fund, as 
defined in Section 4(a)(2) of the Act, exclusive of confirmed lines of 
credit, aggregates or is reasonably likely to aggregate:
    (i) Less than $2.5 billion and will likely remain less than $2.5 
billion for a period of six (6) months or more--the amount of each 
member's assessment shall be at an assessment rate of one-fourth (\1/
4\) of one (1) percent per annum of net operating revenue.
    (ii) less than $150,000,000--the amount of each member's assessment 
shall be at an amount to be determined by SIPC, but in no case shall 
the amount of each member's assessment be less than an assessment rate 
of one-fourth (\1/4\) of one (1) percent per annum of such member's 
gross revenues from the securities business.
    (iii) less than $100,000,000--the amount of each member's 
assessment shall be at an amount to be determined by SIPC, but in no 
case shall the amount of each member's assessment be less than an 
assessment rate of one-half (\1/2\) of one (1) percent per annum of 
such member's gross revenues from the securities business.
    (iv) The amount of each member's assessment shall not exceed one-
half (\1/2\) of one (1) percent per annum of such member's gross 
revenues from the securities business, unless SIPC determines that a 
rate in excess of one-half (\1/2\) of one (1) percent during any twelve 
(12) month period will not have a material adverse effect on the 
financial condition of its members or their customers. No assessment 
made pursuant to this section 1(a)(1) shall require payments during any 
such period that exceed in the aggregate one (1) percent of any 
member's gross revenues from the securities business for such period.]
    (E) Any minimum assessment imposed upon each member of SIPC shall 
be 0.02 percent of the net operating revenues from the securities 
business of such member for each calendar year or part thereof.
    (2) Any change in assessments made in accordance with Section 
1(a)(1) herein shall commence on the first day of the year following 
the date on which SIPC announces its determination, or on such other 
date if the exigency of the circumstances so warrants in SIPC's 
determination, and continue until such time as SIPC provides otherwise.
    (3) Commencing on the first day of the month following the date on 
which SIPC borrows moneys pursuant to Section 4(f) or Section 4(g) of 
the Act, and continuing while any such borrowing is outstanding and 
until such further time as SIPC provides otherwise, the amount of each 
member's assessment shall be at an assessment rate of not less than 
one-half (\1/2\) of one (1) percent per annum of such member's gross 
revenues from the securities business.
    (b) Payments. Assessments shall be payable at such times and in 
such manner as may be determined by SIPC's Vice President--Finance with 
the approval of the Chairman.
    [(c) Collection of General Assessments. Each member of the 
Corporation who is a member of a self-regulatory organization shall pay 
assessments to its collection agent. In the case of members who are not 
members of any self-regulatory organization, assessments shall be paid 
directly to the Corporation.]
    [(d)](c) Report by Collection Agents. Within 45 days after each due 
date, each self-regulatory organization that acts as[which is the] 
collection agent for SIPC shall submit a written report to SIPC[ the 
Corporation] as to any entity [for whom it acts as collection agent 
]whose filing or assessment payment has not been received.
    [(e)](d) Interest on Assessments. If all or any part of an 
assessment payable under Section 4 of the Act has not been timely 
received[ by the collection agent within 15 days after the due date 
thereof], the member shall pay, in addition to the amount of the 
assessment, interest at the rate of 20% per annum on the unpaid portion 
of the assessment for each day it has been overdue. If any broker or 
dealer has incorrectly filed a claim for exclusion from membership in 
the Corporation, such broker or dealer shall pay, in addition to 
assessments due, interest at the rate of 20% per annum on the unpaid 
assessment for each day it has not been paid since the date on which it 
should have been paid.
    [(f) Gross Revenues. The term ``gross revenues from the securities 
business'' includes the revenues in the definition of gross revenues 
from the securities business set forth in the applicable sections of 
the Act.]
Section 2. Overpayments
    If the final annual reconciliation filed by a terminated member 
reflects an assessment overpayment carried forward that exceeds 
$150.00, SIPC may refund such excess to the member upon receipt of the 
member's written request therefor and after [the member's ]SIPC 
[collection agent ]has confirmed [to SIPC ]that all of the member's 
SIPC assessment form filings and payments

[[Page 3992]]

and reports required by SEC Rule 17a-5 covering periods through the 
termination date have been reviewed and accepted.
Section 3. Interpretation of Terms
    (a) For purposes of calculating assessments[ this article]:
    [(a)](i) The term ``securities in trading accounts'' shall mean 
securities held for sale in the ordinary course of business and not 
identified as having been held for investment.
    [(b)](ii) The term ``securities in investment accounts'' shall mean 
securities that are clearly identified as having been acquired for 
investment in accordance with provisions of the Internal Revenue Code 
applicable to dealers in securities.
    [(c)](iii) The term ``fees and other income from such other 
categories of the securities business'' shall mean all revenue related 
either directly or indirectly to the securities business except revenue 
included in Section 16(9)(A)-(K) and revenue specifically excepted in 
Section 4(c)(3)(C).
    (b) For purposes of this Article:
    (i) Gross Revenues. The term ``gross revenues from the securities 
business'' includes the revenues in the definition of gross revenues 
from the securities business set forth in the applicable sections of 
the Act.
    (ii) Net Operating Revenues. The term ``net operating revenues from 
the securities business'' means gross revenues from the securities 
business less interest and dividend expenses, and includes those 
clarifications as are set forth in the SIPC assessment forms and 
instructions.
    (iii) SIPC Fund or Fund. The term ``SIPC Fund'' or ``Fund'' is as 
defined in Section 4(a)(2) of the Act, exclusive of confirmed lines of 
credit.
    (iv) SIPC's unrestricted net assets. The term ``SIPC's unrestricted 
net assets'' means the lesser of SIPC's unrestricted net assets as 
reflected in SIPC's most recent audited Statement of Financial Position 
or reasonably expected by SIPC to be reflected in its next audited 
Statement of Financial Position.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/other.shtml); or
     Send an email to [email protected]. Please include 
File Number SIPC-2019-02 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All comments should refer to File Number SIPC-2019-02. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's internet website (https://www.sec.gov/rules/other.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed bylaw changes that are filed 
with the Commission, and all written communications relating to the 
proposed bylaw changes between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Commission. 
All comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly.
    All submissions should refer to File Number SIPC-2019-02, and 
should be submitted on or before February 13, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(f)(2)(i); 17 CFR 200.30-3(f)(3).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-01023 Filed 1-22-20; 8:45 am]
BILLING CODE 8011-01-P

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