Académique Documents
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10-2378
ADDENDUM
TO APPELLANT'S BRIEF
Lawrence R. Velvel
Massachusetts School of Law
500 Federal Street
Andover, MA 01810
Tel: (978) 681-0800
Fax: (978) 681-6330
Email: velvel@mslaw.edu
TABLE OF CONTENTS
PAGE
Nearly one year ago, I introduced S. 2348, a Bill to establish the Federal
Brol;er·Dealer Insu,ance Corporation. This corporation wDuld protect 26 million
direct in,;,estors from losing their savings through tlJe financial failure of bro];fr.5.
In so doing it would close a serions gap in all[ sfc'urities laws.
There is nu protection under existing securities law for the' investor \"hose
hmker goes hanknlpt. TIle Securities Act of 1933 requires that investors ha\'e
acleqna te informa tion to exercise sound judg1:nent concerning the secul'ities he
purchases. Tl.e Securities Exchange Act of 1934 insnres tbat he will not be
\ictimized by frandElent. manipulati\·e. or cleceptive selling schemes, and that
the market in which his broker transacts his opder will be maintained in a fair
and orderly fasbion. But neither statnte insures tbat this same inve.",tor n'ho
exercises sound judgment in his choice of stock, anD places his order with a
reputable lJroker, cannot lose his entire investment if tnat broker subseQ1.lently
fails because of operational or financial clifficuIUes.·
The United States now wisely insures bank deposits uncler the Federal Deposit
InsllLRnce L6rparan~li ana-="Eh"e Fe(l(:rar~~s and T::!lJrrIlJnsnrance Corpora-
;~b'i1:'J:ra1'FLb'FD'i'mJe1ST<JrI:ue-Fe(jnaT131'm.~e1fI-er~I1TI'ITfT,nlCTt7oTpalatian.
~~F::S-ETre,vOTi1t1'"-g;ive-·t1YeIlfVeS1:or.·\''1joTeit
\'es-ll1,nia-Vi'llg,nvith-u-bruker,-tlJe-
'-SiIIJJe-pr6Iecuontl"tr'w afforcfedwe depositor, v.:~ces Bls-mone:nnallan:it: -
'-TlJe Broker does not act as a slmplepass'-througiJ agent, who"e lJaUIlI!:Y to
his customer ends at the clo"e of each transaction. Gustomer accounts with
brokerage firms are maintained on a continuing basi". Cred·it balance" of cash
and securities !)rovide the investor with instant liquidity for future transactions.
As is the case with banks, these balances are used by the broker to finance the
operations of bis business. Margin regul"ations governing the purc.base of securi-
tie.s on cred·it currently require SO percent collateral in transactions im"olving-
pUhlic customers. This means that credit balances and positions' must always
run well in excess of debits in customer accounts. Brokers' liabilities to their
customers, measured as tbe net between cred·it and debit balances. in customer
margin accounts, is currently 1110re tban $14 billion according to' a recent esti-
mate that appeared in the Wall Street JOtlrna-l. This $14 billion of t.he PUlllic's
money is only one part of investor assets that the FBDIC would insure. A still
greater amount is held in customer cash accounts. In all, assets in brokers' custody
... exceed $50 tiJiion.
The FBDIC, like the Federal corporations that insure savings deposits, \,ould
serve a dual purpose. It would protect investors and tbe nabional econom, from.
serious hardsbip which can follow the failure of' financial institutions. 'and it.'
would increase tbe soundness of these institution~ and puIYJic confidence in
them.
Our securities markets are a national asset. They permit inDiViduals to invest
their savings in private industry and thereby contribute to the growth of capital-
investmenL 'Witbout strong capital markets it would be diffi1cult for our nat.iona\
economy to sustain \:ontinued growth. ,.
Brokers support the proper functioning of these markets, by providing a co
stant flow of orders. The cont.imled financial well-being of brokers and tlle eco
omy depends, in part, on public willingness to entrust assets to brokers. .
Partly because of government insurance, failures of banks are very rare.
run on banks is virtually impossible. The same principle dictates that we pa
the Bill to insure, at a premium fairly related to the ri"k, a{:counts of 26 lJJill~
direct investors and approximately 100 million people with interest in securi
through mutual funds, banks, pension funds, insurance \:ompanies and at
institutions, .'
Wben this Bill was introuuced, many brokers ha-d serious operational or "b
office" difficulties. Recently, the financial difficulties of several brokerage i1'
have compounded these l)rO'blems. S"ome of these finandal problems we.re 0.'
inaUy triggered by operational problems.
Stock brokers owe money to one another. The failure of one ap:gra,a tes .
problem and reduces the financial soundness of all other firms to whic!;l.:L
indebted. Since many firms invest their capital in securities, market d~'c '.'
may further aggravate brokers' financial problems ancI cause stock b ..
failure to pyramid. This can also force the sale of brokers' securities, inten
ing a general decline in securities values. A combination of these e,ents'
erode investor confidence and cause securities values to plummet. One
143
features of thi>: insllnlDce program is to gllarrl against sllch a situation by pro-
tecting brollers from eA cb 01 bers' fa Bures.
. Since June D, ]969, tbe date] introduced this Bill, liQuidAtors or receivers have
been appointed for at least seven firms. \V',Jile total losses are not ];nown, the New
Yorl; Slecl; Ex cbs n2e Trust Fund has {'ommittecl more tba n $15 milJion to protect
tbe cust0mers of th;ee of tbose firms.
While delay in pr.yment and total losses to public customers and other creditors
are lln];nowD, since mid-19GS liQllidaturs or recei"ers have been appointed for at
lea.st 2q firms. These figures uo not include those that ba ve merged, closed Quietly
or narrowly escaped collapse. The actual delays in payment and total losses tn
tbe public 2re j;nown only to liQuidators or trustees in bnn];rnptcy.
1Jltimnte loss 10 the customer is only part of tbe problem. Tbe brol;erage busi-
ness is built on the concept of liquidity-the fact that an investor enn get his
money immediately and not have to wait the outcome of a prolonged baril,ruptcy
court proceeding. A compulsory trust fund or insurance system promotes such
liquidity.
