Rules of the Securities Investor Protection Corporation

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 300

[Release No. SIPA-163; File No. SIPC-96-1]

Rules of the Securities Investor Protection Corporation

AGENCY: Securities and Exchange Commission.

ACTION: Order approving a proposed rule change of the Securities Investor Protection Corporation.

SUMMARY: The Securities and Exchange Commission (“Commission”) is approving a rule change submitted by the Securities Investor Protection Corporation (“SIPC”) as required by Section 3(e)(2) of the Securities Investor Protection Act of 1970 (“SIPA”). SIPC's proposed rule change amends two Series 300 SIPC Rules relating to the closeout and completion of contracts for the purchase or sale of securities made by debtors in liquidation under SIPA. Because SIPC rules have the force and effect as if promulgated by the Commission, those rules are published in Title 17 of the Code of Federal Regulations (“CFR”).

EFFECTIVE DATE: April 7, 1997.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate Director, 202/942-0131, Peter R.

Geraghty, Assistant Director 202/942-0177, or Louis A. Randazzo, Special Counsel, 202/942-0191, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

Pursuant to Section 3(e)(2) of SIPA,[1] on October 10, 1996, SIPC [2] filed with the Commission a proposed rule change (File No. SIPC-96-1). The proposed rule change amends SIPC Rules 300 [3] and 301 [4] which relate to the closeout and completion of contracts for the purchase or sale of securities made by debtors in liquidation under SIPA, to make them consistent with Commission Rule 15c6-1 [5] under the Securities Exchange Act of 1934 (“Act”), which established three business days as the standard settlement cycle for most securities transactions.

[1] 15 U.S.C. 78ccc(e)(2) (1995).

[2] SIPC is a non-profit membership corporation providing certain protection to customers of member broker-dealers that experience financial difficulty.

[3] 17 CFR 300.300 (1996).

[4] 17 CFR 300.301 (1996).

[5] 17 CFR 240.15c6-1 (1996).

II. Proposed Rule Change

SIPC Rules 300 and 301 set forth SIPC's requirements and procedures for closing out or completing open contractual commitments for the purchase or sale of securities between a SIPC member broker-dealer undergoing liquidation (“debtor”) and other broker-dealers. Currently, under SIPC Rule 301, an open contractual commitment made between a debtor and another broker-dealer in the ordinary course of the debtor's business may be closed out or completed if, among other things, the open contractual commitment (1) had a settlement date on or within 30 calendar days prior to the filing date (i.e., the date SIPC files an application for a protective decree) and the respective obligations of the parties remain outstanding on the filing date or had a settlement date which occurs on or within five business days subsequent to the filing date and (2) had a trade date on or within five business days prior to such settlement date. Rule 300 currently defines open contractual commitments as a failed to receive or a failed to deliver which (1) had a settlement date prior to the filing date and the respective obligations of the parties remained outstanding on the filing date or (2) had a settlement date which occurs on or within five business days subsequent to the filing date.

In June of 1995, Commission Rule 15c6-1 became effective, which established three business days as the standard settlement timeframe for most securities transactions.[6] Because Rules 300 and 301 currently refer to a five business day settlement timeframe, SIPC is amending Rules 300 and 301 by replacing the five business day references with three business days. This will make SIPC Rules 300 and 301 consistent with the three business day settlement period in Commission Rule 15c6-1. In addition, SIPC is making a technical amendment to Rule 300(a),[7] which will replace the reference to section 16(8) of SIPA [8] with section 16(7) of SIPA.[9] This technical correction will conform a statutory citation in Rule 300 to the correct section of SIPA.

[6] Specifically, Rule 15c6-1 provides, among other things, that a broker-dealer shall not effect or enter into a contract for the purchase or sale of a security that provides for payment of funds and delivery of securities later than the third business day after the date of the contract unless otherwise expressly agreed to by the parties at the time of the transaction. Rule 15c6-1 does not apply to an exempted security, municipal security (Municipal Securities Rulemaking Board rules required municipal securities to clear three business days after the date of the contract), commercial paper, bankers' acceptance, commercial bill, or government security. Prior to the effective date of Rule 15c6-1, the settlement cycle for securities transactions was five business days. See securities Exchange Act Release No. 33023 (October 6, 1993), 58 FR 52891 (October 13, 1993).

[7] 17 CFR 300.300(a) (1996).

[8] 16 U.S.C. 78lll(8) (1995).

[9] 15 U.S.C. 78lll(7) (1995).

Notice of the proposed rule change was published in the Federal Register on November 1, 1996.[10] No comments were received.[11]

[10] See Release No. SIPA-160 (October 25, 1996), 61 FR 56485 (November 1, 1996).

[11] SIPC consented to an extension of the Commission's action date for the proposed rule change. See Letter from Kevin H. Bell, Assistant General Counsel, SIPC, to Louis A. Randazzo, Special Counsel, SEC, dated November 25, 1996.

III. Discussion and Commission Action

For the reasons discussed below, the Commission believes that the amendments are consistent with Sectopms 3(e)(2)(D) [12] and 8(e) [13] of SIPA. Section 3(e)(2)(D) of SIPA requires SIPC rule changes to be in the public interest and consistent with the purposes of SIPA. Section 8(e) requires that SIPC adopt rules with respect to the closeout of contracts with a debtor for the purchase or sale of securities in the ordinary course of its business. Specifically, the commission believes that the proposed amendments make SIPC Rules 300 and 301 consistent with Commission Rule 15c6-1. In addition, the Commission believes that the amendments will ensure that SIPC's rules close off stale transactions from being completed, other than as a possible claim against the debtor's estate, while at the same time ensuring that current securities transactions with the standard three business day settlement period are completed. Finally, SIPC would retain the ability to closeout open contractual commitments that are not covered by SIPC rules. For example, pursuant to SIPC Rule 306,[14] SIPC has discretion, after consulting with the Commission, to direct the closeout or completion of an open contractual commitment, irrespective of whether it is covered by Rules 300 or 301.

[12] 15 U.S.C. 78ccc(e)(2)(D) (1995).

[13] 15 U.S.C. 78fff-2(e) (1995).

[14] 17 CFR 300.306 (1996).

Accordingly, the Commission finds that the proposed SIPC rule amendments are in the public interest and are consistent with the purposes of the SIPA.

It is therefore ordered by the Commission, pursuant to Section 3(e)(2) of SIPA, that the above mentioned proposed rule change is approved. In accordance with Section 3(e)(2) of SIPA, the approved rule change shall be given force and effect as if promulgated by the Commission.

IV. List of Subjects in 17 CFR Part 300

Brokers, Securities, Securities Investor Protection Corporation.

In accordance with the foregoing, Title 17 Chapter II of the Code of Federal Regulations is amended as follows:

PART 300—RULES OF THE SECURITIES INVESTOR PROTECTION CORPORATION

1. The authority citation for Part 300 continues to read as follows:

Authority: Section 3, 84 Stat. 1636, as amended; 15 U.S.C. 78ccc.

Sec. 300.300 [Amended]

2. Section 300.300(a) is amended by removing the reference to “section 16(8)” and in its place adding “section 16(7),” and in Sec. 300.300(c) removing the reference to “five business days” and in its place adding “three business days”.

Sec. 300.301 [Amended]

3. Sections 300.301 (a)(2)(i) and (a)(2)(ii) are amended by removing the references to “five business days” and in their place adding “three business days”.

By the Commission.

Dated: March 3, 1997. Margaret H. McFarland, Deputy Secretary.

[FR Doc. 97-5670 Filed 3-6-97; 8:45 am]

BILLING CODE 8010-01-M