Broker-dealers are seeing a cut in annual SIPC assessments; will advisers see the same?

The Securities Investor Protection Corp. has replenished its coffers from the financial crisis and is now cutting its assessments to B-Ds. Will the savings stop there?

May 16, 2017 @ 2:48 pm

By Bruce Kelly

Broker-dealers, which loudly complain about increasing costs due to regulation such as the Department of Labor's fiduciary rule, are actually seeing one regulatory expense decrease this year: the annual assessment firms pay to the Securities Investor Protection Corp.

The SIPC fee cut could turn into a sticking point for some advisers, as broker-dealers commonly pass along all or a portion of the SIPC fee in a separate charge to their advisers. Are broker-dealers planning to pass the reduction along to their registered reps?

Commonwealth Financial Network this year already reduced the SIPC assessment to its advisers.

"Commonwealth passes through the SIPC assessment and it works out to nine basis points of an advisers GDC," industry shorthand for gross dealer concession or total revenues, said managing principal John Rooney. "That's down from 15 basis points."

LPL Financial has not cut its fee to date but said it was taking a look at the annual SIPC assessment. It charges almost 19 basis points on an adviser's gross compensation, or $1,875 per $1 million in revenue, as a SIPC assessment to advisers, according to industry sources.

"LPL is always reviewing its fees to see how we can best serve our advisers," said LPL spokesman Jeff Mochal. "We are looking into the reduced SIPC assessment to determine its implications."

Meanwhile, Securities America Inc. has a 45-basis-point charge on commissions that covers both SIPC and Financial Industry Regulatory Authority Inc. fees.

And it doesn't sound like that will be changing any time soon.

"Our 45-basis-point Finra and SIPC fee covers a basket of expenses from Finra as well as the SIPC assessment," company spokeswoman Janine Wertheim wrote in an email. "While the SIPC fee has decreased, the Finra fee covers a variety of charges assessed by Finra. Our charge is designed to cover expenses where they are incurred. This enables Securities America to offer industry leading payouts."

Created in 1970 by Congress, SIPC protects clients against the loss of cash and securities held by a customer at a financially troubled SIPC-member brokerage firm, such as those that seek bankruptcy protection. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash.

Last September, the SIPC board decided to cut the annual assessment it charges firms from 25 basis points, based on a broker-dealers net operating revenue, to 15 basis points, said Stephen Harbeck, CEO of SIPC.

From the mid-1990s through the credit crisis, the SIPC fee was a negligible $150 per firm, regardless of its size or business type. But the SIPC fund took a substantial hit after the 2008 bankruptcies of Lehman Brothers and Bernard L. Madoff Investment Securities.

SIPC's board agreed to cut the assessment because the SIPC fund has been bolstered significantly over the last eight years, Mr. Harbeck said. The SIPC fund had nearly $1.7 billion in assets at the end of 2008; a year later it had fallen to less than $1.1 billion, according to SIPC's website.

At the end of 2016, the SIPC fund had more than $2.7 billion in assets, although the fund still had offsetting expenses from Madoff litigation, according to Mr. Harbeck, who added that the SIPC assessment to broker-dealers could be eventually reduced to 2 basis points of a firm's net operating revenues when the fund sees a decrease in its liabilities.

The assessment "could be cut down to a nominal sum. We are projecting for fiscal 2019 or 2020," he said. "There is still enormous litigation expenses from Madoff of just over $100 million per year, but I expect that to taper down considerably."


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