Hamer Budge, Chairman of the Securities and Exchange COlllmission, has
warned of tbe dangerously bigh level of "fails" iT] tbe securities iJ;dustry. In n
speech report",l in tbe Wail StTcd J01l1"nal on December 10, 1969, be said that
recent .mar];et activity indicates tbat repeated continuous higb volume could
force "fails" and other opeIll tion_problems to return to crisis levels. "Fails" are
tbe nondelivery within the 5 day settlement period of securities owed by one
broker to another. High levels of "fails" and opera tional problems make it diffi-
cult for a bro];erage firm to know what its financial position is and wbat risks
it may reasonably ta ke.
__ In addition to tb~}roblems,...th£r.e have been bU~s on Wall Street.
'NC/.FS1{'eek M aga.zlnc, on DeceilJber 15, 191ifLI:epQrtedJW=erO.S.~.tTorn.ey.~
.• ~l\f(jy~Jit]j"lf'u'Lestlm-ate tba t .~anized cri~stealing $45 million of se,
'---CUnbes annual:JY.Tbe total losses are unkn{Hvn and may be even larger. T:EiIS
''::,ObVlOus1j1':ollJ]Jounclsorokers'linanclal prol:HemS. .,- - ,
,~., In the ten months since I introduced tbis Bill, the securities industry bas lost
S',over $15 million tbrough bro];erage failures. Our latest information is tbat in
~<October 1969. 62 firms were required by tbe New York Stock Excbange to file
~;-IJ)'on'Uily reports because tbey needed "closer scrutiny." Since then, two substantial
~__••Ii:lember firms, Gregory & Sons and McDonnell &. Co., bave gone into liquidation
lqand tbe problems of the industry se~JI.I t.()l:la_ve.intensifi~d. -.--.- ---
~':~f~ One week 'ago Thursday~ tDe'Securities and Exchange Commission was forced
~Ao approve a temporary surcbarge on brokerage Commissions because of the. in-
*:,rlustry's deteriorating financial condition. SEC Chairman, Hanler H. Budge,
i;i~'i3tated in an official letter to tbe New York Stoc]; Exchange that the Commission
""':"as concerned with "tbe financial problems of tbe industry and tbe losses sus-
'iiined in tbe past ye.ar and during the first quarter of 1970." The Cbairman also
'tated tbat the Commission acted oil its understanding tbat tbe industry required
~iii::llnediate financial relief." . ,
After the 1963 bankruptcy of Ira Haupt and Co., h large member firm, the New
6rk Stock Excbange required its members to repay the firm's public customers.
bsequently, tbe New York Stock Excbange also established a guarantee fund .•
th initial assets of $10 million alid a line of credit of $15 million. According to
··press, the New York Stock Excbange's guarantee fund now has less tban $3
,Ilion remaining in uncommitted funds, Furthermore, its line of credit has been
~usted down to $10 million_ : . '.
he guarantee fund of the New Yor][ Stock Exc~ange is in tbe interest of the
lie and of its member firms_ However, there are obvious weaknesses. Tbe fund
mall in comparison to the total dollar volume of trading; to tbe $2 billion to
billion of "fails", that bave been outstanding at various times' to tbe annual
es of $45 million due to tbeft; or to the over $50 billion val~e of customer
e.ts beld hy bro];erage firms. The fund protects only members of the New York
k Exchange. It is voluntary as to its application. By its terms, it need not
pplied to protect investors unless the Board of tbe New York Stock Excl;mrige
aes to act. The fund would be unable to reimburse c'ustomers if one or more
'e'member firms suffered substantial losses and needed to liquidate. .
)2348 would extend protection to customers of brol,erage firms that are not
bers of stock exchanges witb guarantee fund,~. In addition tbe credit of the
ed'States Government would strengtben the protection no'w available from
antee funds_ Tbe mere availability of tbis Federal guarantee sbould bene-
'he brokerage community. It would encoura,g-e Cll"tf)TnO~" +n 1 ----..... •
1;52
sour~e ates tbat tbefts tbis year at Big Board member houses alon,e
~ill r~$20 million, up from. lJl ":fOS; ,\,JjIleover-trl1-1l:®ie.s;JiTI'TiiOwg ..
. ~expJa ined dj~pea~Jct:t;, wlll clTI:iJ1)tO$ito-rtrrI11OiJ, up from $2':; ll11lJIOn JilSt
year. ..".._,----:------:--:--
--"Pl:fe securities loss problem has been well publicized in rf:{;ent montbs. Gener-
aiiy, brokers, bankers and insurance people agree tbat tbe situation ,vas ,,,pawnee)
by tbe operating problems rt:t;ulting from tbe bigb trading volume of recent
year8, wbicb tbrew tbe securities bandling operations of brokers i!ndbanks
into cbaos.
This chaos bas made it easier for di",bonest employes and otbers to dip into
the securities till, and th",re bas been evidence that organized crime is exploiting
the situ a tion both in theft and fencing roles.
A bigb official at a large brokerage house, wbich earlier tbis year lost $2 million
in Treasury blUs states:
"We were put on notice by our insurer tbat, when our policy lapsed at tbe end
of tbe year, we'd be faced \vith bigher rates. We decided then tbat we migbt as
well change our insurance company rigbt away, although we bad done business
wi tb the old one for 40 years. Even so, we're paying $296,000 in premiums for tbe' ,
new tbree-year policy, compared to $113,000 before." :
The broker adds: "I'm scared, botb for my firm and for tbe securities industry~
IVe conld wake up· one morning and find that, all of a sudden tbe insura:nG~'
companies won't cover us any more. Then we might be faced with really striCt
controls imposed on us by tbe Government. I don't think that would be the
answer, any mOIe than self-insurance would. We simply have to cut down on
tbe movement of securities."
And, ruefully comments an insurance executive at a major company:
155
Mr. Moss's letter disclosed that a government investigator, from tbe f'taff
of tbe general acc-ounUng offie-e, had been looking into tbe situation at Mcnon-
nell & Co. sin ce last September, at tbe request of 111 r. Moss.
His assignment bad ,been to ascertain whetber tbere was 8.JJytbing "the Secu-
rities and ,Exchange 'Commission sbould ,bave been doing tbat it failed to do.
A committee staff aids said tbat the investigator bad reacbed tbe conclusion
that tbe S.E.C. bad dODe notbing wrong and tbat any errors of omission were
I1ltributa!bl e to i-ts 'being understaffed.
I Tbe inquiry was undert.aken .as part of tbe committee's over-oil responsibility
to oversee tbe activities of the S.E.C. and other regulatory agencies.
