Contenido del Manual

Finally, mention should be made of problems in the SEC’s rules

themselves. This discussion is not meant to serve as a thorough ex-

ploration of potential problems; its goal is merely to indicate that

there are issues that require thorough study before one can, as do the

supporters of Revised Article 8, take comfort in the assurance that

the federal regulatory regime adequately protects small investors. In

discussing whether the segregation rule could supplant the net capi-

tal rule, the SEC itself has identified a number of theoretical and

practical problems in the customer protection rule.

400

_{In gaining pos-}

session or control of securities, there are “pronounced delays.”

401

_In

addition, “examination by the Commission and self-regulatory or-

ganizations have found substantial and continuing violations of Rule

15c3-3 and an apparent lack of understanding of the rule among

some brokers and dealers some eight years after the rule’s adop-

tion.”

402

_{Furthermore, many broker-dealers liquidated by the SIPC}

Preventable Prelude to Enforcement Action, in THE SECURITIES ENFORCEMENT MANUAL: TACTICS AND STRATEGIES 11, 18 (Richard M. Phillips ed., 1997).

397. In 1994, “[t]he SEC completed a total of 680 examinations, consisting of 478 over- sight and 202 cause examinations.” SEC, 1994 ANNUAL REPORT 34. As there were over 8,600 registered broker-dealers, see id. at 28, in 1994 the SEC conducted oversight exami- nations of approximately 5.5% of these broker-dealers. The quality of the SEC’s empirical studies of the securities industry has also greatly declined in the past decade. See Joel Seligman, Another Unspecial Study: The SEC’s Market 2000 Report and Competitive De- velopments in the United States Capital Markets, 50 BUS. LAW. 485, 485-92 (1995) (criticiz- ing Market 2000: An Examination of Current Equity Market, the SEC’s most recent overall study of the securities markets, for its lack of comprehensiveness, inadequate research and presentation of the research that was done and lack of independence of the study’s staff). This lack of rigor in Market 2000 may be a reflection of deficiencies in the SEC’s resources. At the very least, this lack of rigor cautions against too great a reliance on the SEC’s for- mulation of the issues in clearance and settlement of securities and their resolution. 398. Establishment of Office and Delegation of Authority to Administer Functions, Ex- change Act Release No. 34-36031 (July 28, 1995), 60 Fed. Reg. 39,643 (1995).

399. See Marshall, supra note 396, at 25-26.

400. Net Capital Requirements for Brokers and Dealers; Amended Rules, Exchange Act Release 34-18417 (Jan. 13, 1982), 47 Fed. Reg. 3512, 3514 (1982).

401. Id.

“did not make the required deposits as they approached financial dif-

ficulty.”

403

_{Finally, the SEC noted that the calculation of the Reserve}

Formula is only done weekly, and the required deposit is made three

calendar days later.

404

The segregation rule also allows a broker-dealer to oversecure a

margin loan by forty percent. In practical terms, this means that a

broker-dealer does not have to obtain physical possession or control

of securities whose market value is equal to this forty percent.

405

The hypothecation rules

406

_{contain their own problems. For exam-}

ple, two of the general prohibitions of Rules 8c-1 and 15c2-1 only ap-

ply when a customer’s securities have not been commingled with

those of the broker-dealer or other customers.

407

_{In addition, the third}

general provision of the two hypothecation rules only protects cus-

tomers against hypothecations that “exceed[ ] the aggregate indebt-

edness of all customers.”

408

_{As the leading securities law treatise}

notes, “theoretically, a broker-dealer owed $100,000 in margin ac-

counts by all customers could hypothecate one customer’s securities

403. Id.

404. Id. The SEC was summarizing Rule 15c3-3(e)(3). See 17 C.F.R. § 240.15c3-3(e)(3) (1999). Until the late 1980s, the securities industry used the weekly deposit requirement to reduce its weekly reserve requirements. Broker-dealers would obtain loans secured by cus- tomer securities on the next business day after the weekly rule 15c3-3(e) calculation. These loans would be repaid with unsecured loans just before the weekly calculation. This proc- ess was repeated each week. See Upton v. SEC, 75 F.3d 92, 94, 97 (2d Cir. 1996).

