US Codex
Bill
Notes

To amend the Securities Investor Protection Act of 1970 to confirm that a customer’s net equity claim is based on the customer’s last statement and that certain recoveries are prohibited, to provide the Securities and Exchange Commission with oversight of the Securities Investor Protection Corporation, and for other purposes.

H.R. 5852 · 114th Congress · Jul 14, 2016 · Lineage

A BILL

Section 1 Securities Investor Protection Act of 1970 amendments

(a)
Net equity based on last statement— Section 16(11) of the Securities Investor Protection Act of 1970 (15 U.S.C. 78lll(11)) is amended to read as follows:

“(11) Net equity

“(A) In general—The term net equity means the dollar amount of the account or accounts of a customer, to be determined by—

“(i) calculating the sum which would have been owed by the debtor to such customer if the debtor had liquidated, by sale or purchase on the filing date—

“(I) all securities positions of such customer (other than customer name securities reclaimed by such customer); and

“(II) all positions in futures contracts and options on futures contracts held in a portfolio margining account carried as a securities account pursuant to a portfolio margining program approved by the Commission, including all property collateralizing such positions, to the extent that such property is not otherwise included herein; minus

“(ii) any indebtedness of such customer to the debtor on the filing date; plus

“(iii) any payment by such customer of such indebtedness to the debtor which is made with the approval of the trustee and within such period as the trustee may determine (but in no event more than sixty days after the publication of notice under section 8(a)).

“(B) Treatment of certain commodity futures contracts—A claim for a commodity futures contract received, acquired, or held in a portfolio margining account pursuant to a portfolio margining program approved by the Commission or a claim for a security futures contract, shall be deemed to be a claim with respect to such contract as of the filing date, and such claim shall be treated as a claim for cash.

“(C) Treatment of accounts held by a customer in separate capacities—In determining net equity under this paragraph, accounts held by a customer in separate capacities shall be deemed to be accounts of separate customers.

“(D) Reliance on final customer statement

“(i) In general—In determining net equity under this paragraph, the positions, options, and contracts of a customer reported to the customer as held by the debtor, and any indebtedness of the customer to the debtor, shall be determined based on—

“(I) the information contained in the last statement issued by the debtor to the customer before the filing date; and

“(II) any additional written confirmations of the customer’s positions, options, contracts, or indebtedness received after such last statement but before the filing date.

“(ii) Exception when debtor’s records indicate higher value—Notwithstanding clause (i), if the books and records of the debtor indicate that the net value of a customer’s positions, options, and contracts reported to the customer as held by the debtor, and any indebtedness of the customer to the debtor, is greater than the net value of the customer as calculated under clause (i) using the customer’s last statement, then the determination of the net equity of the customer under this paragraph shall be done using the books and records of the debtor instead of the customer’s last statement.

“(iii) Fraud exception—The provisions of this subparagraph shall not apply to any customer that—

“(I) knew the debtor was involved in fraudulent activity with respect to any customer of the debtor which reasonably indicated a fraud adversely affecting a substantial number of customers; or

“(II) was a person that—

“(aa) was, or was required to be, registered—

“(AA) as a broker or dealer under the Securities Exchange Act of 1934; or

“(BB) as an investment adviser under the Investment Advisers Act of 1940, or that would have been required to register as an investment adviser under the Investment Advisers Act of 1940 but for section 203(m) of such Act;

“(bb) knew, or, due to the activities of such person causing such person to be described under item (aa), should have known, that the debtor was involved in fraudulent activity with respect to any customer of the debtor; and

“(cc) did not notify SIPC, the Commission, or law enforcement personnel that the debtor was involved in such fraudulent activity.”

(b)
Allocation of customer property to customers— Section 8(c) of the Securities Investor Protection Act of 1970 (15 U.S.C. 78fff–2(c)) is amended—
(1)
in paragraph (1), by amending subparagraph (B) to read as follows:

“(B) second, to customers of such debtor, as described under paragraph (4);”

(2)
by adding at the end the following:

“(4) Allocation of customer property to customers

“(A) In general—Allocations of customer property to customers under paragraph (1)(B) shall be made such that customers share in customer property based on a methodology—

“(i) based on the net equity of a customer, as determined using the last statement issued by the debtor to the customer before the filing date;

“(ii) determined by the trustee, in consultation with the Commission; and

“(iii) approved by the court.

“(B) Alternate methodology—If the trustee determines that allocating customer property in accordance with subparagraph (A) would be unfair and inequitable to a substantial segment of customers and would not fully serve the remedial purposes of this Act, allocations of customer property to customers under paragraph (1)(B) shall be made such that customers share in customer property based on a fair and reasonable methodology, with special consideration for the typical, non-professional investor, that—

“(i) if the trustee determines that it is necessary in order to reach a fair and reasonable result, is determined without regard to section 16(11)(D);

“(ii) is determined by the trustee, in consultation with the Commission; and

“(iii) is approved by the court.

“(C) Public notice and comment—Before approving a proposed methodology under subparagraph (A)(ii) or subparagraph (B)(ii), the court shall—

“(i) notify customers and other interested parties that the court is considering the proposed methodology; and

“(ii) provide the customers and interested parties an opportunity to provide comments on the proposed methodology.”