Mr. 1I1ossbad wanted a more EXtensive inquiry into Wall Street's financial
1
"J,'
WALL STREET Is HEADED FOR TIGHTER
(By Philip Greer)
REGUL.!.TIG'Ii"
U.S. SE~.fATE,
COllillfITTEE ON BANKING AND CURRENCY,
SECURITIES SUBCOllOD:TTEE,
Washington, D.O.
The subcommittee met at 10 :15 a..m. in room 5302, New Senate'
Office Building, Senator Harrison A. Williams, Jr. (chairman of the
subcommittee), presidin u . .... i" ~-'~-"
'Present : Senators \Villiams, Muskie, Bennett, and Packwood.
Senator \i\TILLIAlIIS. The subcommittee hearing on S. 2348 will begin
with the statement of Mr. Robert Haack, president of the New York
Stock Exchange. \iF elcome to the subcommittee, Mr. Haack.
STATEMENT 'OF ROBERT W. HAACK, PRESIDENT, NEW YORK STOCK
EXCHA1WE; ACCOMPANIED BY R. JOHN CUNNINGHAM, CRARLES
:KLEM, DONALD L. CALVIN, AN]} MARDON FRANKHAUSER
, Mr. HA.<\CK. M1'. Chairman, Senator Packwood: My name is
Robert W. Haack. I am president of the New York Stock Exchange,
11 vVall Street, New York. \iVith 111e today are several senior officers
" f the e,xcha.nge, R. J oh11 'Cuiluingham, Charles Klem, Donald ,L.
'~Calvin, and Mahlon Frankhauser. All these men have some specIal
~,hpertise in the various topics which will be discussed in my state-
:f;~ent this morning. \iV e will be pleased to attempt to answer any ques-
i£tlons that the members of the subcommittee might have at the con-
usion of m,y prepared remarks.
I would like to begin, M1'. Chairman and members of the. sub-
mmittee, by anllouncing the exchange's support of the objectives of
_2348 to provide greater protection for investors.
',While we have some problems with the bill which has been intro-
)lcecl by Senator Muskie-which I will discuss-we do think that the
sic objective of the bill in Jrovidin .
stmners 0 roker-dealers anc t 16 trac itional concept of indu'stry
f-ragu a . < en e m a wa 0 mc' C IOn 0
Tes aI's cea mg III securIties. \iVe think that the objective of the bill
~l e accomp IS lec a a su stalltially lesser cost and in a more effec-
e way by developing a program around the existing self-regulatory
'mework.
ncler Senator Muskie's bill, Government insurance would be pro-
ed for customer's accounts as has been done for many years with
rect to bank depositors.
(175)
061\
209
L
1 lNDUSTHY l'ROGR,Hl FOR H1PROVED CUSTO~JER PROTECTION
Tbe Excbange believes tbat any program designed to provide improved cm;to-
er financial protection sbould build upon tbe self-regulatory capabilities and
sources developed over the past tbirty years. It recognizes tbat federal assist-
ce may be needed to finance tbe most effective program for ,tbe protection_otg).J_
I'estors. In this connection. tbe Excbange strongly'urges tbat the'Si.iliciJ-Jiilllittee
ould aHO'I'i" tbe-iii-dilstryto' develop tbe approach outlined above and to make its
commendations, prior to finalizing any legislative measures that IDay be
quired,
APRIL 14, 1870.
07
210
a plan that will protect public customers of bro!.;er·clealers up to certain defined
limits.
A "las!.; force" composed of the following industry representatives was formed
to d~TciCljJ a plogrITID consistent ,,~vesagreedupon and to plovi'de
nrellort by Jul.v 1, }\)70: -~~_._ . _.~-------~_ ..
~Tr:-Ra'lph'DeNunzio (New York)-New Yor!.; Stoe!.; Exchange-Chainnon.
IvIr. Watson B. Dilbney (LouisviJle)-NatiC'nal Association of Seeurities
Dealers, Inc.
Mr. Robert M. Fomon (Los Angeles)-Pacific COllst Stock Exchange.
ilir. Clifford W. Micbel (New Yorl;)-Association of Stock Exchange
Firms.
iIlr. Francis R. Schanck, Jr (Chicago )-lI1icJwest Stock Exchange.
1I1r. Robert C. Van Tuyl (New York)-American Stock Exchange.
Mr. Wheelock Whitney (Minueapolis)-Illvestment Bankers Associatiou
of America.
The Committee hopes that the precedent of· careful study and consultation be·
tween t.he Securities and Exchange Commission ancl the securities industry will
be followed to provide a sound program for the protection of all public investors.
Sincerely,
-~··-Aillericari Stock Exchange, Ralph S. Sanl; Association of Stock Ex·
-t1ra1l}5eFi1ms:-43:'a"1·o1:d--A~-R0usseJot-·;-Boston-'Stoc1.-E:S:ClTIinge,
-~E:-:J3iJWcl~;:-New~Y:01"k--Stocld!JrChH1]"ge~hert-"W·.
Hllal:l{;
., Pacific Coast Stock Eicharige-;-h~6lJe1'nr"FOil:iO-il"";'11J\'""e"Stment
'--:BaDJie1'S--::;':SSoCliltlOn of Kllleri~o\n(rre,v-rMe1ton, JT.";-r,1"i1:1W"est
'-Sl~,:M:-i-eh-a-el~0I3j~1·~"N-a-ti1)lla'1--mssuctitim:r---ur-se'
~C11 nfj~~lllc.; G~oll._~S:-'-Macklln-;-:-Jr:-;-phllaaerpJmf
Baltimore-Washington Stock l!::xcliallge, ~~Etr~~'~11~~1·il1~.- - -
08
Ii 21J
I
I
I mention these facts for two reasons: to sho',\, that we are here to-
day representing a very broad cross-section of the securities industry;
I and to indicate the chversity of the industry itself,
I You have been hearing testimony for 2 days on a bill (S. 23-:1:8) to
~sta51Jsh a Federal- D1~urailcecorporatJOn,c1esJgnec1~he 1'1'01 c1s of
I , rEs s')onsor, Senator .1I:111sk18, "to prot~ct. lJ1veswrs from loss because
':a.r~aij~ orb~leaJerDrmsthrougJ1"W1lOm t.Rey buy and seli-
I secllntles7" -----.-~
I" I migIlt add WR thoroughly support -the principle thCLt is involved
I in that statement, and I would furt.her add that ,ye support and ap-
p1a.ud your opening remarks in which you stated that you..felt it ,,:as
necessary to establish our own programs which would offer full J11-
vestor insurance protection. IVe t.horoughlysn pport the principles in-
volved in your st.atement, the events of the last 2. years.