Both the SEC and the SROs took actions to close this loophole. In 1986 the SEC began investigating this practice and in 1987 brought a proceeding against a broker-dealer for exploiting this loophole. SeeIn re Underwood, Newhaus & Co., Exchange Act Release No. 34-25531, 40 S.E.C. Docket 785 (Mar. 30, 1988). In the appeal from this proceeding, the Second Circuit held that, although this pay down practice was in literal compliance with Rule 15c3-3(e), the SEC was entitled to make a broad interpretation that would reduce the “substantial risk” customers were exposed to for most of the week. SeeUpton, 75 F.3d at 97. In 1989, the NYSE notified its members that this pay-down practice could violate Rule 15c3-3(e). See NYSE, Broker-Dealer Censured for Violation of SEC Rule 15c3-3 and Dis- cussion of the Intent and Objective of the Rule, Interpretation Memo 89-10 (Aug. 23, 1989). 405. Rule 15c3-3(a)(5) defines “excess margin securities” as “those securities referred to in paragraph (a)(4) of this section [defining “margin securities”] carried for the account of a customer having a market value in excess of 140 percent of the total of the debit balances in the customer’s account or accounts encompassed by paragraph (a)(4).” 17 C.F.R. § 240.15c3-3(a)(5) (1999). The 140% comes from bank lending practices at the time of enact- ment of Rule 15c3-3. If a bank would only loan 75% of the fair market value of a security, it required approximately $140 worth of securities to secure a $100 loan. See WOLFSON ET AL., supra note 348, at ¶ 7.02[1][a] n.22.

406. See 17 C.F.R. § 240.8c-1 (1999); 17 C.F.R. § 240.15c2-1 (1999). Two rules, both identical in language, were adopted because section 8 of the 1934 Act applies only to a “reg- istered broker or dealer, member of a national securities exchange, or broker or dealer who transacts a business in securities through the medium of any member of a national securi- ties exchange,” 15 U.S.C. § 78h (1994) (emphasis added), while section 15 applies to any “manipulative, deceptive, or other fraudulent device or contrivance” by any “broker or dealer” in connection with “any transaction in . . . any security . . . otherwise than on a na- tional securities exchange,” 15 U.S.C. § 78o(c) (1994) (emphasis added).

407. See 17 C.F.R. §§ 240.8c-1(a)(1), (a)(2); 240.15c2-1(a)(1), (a)(2) (1999). 408. Id. §§ 240.8c-1(a)(3); 240.15c2-1(a)(3) (emphasis added).

for that sum even though that one customer owed a much lesser

amount.”

409

_{Customers are not necessarily left without legal protec-}

tion in these situations. Rule 15c3-3, the segregation rule, may over-

ride the hypothecation rules through its requirements that a “broker

or dealer shall promptly obtain and shall thereafter maintain the

physical possession or control of all fully-paid securities and excess

margin securities carried by a broker or dealer for the account of cus-

tomers.”

410

_{Some commentators have read the segregation rule and}

the hypothecation rules in this way.

411

_{But it should be noted that the}

SEC also proposed amendments to the hypothecation rules in 1971,

the same release first proposing Rule 15c3-3, that would have re-

stricted hypothecation or stock lending in a manner consistent with

Rule 15c3-3.

412

_{The SEC, however, never adopted these restrictions.}

Accordingly, it is just as consistent with the regulatory history to ar-

gue that the hypothecation rules override the segregation rule as it is

to assert the converse. Due to the conflict between Rule 15c3-3 and

the hypothecation rules, it is possible that whatever protection exists

is afforded by state, not federal, law.

413

_{The irony of this legal situa-}

tion would probably be lost on supporters of Revised Article 8, as

they have such an a priori faith in the efficacy of SEC regulation.

