On February 17, the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC) proposed a joint rule that would govern the resolution of large broker-dealers that are designated as “covered financial companies” under the Orderly Liquidation Authority (OLA) provisions (Title II) of the Dodd-Frank Act. OLA allows the FDIC to resolve and liquidate systemically important banking organizations (other than insured depository institutions) and nonbank financial institutions that generally are designated as “covered financial companies” under OLA.

Insolvent SEC-regulated broker-dealers currently are liquidated under the Securities Investor Protection Act (SIPA) with the Securities Investor Protection Corporation (SIPC) appointed by the SEC to oversee the broker-dealer’s liquidation by a court-appointed liquidation trustee. In the case of large SEC- regulated broker-dealers, however, OLA generally authorizes the Federal Reserve Board and the SEC by supermajority vote, in consultation with the FDIC, to issue an orderly liquidation recommendation to the Secretary of the Treasury to designate these firms as “covered financial companies.”

Under section 205 of the Dodd-Frank Act, when the FDIC is appointed as receiver for a covered broker-dealer, it must appoint SIPC as trustee to liquidate the broker-dealer under SIPA. In such a case, SIPC generally can exercise its existing powers and those conferred on a SIPA trustee under SIPA, although it does not have authority over any broker-dealer assets or liabilities that are transferred by the FDIC to a “bridge financial company” (a company that is created by the FDIC to preserve and maintain key operating businesses of an insolvent covered financial company).

A major focus of the proposed rulemaking (and section 205) is to preserve SIPC’s general authority and the SIPA rights of the broker-dealer’s customers within the OLA framework, while confirming and defining the FDIC’s collateral OLA authority. The proposed joint rule would implement the OLA provisions governing covered broker-dealers primarily by:

  • clarifying key terms used in the relevant Title II authority,
  • proposing a mechanism for integrating the requirements and authorities of OLA on the one hand with those of SIPA on the other hand,
  • further defining the respective roles of SIPC and the FDIC in a covered broker-dealer liquidation,
  • specifying the process for the filing of a protective decree for the covered broker-dealer, and specifying in detail the procedural aspects (e.g., the claims process, claims priorities, treatment of administrative expenses, etc.) of the OLA process for the covered broker-dealer.

Comments on the proposed rule will be due 60 days after the publication of the SEC/FDIC notice in the Federal Register.