I Event.s of the last 2 veal'S occurring- wit.hin and around the 111-
dustr}" including ou~'werr-pli.b1icized.papen,;,ork problems,.the severe
I _5l~::()!its.squfeeze aftljictifn g manfiY of olllr firms atnc~ theI w.i t!ldr awal flJrl'o:HH'1
usmess 0 'severa 0 t llose 1 rms, lave crea en a egl t 1Jllaue t sense a f
lil - -
concern in the pub] ie's mind for the health of t.he securities indust.ry.
S. 2348 validly addresses it.self to the point t.hat this concern should
not be permitted to create a crisis of public confidence in the, ability
}.-
of these institutions to meet t.heir liabiJitie--..3. Such a crisis of confi-
", dence could only result in' sev~re adverse consequences to investors,
j, _corporations seeking hmds, the industry, and the markets it serves.
W e fully recog11ize and 'accept the need tQ.JJ!'otect t~9-J:}~L
I ,;,mvestor from loss clue to t.he fmlure of a broker or dealer t.o meet. '
~~EsllnanclalOb~lgabons to customers. We oo11eve, how.e:rer,. t1TI'CtD~
'\;r~son ?f1.i.le ulllque character. allClstr.uc~ure of the secuntJes mclustry
!;~' tlllS ob]ectJvecan be best achleved WIt.hm t.he framework of a three-
~:~tier, self-reg-uhtioH. That will be "the'firms -theniselves:'ViTe--n'ill go
~;;into some of their programs. Then we have t.he oversight provided by
'~~:phe exchange from whom you have heard ftrticulately today, and,
:~iJhircUy, the 'overall oversight of .the 'SEC and Congress itself.
~t Our industry has historically, and as recently as last month, dem-
ftpnstrateiCl its" cormnitm.ent to full customer protection, and we would
'~l,ike to take the opportlmity -this mo'rning to share with you our views
~on why self-regcilation is'a necessary, workable and obtainable alte.rna-
~1ive .to the legislation under consideration by t.hi~ s~bcommittee.
~, Smce. S. 2348 was drafted by analogy to eXlstmg Governmental
!J'g-uaranty pro,gTams-the Federal Deposit Insuran.cB Corporation p.nd
~;~he Federal Savings 'and Loan Insurance Corporation-it may first
,'f#,~ useful to consider the reasoris underlying enactment of these laws.
~"Both FDIC and FSLIC arose out of the total collapse of the Nation's
~@pancial structure i!l the great d~pression. Their dominant purpose
'~as to restore publIc confidence III the soundness of the system of
~}Y~ich t.hos~ institutions were a part. The pyimary means of achieving
''!fkhIS Ob]ectl.ve was to erect ~ c?mprehens:n !3. r:etwork of reg1.1la!'-Ory
T
09
218 '1,
Se.nator ·WILLIAMS. Thank you very much; Mr. Gardiner. ThfLt was ~
an excellent. stat.ement. I just have one or two questions. .1
I·.
I wonder if you could describe the re1ationship between your finns: I'
operating profits or losses and your capita] structure?
Mr. GARDINER. I will go from Mr. Hn[\.ck's statement. that [1. very
small number of firms are presently under restriction. There is no
direct relationship between the firm's capital and profit or losses until
such time as the loss impairs its eapital. At such a tin'le, restriction by ~.'
an exchange orregillatory body \foulrl come immediately into play~ ]
Therefore, I would say at the present moment the capital structure 1
of our member £inns is strong. It certa.inly has been-it is not as strong 1
as it was 18 months I1go. l~T e as a trade fissociation do no have access .1
:•
to the. figures as the exchange dues, fmd cannot give you specific infor- j
mat-ion as to exactly what the standing-s are. I think that Bob Haack's 1
testimony will give,'you the best indication ofthat.. J
Senator \VILLIAl\£S. If a· finn fails. what funds and securities of its !l
customers are subject to risk? The qlle.sti'on here is a.ren't th-ere certa.in ]
type.s of securities requ~red to be· segregated ana: others tliil.t 'are not? ,J
Mr. GAnDINER. Yes, SIr. The presenIt regulatory rules are that free, )
fully paid secunities l11.11St be sUibject to segregrd:Jion. -I'll short: they go '.,n.,i
in a se.parate bank vault away from the general securities or the firm. ~
They are put fLside. iI
Now the other securities, those in whieh customers mEty have bor- ~.:
rowed money on, which are partly owned by the firm and partly by 1
the customer, are in the general securities of the firm. ' 9
There is t.hat distinction in the seeurities, yes. '~
Senator liVILLIAl\fS. Do you encourRbUe customers to leave funds or ~ij
securities with you? ' '..B.~
]{r. GARDINER. Yes, we do. I am only speaking now for my own Y
firm and I am sure many of the othe,rs do the same. ),~ .'
_The l~ea,son is that toclayto transfer and ship securities to a customer U
is more time consumittg and more difficult than fOl- tis to keep tile· ,.~
securities for the customers themselves. Transfer agents a.re ba.cked up Jl
because of the paperwork crunch. ·':1:,.1,"
e
SEillator WILLIAMS. I thou ht I understood Senator Mnskie to Si.lc;.~ ..
at une e1' 'lIS 1 t lere wou c e a areater ease in stock trans~' . M
!
ers t rough the encoura mo' a customers to eave t 1811' se u" "",~
s ree names WIlt le 1'0 -ers. Did t lat come out? Did I understand .:.. ~
that correcEly ~ " j
----nn..."f'ETER'RLOCr.. That js correct ."J
Senator'VILLIAlIl:S. Could you comment on that? You are suggest~j
ing that you encourage-- 'f
Mr. GARDINER. That we do now. .!