Not only are there gaps in the SEC’s rules that could affect inves-

tors, but the enforcement of these rules rests with the SEC and the

SROs. Courts have been unsympathetic to plaintiffs bringing private

causes of action under the segregation or hypothecation rules.

414

_Al-

though rare exceptions exist,

415

_{most courts have held, under a vari-}

ety of factual circumstances and legal theories, that section 15 of the

1934 Act does not give rise to a private cause of action.

416

_{The empiri-}

409. LOUIS LOSS & JOEL SELIGMAN, 7 SECURITIES REGULATION 3190 n.180 (3d ed. 1991). This problem was identified at least as early as 1971, see BARUCH, supra note 342, at 55-56, but was not remedied in the SEC’s rulemaking following the passage of SIPA. 410. 17 C.F.R. § 240.15c3-3(b)(1) (1999).

411. See, e.g., Bloomenthal & Salcito, supra note 348, at 168.

412. See Reserves and Related Measures Respecting the Financial Responsibility of Brokers and Dealers, Exchange Act Release 34-9388 (Nov. 23, 1971), 36 Fed. Reg. 22,312, 22,313-14 (1971).

413. LOSS & SELIGMAN, supra note 409, at 3189-90.

414. Id. at 3160 n.112 (Rule 15c3-3), 3179 n.158 (section 8(b) and Rule 8c-1).

415. See, e.g., Gotshall v. A.G. Edwards & Sons, Inc., 701 F. Supp. 675, 678 (N.D. Ill. 1988).

416. See, e.g., Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1578 (9th Cir. 1990); Brannan v. Eisenstein, 804 F.2d 1041, 1043 n.1 (8th Cir. 1986); SEC v. Seaboard Corp., 677 F.2d 1301, 1313-14 (9th Cir. 1982); Kidder Peabody & Co. v. Unigestion Int’l, Ltd., 903 F. Supp. 479, 493-95 (S.D.N.Y 1995); Komanoff v. Mabon, Nugent & Co., 884 F. Supp. 848, 857-58 (S.D.N.Y. 1995). Section 17 of the 1934 Act and its record keeping requirements also do not create a private cause of action. See, e.g., Touche Ross & Co. v. Redington, 442 U.S. 560, 571 (1979); accord Continental Bank, Nat’l Ass’n v. Village of Ludlow, 777 F. Supp. 92, 103 (D. Mass. 1991); FMC Corp. v. Boesky, 727 F. Supp. 1182, 1197 (N.D. Ill. 1989), aff’d on other grounds, 36 F.3d 255 (7th Cir. 1994); Deutsch v. Integrated Barter Int’l, Inc., 700 F. Supp. 194, 201 (S.D.N.Y. 1988).

cal evaluation of the SEC’s and SROs’ effectiveness in enforcing the

various rules promulgated under section 15 becomes even more cru-

cial in light of inability of private litigants to enforce these rules.

Therefore, the lack of any serious study by the supporters of Revised

Article 8 of such enforcement activities becomes even more problem-

atic.

IX. S

ECURITIES

I

NVESTOR

P

ROTECTION

A

CT

This Article does not attempt an in-depth review and discussion of

SIPA and the SIPC. Rather, it highlights a number of practical prob-

lems in the SIPC’s administration of SIPA that proponents of Re-

vised Article 8 have ignored. In addition, the interaction of Revised

Article 8 and SIPA creates a number of legal issues that cast doubt

on the continued effectiveness of insurance coverage.

The first practical problem is the size of the SIPC Fund, which is

based on questionable assumptions. The preconception that the SIPC

is a back-up to the SEC’s regulatory regime

417

_{accounts for the SIPC’s}

assumption that it will never have to liquidate more than one major

broker-dealer

418

_{within a short period of time. In addition, the SIPC}

has assumed that any failed broker-dealer would have complied with

the SEC’s possession and control rules and that, therefore, there

would be no shortfall in customer securities.

419

_{Based on these as-}

sumptions, the SIPC has set $1 billion as its goal for the SIPC

Fund.