(c)
Prohibition on certain recoveries—
(1)
In general— Section 8 of the Securities Investor Protection Act of 1970 (15 U.S.C. 78fff–2) is amended by adding at the end the following new subsection:

“(g) Prohibition on certain recoveries—Notwithstanding any other provision of this Act, a trustee may not recover any property transferred by the debtor to a customer before the filing date unless, at the time of such transfer, such customer—

“(1) knew the debtor was involved in fraudulent activity with respect to any customer of the debtor which reasonably indicated a fraud adversely affecting a substantial number of customers; or

“(2) was a person that—

“(A) was, or was required to be, registered—

“(i) as a broker or dealer under the Securities Exchange Act of 1934; or

“(ii) as an investment adviser under the Investment Advisers Act of 1940, or that would have been required to register as an investment adviser under the Investment Advisers Act of 1940 but for section 203(m) of such Act;

“(B) knew, or, due to the activities of such person causing such person to be described under subparagraph (A), should have known, that the debtor was involved in fraudulent activity with respect to any customer of the debtor; and

“(C) did not notify SIPC, the Commission, or law enforcement personnel that the debtor was involved in such fraudulent activity.”

(2)
Construction— Nothing in this Act, or the amendments made by this Act, shall be construed as prohibiting a trustee appointed under the Securities Investor Protection Act of 1970 from recovering property transferred by a debtor to a person who is not a customer of the debtor.
(d)
Definition of customer status— Section 16(2)(B) of the Securities Investor Protection Act of 1970 (15 U.S.C. 78lll(2)(B)) is amended—
(1)
in clause (ii), by striking “; and” and inserting a semicolon;
(2)
in clause (iii), by striking the period at the end and inserting a semicolon; and
(3)
by adding at the end the following new clauses:

“(iv) any person that had cash or securities that were converted or otherwise misappropriated by the debtor (or any person who controls, is controlled by, or is under common control with the debtor, if such person was operating through the debtor), irrespective of whether the debtor held or otherwise had custody, possession, or control of such cash or securities; and

“(v) any other person that the Commission, in its discretion and without any need for court approval, deems a customer of the debtor.”

(e)
Commission oversight of SIPC— Section 3 of the Securities Investor Protection Act of 1970 (15 U.S.C. 78ccc) is amended by adding at the end the following:

“(f) Commission oversight of SIPC—The Commission may—

“(1) direct SIPC to take any action pursuant to this Act that the Commission determines is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this Act.; and

“(2) issue or revise any regulation under this Act.”

(f)
Fund replenishment— Section 4 of the Securities Investor Protection Act of 1970 (15 U.S.C. 78ddd) is amended by adding at the end the following:

“(j) Fund replenishment

“(1) Replenishment plan—If the balance of the Fund decreases by 50 percent or more during a fiscal year, SIPC, in consultation with the Commission, shall establish and carry out a fund replenishment plan, under which SIPC shall borrow in the public debt markets on terms and conditions which permit debt repayments and the reasonable buildup of fund reserves to be covered from existing annual assessments.

“(2) Transfer of amounts with respect to fraudulent debtors—If the Commission determines that payments from the SIPC Fund will be required because the management of a debtor (or any person who controls, is controlled by, or is under common control with the debtor, if such person was operating through the debtor) committed fraud, the Commission may transfer amounts from a fund established under section 308 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246) to the SIPC Fund, if the Commission determines that such transfer will—

“(A) enable prompt assistance to customers of the debtor (or person); and

“(B) allow for the maintenance of adequate resources in the SIPC Fund.”

(g)
Commission report on liquidation proceedings— Section 11(c) of the Securities Investor Protection Act of 1970 (15 U.S.C. 78ggg(c)) is amended by adding at the end the following:

“(3) Report on liquidation proceedings—The Commission shall, after the end of the 90-day period beginning on the date that a liquidation proceeding is commenced under this Act, promptly issue a report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate providing the status of customer claims in such proceeding, including amounts paid under this Act to settle such claims and the amount of outstanding claims.”

Sec. 2 Effective date; rule of application

(a)
In general— The amendments made by section 1 shall take effect with respect to a liquidation proceeding under the Securities Investor Protection Act of 1970 that—
(1)
was in progress on the date of the enactment of this Act; or
(2)
is initiated after the date of the enactment of this Act.
(b)
Ongoing proceedings— Notwithstanding subsection (a), with respect to a liquidation proceeding under the Securities Investor Protection Act of 1970 that was in progress on the date of the enactment of this Act—
(1)
section 8(c)(4) of the Securities Investor Protection Act of 1970, as added by this Act, shall not apply to such liquidation proceeding; and
(2)
the amendments made by section 1 shall not apply with respect to a customer involved in such proceeding if the trustee in such proceeding determines that the customer’s claims under the Securities Investor Protection Act of 1970, as in effect on the day before the date of enactment of this Act, have been fully satisfied.
(c)
Payment requirements for certain proceedings—
(1)
In general— The trustee with respect to a liquidation proceeding of a debtor under the Securities Investor Protection Act of 1970 shall make such delivery of securities or payment of amounts to the customers of the debtor as are necessary to satisfy the net equity claims of such customers before the end of the 60-day period beginning on the date of the enactment of this Act—
(A)
in the case of any proceeding that was in progress on the date of the enactment of this Act; and
(B)
in the case of any proceeding—
(i)
initiated after the date of the enactment of this Act; and
(ii)
with respect to which the Securities Investor Protection Corporation had been asked to initiate a proceeding against such debtor before the date of the enactment of this Act and had refused.
(2)
Report on failure to satisfy claims— If, with respect to a proceeding described under paragraph (1), the net equity claims of the customers of the debtor in such proceeding are not satisfied within the 60-day period required under such paragraph, the Securities and Exchange Commission shall issue a report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate explaining why such claims were not satisfied before the end of such period.
(d)
Definitions— For purposes of this section, the terms “customer”, “debtor”, “net equity”, and “security” have the meaning given those terms, respectively, under section 16 of the Securities Investor Protection Act of 1970.