Senator WILLIAMS. Senator Muskie said there, would be greater". j
encouragement under the bill. Again, are-- . ··1
Mr. GARDINER. Again, I can only give you our own firm's experience· .,1
in this regard. Over the past 2 years we have not seen any grea.ter I
desire on the part of the public having heard the publicized Ira Haupt
-'~ o9A
242
:'STATEMENT OF DAVID M. KENNEDY, SECRETARY O'F THE TREAS-
URY; ACCOMPANIED BY BRUCE K. l"lacLAURY, DEPUTY·UNDER
SECRETARY FOR MONETARY AFFAIRS
VV'- 10
. . . .
obligations to customers. The proposal also would require that one
or more of certain enumerated oonditions be present as set. forth in
section 35(m)(1).
The bill also authorizes the Corpora.tion, before it see-ks appointment
of a trustee, to make subordinated loans to 'n, member in danger of
failing to meet its obligations t.o customers if the Corporation deter-
mines that it is in the interest of customers and that such loan is rea-
som,bly expected to reduce the charge to the Corporation's fund.
However, this may be done only upon the findings and conditions
enumerated in proposed section 35{fil) (2) and (3). .
Finally, if a member of the Corporation fails to pay all or any part
of an assessment when due, it will beAuuawful for him to engage in
business as a broker or dealer if, 5 days\after receipt of written notice
of this failure, the member has not paid the full amount claimed to be
owed. He would be permitted to pay under protest and sue to recover
any amOlmt he denies owing.
I have not Rttempted to describe the bill's technical aspects, but
we have submitted to your staff a section by section analysis of the
bill. If there are any further questions in that regard, we shall be
pleased to submit a separate explanatory memorandum.
On behalf of myself and the Commission, I wish to thank you
for the courtesy shown to' us and your great interest in the vital legis-
lative endea.vor which an insurance protection program such as this
represents.
""8enator\VILL:rAlIIS: 'Mr. Chairmall~dow'e'have a section by section
analysis of this daft bill that bears the date of July 16~ We have the
onesubmitted on July 9.
l\:u:. BUDGE. I think: they are almost identical except for the change
Secretary Kennedy mentioned this morning.
Senator 'IV ILLIAM:S. One change ~
Mr. BUDGE. That is the only major change of which I am aware.
~enator "yvILLIAMS. We had better be advised of the other changes,
major or mInor.
Senator BENNETI'. Could you submit a memo identifying and de-
scribing the specific changes without submitting a complete--
Mr. BUDGE. Yes, sir; we will do that today, Senator.
Senator vV ILLIAlIfS. We. will expect that very soon, the.n.
:Mr. BUDGE. Yes, sir.
n:he memorandum referred to follows:)
MEMOR.'>.NOUM OF THE SECURITIES ANIi EXCHANGE COMMISSION REGA..RDING
. "'J:'OSSffiLE AMENDMENT 0", THE BANKRUPTCY ACT
------ . -~"'~-~"~"""""~=~"""""-"".''''''-.,-.---.
l A bill substantially identical to sucb draft was Introduced' in tbe BOllse of Repre-
sentatives on July, 14, 1970, by Cbairman Moss and otber members of Congress, as
ELR. 18158.
I
J
11
not pUTsuant to the Bankruptcy Act, but pursuant to special procedures set forth
in suhsection (m) of section 35 of the Securities Exchange Act as proposed to be.
added by the bill. There are a number of reasons for adopting this approach,.
including the following: .
1. Liquidation of a broker-dealer firm pUl'suant to the hill would not be· .
an 0l' dii::i1li'jr:-iJ>rn In up tey pI DCee d rug i n it-iai:etl-by-cre-cli1:urs;-ln:rtTrrtlrerwmJtd::
be'a special pl'ot:eedtrrg-in-ili-a-t-e~begeeUl+Hes--:hrvestor-Pro!:ecti~
'~r(Jvi1:1ed-j'urin""'llie--bi±l-,--J.'li~i=1.ity-:f-or-the-protection of all~
tomers of ilie broker-dealer in qnesUoll.
---~. To the extent necessary, tDel:.~orporation will advance funds to the'
frustee for the benefit of customers, III am(}Unts up to the hm]t of $5lJ;O\lO
o for each customer which ]13 provuJed for in the bill. Such arrangements
have no parallel in bankrnptcy proceedings.
3. The procedure i,s designed to pay customers claims as rapidly as pos-
sible, making use of funds advanced by tbe Corporation and other special
procedures provided in tbe bill for tbis purpose, thus a voiding tbe lengthy
delays wbicb may occur in ordinaTy bankruptcy proceedings.
4. The trustee will norroal'ly complete open contractual commitments of
tbe deb-tor' wbere customer's interests are involved. This would not neces-
,sarily be done in ordinary bankruptcy proceedings.
Wbile tbe bill, therefore, provides its own special liquidation procedures as a
substitute for ordinary bankruptcy laws in order to obtain the benefits of exist-
ing legislntiull and experience in tbis area. Thus, sUbparagraphs (m) (6) and
(7) provide that a trustee appointed pursnant to the bill i,s vested with the same
powers and duties as a trustee in bankruptcy together with certain additional
powers appropri'ute to the special nature of the proceedings. SUbparagrapb (ill)
(8) provides that except to tbe extent inconsistent with tbe provisions of tbe bill
and except that no reorganization shall be attempted, proceedings sball be con-
ducted in accordance with the provisions of Cbapter X of tbe Bankruptcy Act
?nd such other ~provision.~_Qf the Bankrnptcy Act as Section 102 of Ch2.pter X
of the Act would make applicable.' .
Subparagraph (m) (7) togetbH with subparagrapb (m) (11) of the bill contem-
plate tbat the trustee, to the extent practicable, will satisfy the claims of cus-
tomers who are entitled to securities by delivering such securities to tbem. In
ordinary ~bankruptcy proceedings tbe trustee would normally sell all securities
and distribute cash to customers. Subparagraph (m) (13) excludes from tbe class
of customers who may benefit from advances by tb€ Corporation, customers wbo
are partners, officers, directors or substantial stockholders of a broker-dealer in
liqUidation.
Section 60(e) of tbe Bankruptcy Act (ll U.S.C. 96(e) contains special defini-
tions and procedures applicable to tbe bankruptcy of a "stock broker."
Clause (a) of paragraph 10 of subsection (m) of the bill incorporates section
60 (e) of tbe Bankruptcy Act by reference and tbus brings into play the provisions
of section 60(e) dealing witb the rigbt of ~ustomers of a ban]rrupt stock broker
to recover specifically identifiable property in tbe custody of the stock broker and
the concept of a "single and separate fund" consisting of all property received,
acquired, or beld by a stock broker from 01" for tbe account of customers except
specifically identifiable property of a customer whicb would be recovered, by him.
