Update: On July 24, 2020, the SEC and FDIC adopted a final rule to implement provisions applicable to the orderly liquidation of covered broker-dealers under Title II of the Dodd-Frank Act. The final rule, which is substantively identical to the proposed rule, will become effective 60 days after publication in the Federal Register.

On February 17, 2016, the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC) jointly issued proposed rules to implement provisions applicable to the orderly liquidation of covered broker-dealers under Title II of the Dodd-Frank Act. Title II sets out an alternative insolvency regime for the orderly liquidation of large financial companies, including certain large broker-dealers, that meet specified criteria.

The SEC and FDIC are accepting comments on the proposal until May 2, 2016.

For purposes of the proposed rules, a "covered broker or dealer" would be a company that is the subject of an affirmative Section 203(b) or Section 210(a)(1)(E) determination under Dodd-Frank, and that is a qualified broker or dealer. Following determination under Section 203 or Section 210:

Following appointment of the SIPC as trustee for the covered broker-dealer, the proposed rules would require:

Although a SIPA proceeding is conducted under bankruptcy court supervision, a Title II proceeding would be conducted entirely outside of the bankruptcy courts, through an administrative process, with the FDIC acting as receiver. Therefore, filing a notice and application for a protective decree would give notice to interested parties that an orderly liquidation has been initiated.

The proposal sets out a non-exclusive list of notices. Under the proposal, a notice and application for a protective decree under Title II may, among other things, provide for notice:

Under the proposed rules, the FDIC would have the authority, as receiver or in anticipation of being appointed receiver, to form one or more bridge broker-dealers as a means of liquidating the covered broker-dealer. Following the establishment of one or more bridge broker-dealers, the FDIC would transfer all customer accounts, associated customer name securities, and customer property to the bridge broker-dealers unless the FIDC, after consulting with the SEC and the SIPC, determines that either:

The proposal would also:

In a Title II liquidation of a covered broker-dealer, a customer's net equity claim against the covered broker-dealer would be deemed to be satisfied and discharged to the extent that customer property of the covered broker-dealer, along with property made available through advances from the SIPC, is transferred and allocated to the customer's account at the bridge broker-dealer. The FDIC, as receiver, in consultation with the SIPC, as trustee, would allocate customer property and property made available through advances from the SIPC in a manner consistent with the SIPA and with the SIPC's normal practices. The use of a bridge broker-dealer would be designed to give customers access to their accounts as quickly as practicable, while ensuring that customers receive assets in the form and amount that they would receive in a SIPA liquidation.

In addition, the proposed rules provide that:

The proposal would provide the SIPC with the authority as trustee for the covered broker-dealer to make determinations, allocations, and advances in connection with customer and creditor claims in a manner consistent with its customary practices in a liquidation under the SIPA. Each customer of a covered broker-dealer would receive cash and securities at least equal in amount and value, as of the appointment date, to what that customer would have received in a SIPA proceeding.

The notice of the FDIC's appointment as receiver would be required to be accompanied by notice of the SIPC's appointment as trustee. The FDIC would consult with the SIPC regarding procedures for filing a claim, including the form of claim and the filing instructions, to facilitate a process that is consistent with the SIPC's general practices. The claim form would include a provision permitting a claimant to claim customer status, if applicable, but the inclusion of any claim to customer status on the claim form would not be determinative of customer status under the SIPA.

Under the proposal, the claims bar date would be the date following the expiration of the six-month period beginning on the date that the notice to creditors was first published. Any claim filed after the claims bar date would be disallowed, except that a claim filed after the claims bar date would be considered by the receiver if both:

Any claim for net equity filed more than 60 days after the notice to creditors is first published need not be paid or satisfied in whole or in part out of customer property and, to the extent the claim is paid by funds advanced by the SIPC, it would be satisfied in cash or securities, or both, as the SIPC determines is most economical to the receivership estate.

The proposal would require the FDIC to notify a claimant whether it would allow a claim within the 180-day period or the expedited 90-day period. The process established for the determination of customer claims would constitute the exclusive process for the determination of those claims. No one customer's claim, or group of customer claims, would be treated in an expedited manner ahead of other customers' claims.

The receiver's determination to allow or disallow a claim in whole or in part would use the determinations made by the SIPC regarding customer status, claims for net equity, claims for customer name securities, and whether property held by the covered broker-dealer qualifies as customer property. A claimant would have the right to seek a de novo judicial review of any claim that is disallowed in whole or in part.