420

The assumption that only one large broker-dealer can fail at one

time is based on a further assumption that there is no systemic risk

involving broker-dealers. If the potential occurrence of the domino ef-

fect predicted by the systemic risk theory was real, then more than

one large broker-dealer could fail at one time. The fact that the SIPC

417. Seesupra Part VIII.

418. See GAO 1992, supra note 348, at 44.

419. See id. at 45. On the other hand, the SIPC has made certain other, more conserva- tive, assumptions, including “that the failed broker-dealer’s capital would be depleted to the point that its required reserves would be exhausted and that the trustee would not re- cover any portion of the broker-dealer’s partially secured and unsecured receivables.” Id.

420. See id. at 44. In addition, the SIPC has a bank line of credit of $1 billion, see id. at 19, and the ability to borrow an additional $1 billion from the SEC, which in turn would borrow the funds from the Department of the Treasury, see 15 U.S.C. §§ 78ddd(g)(h) (1994). Although the SIPC has set the size of the SIPA Fund to accommodate the liquida- tion of a single major broker-dealer, the SIPC has made no special arrangement for liqui- dating such a broker-dealer. See GAO 1992, supra note 348, at 54. This lack of preparation is striking because, as of 1992, the largest SIPC liquidation had involved processing only 61,000 customer claims while, in 1990, there were over fifty securities firms with more than 100,000 customers accounts. See id. In addition, the SIPC is a minuscule agency with a mere twenty-nine staff members in 1996. See SIPC, 1996 ANNUAL REPORT 4. These are

is overseen by the SEC,

421

_{one of the prime movers behind Revised}

Article 8 and presumably a subscriber to the systemic risk theory,

lends a certain irony to the SIPC’s position.

The GAO has criticized the second assumption behind the size of

the SIPA Fund. “In view of the prevalence of fraud in past smaller

SIPC liquidations, we believe that the possibility of fraud or of a seri-

ous breakdown of internal controls cannot be ruled out, even though

SEC contends that these controls are monitored more closely in lar-

ger broker-dealers.”

422

The final practical problem with SIPA is the exclusion from its

coverage of certain financial intermediaries that have access to cus-

tomer funds and securities.

423

_{In raising this issue in its 1992 report,}

the GAO did not estimate the parameters of this issue (e.g., number

of customers affected, typical size of securities holding, etc.), al-

though it did note that, “in the last 5 years, 26 of 39 SIPC liquida-

tions involved failures resulting from fraud on the part of introducing

421. See 15 U.S.C. § 78ccc(e) (1994). In 1992, the GAO criticized the SEC for not paying “sufficient attention to its SIPC oversight responsibilities.” GAO 1992, supra note 348, at 61.

422. GAO 1992, supra note 348, at 45. The uniform net capital rule finally adopted in 1975 was intended to both “enhance the protection of customer funds and securities held by broker-dealers . . . [and] to protect the SIPC fund by requiring all broker-dealers to op- erate under a sound capital base.” Net Capital Rule: Proposed Uniform and Comprehen- sive Regulation, Exchange Act Release 34-9891 (Dec. 5, 1972), 38 Fed. Reg. 56 (1973). In 1982 the SEC significantly reduced the net capital requirements of broker-dealer using the Alternative Capital Method (ACM). See Net Capital Requirements for Brokers and Deal- ers; Amended Rules, Exchange Act Release No. 34-18417 (Jan. 13, 1982), 47 Fed. Reg. 3512 (1982). At the same time, haircuts (required discounts in calculating reserve capital) were increased on most debt securities and preferred stock. See Net Capital Requirements for Brokers and Dealers, Exchange Act Release No. 34-18737 (May 13, 1982), 47 Fed. Reg. 21,759 (1982). In 1985, only a minority of broker-dealers used ACM, but this minority in- cluded most of the large broker-dealers. See SEC, THE FINANCING AND REGULATORY