Such single and separate fund is used to pay c·ln.ims of customers.
Tbe remaining clauses of p-aragraph 10 of subsection (m) modify to some
degree tbe operation of the .pm'l'isJollS o·f section 60 (e) o·f the Bankruptcy
Act as so incorporated by reference, in order to eliminate certain anomalies and
to accommodate the procedures to cbanges in the practices of tbe securities indus-
try whicb bave developed since 1935 when section 60(ej was enacted. Tbus, the
first sentence of subparagrapb (B) mal,es it clear tbat the term "stock broker"
includes a securities firm acting as a dealer as well as a firm acting as a broker.
Subparagraph (D) contemplates tbe completion of open contractual commitments.
Suhpu.ragraph (E), together with other provisions of the bill, provides for the
recovery of certain advances by the Corporation, and subparagraph (F) includes
in tbe categul'y of specifically identifirrble property wbicb may be recovered by
customers securities beld in bulk segregation or as a part of any central c'!rtificate
senice of rr stock cle.aring corporation or similar depository if tbe identity of the
customers entitled to tbese particular securities is established to tbe satisfaction
of the trustee. Tbis subparograpb also grants to tbe Commission c'!rtain ruJe-
12
"prDvided that if such brDl;:er-dealer bolds 100/0 (or 50/0) of an equity security
Df a class registered pursuant to SectiDn 12 of the Exchange Act for 10
consecutive business d"ays he shall file a notice to that effect with the
Securities and Exchange Commission"".
We request that tbis letter be included in the" record of the hearing and we
would welcome the opportunity to furnish any further infDnnation on this subject
that might he helpful to you.
Sincerely yours,
CRol-IG SEVERANCE.
1 "No-load" lDufual funds Le. those sold without a sales charge, normally do not have
no underwriter. . '
~01
not pursuant to the Bankruptcy Act, but pursuant to special procedures set forth
in subsection (m) of section 35 of the Securities Exchange Act as proposed to be.
added by the bill. There are a number of reasons for adopting this approach,.
including the following; ..
1. Liquidation of a broker-dealer firm pUl'suant to the bill would not be.
an ordinary. bankruptcy proceeding initiated by creditors, but rather would:
be a special proceedin<T initiated by the Securities Investor Protection COr-.
'pora lon, proVl ed for in· e ' . . lOn 0 a cus-
m r ~ r In s lOn.
r 2. 'rtf IDe extent necessary, the Corporation will advance funds to the'
trustee for the benefit of customers, in amounts up to the limit of $50,000
for each customer which is provided for in the bill. Such arrangements
have no parallel in bankruptcy proceedings.
3. The procedure i.g designed to pay customers claims as rapidly as pos-
sible, making use of funds advanced by the Corporation and other special
procedures providecl in the bill for this purpose, thus avoiding the lengthy
delays which may occur in ordinary bankruptcy ];}roceedings.
4. The trustee will norma1'ly cOill];}lete open contractual commitments of
the debtor· where customer's interests are inVOlved. This would not neces-
\Sarily be done in ordinary bankruptcy proceedings.
While the bill, therefore, provides its own special liquidation procedures as a
substitute for ordinary bankruptcy laws in order to obtain the benefits of exist-
ing legislatiou and experience in this area. Thus, sUbparagraphs (m) (6) and
(7) provide that a trustee appointed pursuant to the bill i.g vested with the same
powers and duties as a trustee in bankruptcy together with certain additional
powers appropriate to the special nature of the proceedings. Subparagraph (m)
.(8) provides that except to the extent inconsistent >yith the provisions of the bill
and except that no reorgani;;ation sball be attempted, proceedings shall be con-
ducted in accordance with the provisions of Chapter X of the Bankruptcy Act
and such otherprovisioul;LQftlJeJlaIlkruptcy Act as Section 102 of Cbapter X
of the Act wouLd make applicable. .
Subparagraph (m) (7) togethu with subparagraph (m) (ll) of the!J.ill contem-
plate that the trustee, to the extent practicable, will satisfy tile elaims of cus-
tomers who are eutitled to securities by delivering such securities to them. In
ordinary ·bankruptcy proceedings tbe trustee would normally sell all securities
and distribute cash to customers. Subparagraph (m) (13) excludes from the class
of customers who may benefit from advances by the Corporation, customers who
are partners, officers, directors or substantial stockholders of a broker-dealer in
liquidation.
Section 60(e) of the Bankruptcy .Act (11 U.S.C. 96{e)) contains special defini-
tions and procedures applicable to the bankrutytcy of a "stock broker."
Clause (a) of paragraph 10 of subsection (m) of the bill incorporates section
60 (e) of the Bankruptcy Act hy reference and thus brings into play the provisions
of section 60 (e) dealing with the right of c.ustome.rs of a bankrupt stock broker
to recover specifically identifiable property in the custody of the stock broker and
the. concept of a "single and separa te fund" consisting of all property received,
acquired, or beld by a stock broker from or for the account of customers except
specificaLly ideutifiable property of a customer which would be recovered, by him.
Such single and separate fund is used to pay c·lllims of customers.
The remaining clauses of paragraph 10 of subsection (m) modify to some
degree the operatiou of the .pwvisJons 0{ sectiou 60 (e) of the Bankru'ptcy
Act as so incorporated by reference, iu order to eliminate certain anomalies and
to accornmoda te tbe procedures to changes in tbe practices of the securities indus-
try which bave developed since 1938 when section 60 (e) was enacted. Thus, the
first sentence of subparagraph (B) makes it clear tbat the term "stock broker"
includes a securities firm actiug as a dealer as well as a firm acting as a broker.
SUbparagraph (D) contemplates the completion of open contractuai commitments.
