Vol 1 (2004) - Issue 2

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Cross-Border Broker Dealer Insolvencies

I. Introduction

Over the past ten years, there has been increased international activity in the global securities markets. Coupled with this is the increased number of brokerage firms that now have international offices or subsidiaries in a variety of countries. Given the globalization of the market, the Securities Investor Protection Corporation (‘SIPC’), located in the United States, and the Financial Compensation Scheme Limited (‘FSCS’), located in the United Kingdom, have agreed to enter into a Memorandum of Understanding in order to better serve the needs of securities investors in the event of member broker dealer liquidations.
SIPC is a non-profit membership corporation composed of most securities brokerage firms registered with the United States Securities and Exchange Commission. Membership in SIPC is not voluntary; it is mandated by law. SIPC was created under the Securities Investor Protection Act of 1970, codified at Title 15, United States Code, Sections78aaa-lll. The purpose of SIPC is to afford certain protections against losses to customers resulting from a member broker dealer’s failure. SIPC is designed to promote investor confidence in the US securities markets. FSCS is an independent company set up in the United Kingdom under the Financial Services and Markets Act 2000. Similar to SIPC, FSCS is designed to compensate investors in cases where persons who are or have been authorized persons are unable, or likely to be unable, to satisfy claims in respect to a civil liability owed by them in connection with their investment business.
SIPC and FSCS recognize the potential for cross-border insolvencies and the prospect of cross-border claims from investors arising from failed member broker dealer firms and their affiliates. Consequently, SIPC and FSCS held a conference and entered into discussions on the treatment of investor claims arising from cross-border broker dealer member firms. As a result of these discussions, SIPC and FSCS mutually agreed to enter into a Memorandum of Understanding (the ‘MoU’). This article discusses the protocol in arriving at the memorandum of understanding, the background of the investor protection programs, the terms of the MoU, and its implications for cross-border broker dealer insolvencies.

II. The roles of SIPC and FSCS within their own jurisdictions

A. Securities Investor Protection Corporation

The Securities Investor Protection Act (‘SIPA’), 15U.S.C. Sect. 78aaa et seq., was enacted in 1970 in response to a rash of broker dealer firms that either went out of business or were merged or acquired during the paperwork crunch of 1968-1970. SIPA incorporates the U.S. Bankruptcy Code (chapters 1, 3, and 5 and subchapters I and II of Chapter 7 of Title 11) to the extent it is consistent with the provisions of SIPA.
SIPC’s members are generally all persons registered as broker or dealers under Section 15(b) of the Securities Exchange Act of 1934. SIPC excludes membership to persons whose principal business in the determination of SIPC, taking into account business of affiliated entities, is conducted outside the US.