CAPITAL NEEDS OF THE SECURITIES INDUSTRY 60 ex. 13, 68 ex. 18 (1985). The net effect of the 1982 amendments was to reduce the required regulatory capital of broker-dealers by over $550 million. See id. at 14. “By these amendments the Commission intended to give broker-dealers greater freedom to use capital where it can be most productive.” Id. 423. See id. at 68-69. All persons registered with the SEC under section 15(b) of the 1934 Act are members of SIPC unless they fall into an excluded category. See 15 U.S.C. § 78ccc(a)(2)(1994). SIPC membership includes:

all persons registered as brokers or dealers under section 78o(b) of this title,

other than

(i) persons whose principal business, in the determination of SIPC, taking into account business of affiliated entities, is conducted outside the United States and its territories and possessions; and

(ii) persons whose business as a broker or dealer consists exclusively of (I) the distribution of shares of registered open and investment companies or unit in- vestment trusts, (II) the sale of variable annuities, (III) the business of insur- ance, or (IV) the business of rendering investment advisory services to one or more registered investment companies or insurance company separate ac- counts.

firms that did not retain customer accounts.”

424

_{Although applicable}

state law may require government securities brokers or dealers to be

SIPC members, federal law does not.

425

_{In a 1990 report, the GAO}

noted that most broker-dealers that deal in government securities

are registered under section 15(b) of the 1934 Act and, therefore, are

members of SIPC.

426

_{A small group of specialist dealers, some of}

which can hold customer funds and securities, are not SIPC mem-

bers.

427

_{Finally, there is a group of bank dealers that are not SIPC}

members,

428

_{and that may hold customer cash and securities.}

429

_As

with the 1992 report, the GAO in its 1990 report provided no esti-

mates of the potential size of the risk represented by these specialist

and bank dealers.

All that this Article means to suggest by the foregoing cursory re-

view of SIPA and the practical operations of the SIPC is that the

adequacy of the insurance coverage for investors whose securities

and cash is held by financial intermediaries is unclear. Certainly, the

GAO’s conclusion that “the regulatory framework within which SIPC

operates has thus far been successful in protecting customers while

at the same time limiting SIPC’s losses”

430

_{must be read as what it is,}

a statement of past history and not a prediction of the future.

431

424. GAO 1992, supra note 348, at 69.

425. See Don & Wang, supra note 338, at 513 n.22.

426. See UNITED STATES GENERAL ACCOUNTING OFFICE, GAO/GGD-90-114, U.S. GOVERNMENT SECURITIES: MORE TRANSACTION INFORMATION AND INVESTOR PROTECTION

MEASURES ARE NEEDED 5, 25-26, 60-61 (1990). By July 1989, 1,496 diversified securities firms that were already registered with the SEC had updated their registration with the SEC “on a revised form that better described the firms’ government securities activities.”

Id. at 25.

427. See id. at 60-61. In July 1989, this consisted of a total of sixty-three specialist firms, twenty of which could hold customer funds and securities. See id. at 26, 60.

428. See id. at 27. In July 1989, there were 281 registered bank dealers. See id. at 26. 429. See id. at 26 n.3. There is no FDIA coverage for shortfalls of securities although there may be insurance coverage under the FDIA for cash up to $100,000 held by an in- sured bank. “Similarly, if a bank failed, securities held for a customer would be returned to that customer . . . . Bank customers would appear, however, to have less protection than under SIPC if a bank failed, a customer’s securities were missing, and the bank was liqui- dated rather than merged into another institution.” Id. at 62.

430. Id. at 3 (emphasis added).

431. See Rogers, supra note 7, at 1538 (quoting the GAO’s conclusion without any dis- cussion of the GAO’s concerns); see also Mooney, supra note 114, at 313 (relying upon SIPA to argue that “[a]n upper-tier priority rule would neither pit the rich against the poor nor

In document ELABORACIÓN DE UN MANUAL INFORMATIVO DE TÉCNICAS DE MANIPULACIÓN DE ALIMENTOS PARA LOS ESTUDIANTES DEL ITSCO CARRERA DE ADMINISTRACIÓN TURÍSTICA Y HOTELERA (página 31-44)