Subparagraph (Ej, togetber with other provisions of tbe bill, provides for the
recovery of certain advances by tbe Corporation, and subparagraph (F) includes
in tbe categury of specifically identifiable property wbicb may be recovered by
customers securities bejel in bulk segregation or as a part of any central ('~rtifirate
sel'dce oE a stock clearing corporatian or similar depository if the identity of tbe
customers eotitled to these particular securities is established to the satisfaction
of tbe trustee. Tbis subparagrapb also gmnts to tbe Commission c~rtain rule-
I
J
\Nestlavv
H.R. REP. 9]-]613 Page J
H.R. REP. 9]-]613, H.R. Rep. No. ]613, 9]ST Cong., 2ND Sess. ]970, 1970 U.S.C.C.A.N. 5254, ]970 WL 5920
(Leg.Hist.)
THE PRIMARY PURPOSE OF THE REPORTED BILL IS TO PROVlDE PROTECTION FOR lNVESTORS IF
THE BROKER-DEALER WITH WHOM THEY ARE DOING BUSINESS ENCOUNTERS FfNANCIAL TROU-
BLES. IN THESE CIRCUMSIANCES PUBLIC CUSfOMERSSOMETlMES ENCOUN"TElnS1FFICD[TY IN
'0 OBTAINING THEIR CASH BALANCES OR SECURITIES FROM THE BROKER-DEALERS. SOMETIMES IT
14
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H.R. REP. 91-J613 Page 2
THE SERlOUS AND PERSISTENT FINANCIAL PROBLEMS BESETTING THE SECURlT1ES INDUSTRY
IN RECENT MONTHS HA VE LED TO THE VOLUNTARY LlQUIDATIONS, MERGERS, RECEIVERSHIPS
OR, LESS FREQUENTLY, BANKRUPTC1ES OF A SUBSTANTIAL NUMBER OF BROKERAGE HOUSES.
SUCH FAILURES MAY LEAD TO LOSS OF CUSTOMERS' FUNDS ANDSECURlT]ES W1TH AN If\lEVI~
TABLE WS~G OF CONFIDE~CE'1N THE<U.S.SECURlT1ES IviARkET~-:-SUC.HLFSSE:NED tONFJ-
, DENCE HAS AN EFFECT ON THE ENTIRE ECONOMY. WHATEVER OTHER STEPS MUST BE TAKEN TO
'JMPROVE THESE CONDlT10NS,ONE OBJECTIVE OF~HE BlLL, AS REPORTED,lS TO PRgV1J)E IN-
.' VESTORS PROTECTION AGAINST LOSSES~cADSEDBY~JJrtlNSOLvENCy~'6FTHE1RBROKER':-~~
• DEALER. THE NEED IS S1MILAR, IN MANY RESPEtTS, TO THAT WH1CH PROMPTED THE ESTAB-
'. LlSHMENT OF THE FEDERAL DEPOSlT INSURANCE CORPORA T101'fAND THEFE:"i5ERALSAVlNG-S--
AND LOAN INSURANCE CORPORATlONS.
*2 AS THE CONGRESS RECOCJNlzE1.TnTi933 WHEN IT ENACTED THE F1RST FEDERAL SECURlT1ES
ACT, ' ... SECURlTIES ARE INTRlCATE MERCHANDlZE.' (H.R. REP. NO. 85, 73D CONG., 1ST SESS.,
MAY 4,1933.) SO, TOO, IT HAS COME TO BE RECOGNIZED THAT THE SECURlTlES BUSINESS IS AN
INTRlCATE BUSINESS. IN SOME RESPECTS THE INDUSTRY IS UNIQUE, AND lTS PROBLEMS AND
PRACTICES REQUIRE ORlGINAL SOLUTIONS. BROKER-DEALERS, AMONG THE]R MANY OBLlGA-
TIONS, ARE RESPONSIBLE FOR SAFEGUARDING BILLlONS OF DOLLARS IN CASH AND SECURlT1ES
WH1CH BELONG TO INVESTORS. THERE ARE TODAY IN THJS COUNTRY OVER 26 MiLLION SHARE-
HOLDERS, MANY OF WHOM P..A VE EJTHER CASH OR SECURlT1ES OR BOTH IN THE CUSTODY OF
BROKER-DEALER F]RMS.
FREE CREDJT BALANCES ARE FUNDS LEFT WJTH A BROKER-DEALER F1RM BY CUSTOMERS WHO
HA VE AN UNRESTRlCTED RlGHT TO WJTHDRAW THEM ON DEMAND. THIS MONEY USUALLY
COMES FROM THE PROCEEDS OF THE SALE OF CUSTOMER'S SECURlTIES OR FROM D1VIDENDS
PAlO. IT]S LEFT ON DEPOSlT WlTH THE BROKER LARGELY AS A CONVEN]ENCE. THESE FUNDS
MAY BE AND ARE USED BY BROKER-DEALERS TO l\1All'lTAIN POSlTJONS IN SECURlTJES, TO FI-
NANCE MARGIN PURCHASES OF OTHER CUSTOMERS, AND TO OPERATE THEIR BUSINESS GENER-
ALLY. ONLY RARELY, IS *5256 INTEREST ON THESE FUNDS PAm BY THE BROKER TO THE cus-
TOMER. AT THE PRESENT TlME IT IS ESTIMATED THAT APPROXIMATELY $2 BILLlON OF CUS-
TOMER MONEY IS ON DEPOSJT UNDER THESE CIRCUMSTANCES WlTH MEMBERS OF THE NEW
YORK STOCK EXCHANGE ALONE.
THIS ESTIMATED FIGURE REPRESENTS A DROP, HOWEVER. THE ESTlMA TED TOTAL FOR THE
BEGINNING OF 1970 WAS $2.8 BlLLlON, AND HIE COMPARABLE ESTIMATE FOR EARLY 1969 WAS
$3.7 BlLLlON.
BROKER-DEALERS ALSO HOLD SUBSTANTlAL AMOUNTS OF CUSTOMER SECURlTlES FOR SAFE-
KEEPING. 'WHILE CUSTOMERS HAVE AN UNRESTRlCTED RJGHT TO RECEIVE ON DEMAND THESE
SECURlTlES WHICH BELONG TO THEM AND ARE FULLY PAm FOR, THERE IS AN INEVJTABLE RlSK
THAT THEY Jl..1AY BE TRANSFERRED IMPROPERLY OR MAY BE REACHED BY CREDITORS OF THE
BROKER-DEALER IF THE DIFFICULT AND TECHNICAL LEGAL REQUIRES OF 'SEGREGATJON' ARE
NOT OBSERVED. MOREOVER, SECURlTIES WHICH ARE NOT FULLY PAID FOR-- THAT IS, MARGIN
SECURlTIES-- ARE HELD BY THE BROKER-DEALER AND MAYBE PLEDGED BY THE BROKER AS
COLLATERAL ON BANK LOANS. WHILE FIGURES ARE NOT A VAILABLE REGARDING THE TOTAL
VALUE OF SECURITlES SO HELD, THE LARGEST BROKERAGE FIR1vl IN THJS COUNTRY RECENTLY
HELD ABOUT $]8 BlLLION IN CUSTOMER SECURlTJES FOR SAFEKEEPING. BY CONTRAST, THE TO-
TAL ASSETS OF THE FIRM WERE ABOUT $1.8 BILLlON.
