Release No. 34-15777

May 4, 1979

New Rule Designating Financial Responsibility Rules for Purposes of the Securities Investor Protection Act of 1970

ACTION: Final rules.

SUMMARY: The Commission is adopting a new rule in conjunction with the 1978 amendments to the Securities Investor Protection Act of 1970 ("SIPA"). The new rule designates "financial responsibility rules" for purposes of the SIPA.

EFFECTIVE DATE: Immediately upon publication.

FOR FURTHER INFORMATION CONTACT: Gregory N. Smith, Division of Market Regulation, Securities and Exchange Commission, 500 North Capitol Street, Washington, D.C. 20549. (202) 755-7484.

SUPPLEMENTARY INFORMATION: Section 16 of the Securities Investor Protection Act Amendments of 1978 (15 U.S.C. 78aaa) amended Section 3(a) of the Securities Exchange Act of 1934 by adding a new paragraph defining "financial responsibility rules" as "the rules and regulations of the Commission or the rules and regulations prescribed by any self-regulatory organization relating to financial responsibility and related practices which are designated by the Commission, by rule or regulation, to be financial responsibility rules."

That term is relevant to two sections of SIPA. Under Section 5 of SIPA, the court may enter a protective decree on behalf of customers of a broker-dealer if the court finds, among other things, that the debtor broker-dealer is not in compliance with applicable requirements under the Securities Exchange Act or rules of the Commission or of any self-regulatory organization with respect to financial responsibility or if the debtor broker-dealer is unable to make such computations as may be necessary to establish compliance. Section 13 of SIPA refers to financial responsibility rules in connection with inspections of broker-dealers which are members of the Securities Investor Protection Corporation ("SIPC").

New Rule 3a40-1 under the Securities Exchange Act ¹ designates as "financial responsibility rules" all rules and regulations adopted by the Commission pursuant to Section 8, 15(c)(3), 17(a) or 17(e)(1)(A) of the Securities Exchange Act, all rules and regulations adopted by the Commission relating to hypothecation or lending of customer securities, all rules adopted by self-regulatory organizations relating to capital, margin, recordkeeping, hypothecation, or lending requirements, and any other rule adopted by the Commission or a self-regulatory organization relating to the protection of funds or securities. The Commissions intention in paragraph (d) of the new rule is not to sweep into coverage all of its rules or those of the self-regulatory organizations which indirectly protect funds or securities but only rules which are akin to those specified in paragraphs (a) through (c) and which are customarily described as "financial responsibility" rules.

The Commission has determined that this new rule should be effective immediately upon publication in the Federal Register pursuant to 5 U.S.C. 553(d). The Commission finds good cause for making the rule effective immediately in that the rule clarifies the power of SIPC pursuant to Section 5 of SIPA to seek protective decrees, clarifies the power of the self-regulatory organizations in connection with inspections, and requires no modification of conduct.

The term "financial responsibility rules" for purposes of the Securities Investor Protection Act of 1970 shall include:

(a) Any rule adopted by the Commission pursuant to Section 8, 15(c)(3), 17(a) or 17(e)(1)(A) of the Securities Exchange Act of 1934;

(b) Any rule adopted by the Commission relating to hypothecation or lending of customer securities;

(c) Any rule adopted by any self-regulatory organization relating to capital, margin, recordkeeping, hypothecation or lending requirements; and

(d) Any other rule adopted by the Commission or any self-regulatory organization relating to the protection of funds or securities.

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By the Commission.