Banking and Finance Law Daily FDIC, SEC adopt final rule providing for orderly liquidation of broker-dealers
Monday, July 27, 2020

FDIC, SEC adopt final rule providing for orderly liquidation of broker-dealers

By Charles A. Menke, J.D.

The final rule implements provisions of Title II of the Dodd-Frank Act and was developed in consultation with the Securities Investor Protection Corporation.

The Federal Deposit Insurance Corporation and the Securities and Exchange Commission have adopted a final rule to provide for the orderly liquidation of large broker-dealers, the FDIC announced. The final rule implements Section 205 of the Dodd-Frank Act, which provides the authority for the appointment of the FDIC as receiver to conduct the orderly liquidation of systemically important financial companies. The final rule takes effect 60 days after publication in the Federal Register.

Dodd-Frank requirements. Under the Dodd-Frank Act, the orderly liquidation of a covered broker-dealer must be accomplished in a manner that ensures that customers of the covered broker-dealer receive payments or property at least as beneficial to them as would have been the case had the covered broker-dealer been liquidated under the Securities Investor Protection Act of 1970 (SIPA). The final rule harmonizes and clarifies the integration of applicable SIPA principles into Title II in a manner that is consistent with these requirements. Among other things, the final rule clarifies how the relevant provisions of SIPA would be incorporated into a Title II proceeding. In addition, the final rule describes the claims process applicable to customers and other creditors of a covered broker-dealer and clarifies the FDIC’s powers as receiver with respect to the transfer of assets of a covered broker-dealer to a bridge broker-dealer.

Customer protections. The final rule addresses many of the customer protection features of SIPA that were incorporated by the Dodd-Frank Act into Title II. For example, upon the appointment of the FDIC as receiver, the FDIC would appoint the Securities Investor Protection Corporation (SIPC) to act as trustee for the broker-dealer. SIPC, as trustee, would determine and satisfy customer claims in the same manner as it would in a proceeding under SIPA. The treatment of the covered broker-dealer’s qualified financial contracts would be governed in accordance with Title II.

Bridge broker-dealer. In addition, the FDIC is authorized to use a newly organized bridge broker-dealer for the liquidation, in which the customer accounts, securities, and property would be transferred to that entity. The transfer of assets and liabilities to a bridge broker-dealer would enable the receiver to continue the broker-dealer’s operations and maximize the value of the assets by avoiding a forced or distressed sale. Continuing the broker-dealer’s operations also may help mitigate the impact of the failure on other market participants and minimize systemic risk.

Prior proposal. The final rule is substantially identical to the agencies’ joint proposal that was issued in 2016 (see Banking and Finance Law Daily, Feb. 18, 2016). According to an FDIC Staff Memorandum, while four years have passed since the proposal’s publication, FDIC staff believes that the underlying rationale and support for the final rule remains valid. In addition, FDIC staff does not believe there is a need to re-propose the rule for public comment.

MainStory: TopStory BankingOperations DoddFrankAct Receiverships SecuritiesDerivatives

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