SIPC Ruling Expected on Lehman CCA Balances


New York – The Securities Investor Protection Corporation (SIPC) has yet to rule on whether Lehman client balances tied to Client Commission Arrangements (CCA’s) and soft dollar accounts should be viewed as client assets and exempted from bankruptcy.    A grey area of US bankruptcy regulation, client CCA balances have been tied up in the Lehman bankruptcy administration since September, despite Lehman’s best efforts to establish the ‘separateness’ of the assets.   A ruling from SIPC may be imminent.

CCA’s and their UK counterpart, Commission Sharing Agreements (CSA’s), are structured to allow money managers to trade with one counterparty and pay for another counterparty’s research. A portion of trades are set aside as credits which can be used by clients to pay for research, including research from other broker-dealers or alternative research providers.  The regulatory benefits are best execution and greater transparency in commission spending. Apparently, however, SIPC didn’t get the memo.

Lehman structured their CCA’s based on regulatory guidance to ensure that credits would be considered customer property, defined in section 16(4) of the Securities Investor Protection Act of 1970 (SIPA) to include cash and securities “at any time received, acquired, or held by or for the account of a [broker-dealer] from or for the securities accounts of a customer.”

To achieve this, Lehman took specific steps in structuring their CCA’s:

  • Lehman recorded commission credits on its books and records as money that was entrusted to it by clients;
  • Credits were treated as money owed to customers in calculating the amount of cash Lehman was required to reserve pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934, which requires broker-dealers to segregate customer funds in a separate bank account;
  • Lehman provided written assurances to its clients that their commission credits would be treated as customer property under SIPA;
  • Statements were issued by Lehman showing the dollar amounts of credits available to customers;
  • Lehman agreed to transfer commission credits to other broker-dealers or withdraw commission credits in the form of cash at the direction of clients.

Despite these precautions, the trustee adminstering Lehman’s bankruptcy has held the CCA balances of Lehman clients pending a ruling from SIPC, which has been slow in coming. Barclays Capital, which acquired the US assets of Lehman, has retained outside counsel, enlisted the SEC, and met repeatedly with the SIPC to try to get a resolution. Word is that a resolution may be pending soon. We hope so. A clear resolution from the SIPC will help restore impetus to broader regulatory agendas which CCA’s support.


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