THERE ARE SOME SAFEGUARDS, HOWEVER, ON BOTH THE STATE AND FEDERAL LEVELS AS
WELL AS IN INDUSTRY IMPOSED REGULATlONS. AT THE FEDERAL LEVEL BROKERS AND DEAL-
'- . 15
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H.R. REP. 91-J6J3 Page 3
ERS ARE REQU1RED TO REG1STER WlTH THE SECURJT1ES AND EXCHANGE COMM1SSJON (THE
'COMM1SS10N') AND MA1NTAJN CERTA1N MIN1MUM CAPlTAl REQUJREMENTS. THEY MUST LlMlT
THEJR AGGREGATE lNDEBTEDNESS IN RElAT10N TO THEJR NET CAPlTAL IN ORDER TO ENABLE
SUCH F1RMS TO MA1NTAlN PRESCRlBED M1NJMUM STANDARDS OF LlQUlDJTY AND F1NANCIAL
RESPONSJBILlTY. THEY MAY ALSO HYPOTHECATE OR LOAN A CUSTOMER'S SECURJTJES ONLY
UNDER CERTA1N PRESCRJBED CONDlTIONS, lNCLUD1NG A LlMlTAT10N OF HYPOTHECATJON OF
CUSTOMERS SECURJTJES TO TBE AGGREGATE AMOUNT OWED TBE BROKER BY CUSTOMERS.
TBEY ARE REQU1RED TO MA1NTA1N AND PRESERVE ACCURATE BOOKS AND RECORDS AND TO
REPORT TO TBE CUSTOMER CONCERN1NG TRANSACT10NS lN B1S ACCOUNT.
*3 MEMBER F1RMS OF REG1STERED EXCHANGES ARE ALSO REQU1RED TO FURN1SH TO TBE
CUSTOMER WHOSE FREE CREDlT BALANCES ARE USED, STATEMENTS DlSCLOSlNG THE AMOUNT
DUE TO THE CUSTOMER, THE FACT THAT SUCH FUNDS ARE NOT SEGREGATED AND MAY BE
USED BY THE F1RM IN lTS BUSlNESS, AND THAT SUCH FUNDS ARE PAYABLE TO THE CUSTOMER
ON DEMAND. IN ADDlT10N, CERTA1N EXCHANGES, AS WELL AS THE NAT10NAL ASSOC1AT10N OF
SECURlTlES DEALERS, REQUlRE SEGREGAT10N AND lOENT1FJCAT10N OF CUSTOMER SECURJT1ES.
UNDER THE NEW YORK STOCK EXCHANGE'S RULES, FOR EXAMPLE, CUSTOMERS' EXCESS MAR-
GIN AND FULLY PAlO SECURJT1ES MUST BE PHYSICALLY SEPARATED FROM USABLE MARGIN
AND F1RM SECURlT1ES AND THEJR OV/}JERSHIP SPECIF1CALLY lDENT1FIED. TH1S lS MOST FRE-
QUENTL Y ACCOMPLlSHED BY THE BULK SEGREGATION METHOD.
WH1LE THE TOTALlTY OF THE RULES AND REGULATIONS NOTED ABOVE PROVlOE lMPORTANT
PROTECTlONS FOR INVESTORS, IT lS CLEAR THAT THESE RULES ARE NOT SUFF1CIENT BY THEM-
SELVES TO PREVENT THE EXPOSURE OF CUSTOIviERS TO SUBSTANTIAL RlSK OF LOSS AS A RE-
SULT OF FINANC1AL M1SlvlANAGEMENT BY A F1RM OR lTS EMPLOYEES OR INSOLVENCY.
THE lNDUSTRY ITSELF IS AWARE OF THE lMPLlCATION OF TH1S. IN THE WAKE OF THE COL-
LAPSE OF lRA HAUPT & CO., A NEW YORK STOCK EXCHANGE MEMBER F1Rlvl THAT EXCHANGE
ESTABLlSHED IN 1964 A TRUST FUND TO PROTECT CUSTOMERS *5257 OF ITS MEMBER FJRMS.
OTHER EXCHANGES HAVE FOLLOWED THlS STEP. HOWEVER, FOR A NUMBER OF REASONS, SUCH
PROTECT10N HAS NOT PROVED TO BE SUFFIClENTLY COMPREHENSIVE TO MAlNTAIN INVESTOR
CONFlOENCE. FJRST, THE INSTRUMENTS ESTABLlSHlNG THE TRUST FUNDS PROVlOE THAT THEIR
USE lS DlSCRET10NARY AND THAT THE TRUSTEES HAVE NO LEGAL OBLlGATION TO THE CUS-
TOMERS OF MEMBER FIRMS. SECOND, THE TRUST FUND OF THE NEW YORK STOCK EXCHANGE lS
NOW VJRTUALLY EXHAUSTED, HAVlNG BEEN REQUIRED TO COMMIT APPROXIMATELY $55 MIL-
LION, WH1CH INCLUDES $30 M1LLlON TRANSFERRED FROM THE EXCHANGE'S BUILDING FUND IN
THE SPRING OF THlS YEAR. FINALLY, NO TRUST FUND HAS BEEN EST ABLlSHED TO PROTECT IN-
VESTORS WHO DEAL WITH A BROKER WHO IS NOT A MEMBER OF ANY EXCHANGE.
UNFORTUNATELY, SINCE AUGUST OF THlS YEAR, THREE MEMBERS OR FORMER MEMBERS OF
THE NEW YOR.,l( STOCK EXCHANGE HAVE BEEN FORCED TO GO INTO BANKRUPTCY OR TO COM-
lvIENCE LlQUlDATION PROCEEDINGS. AS OF THIS DATE, THE EXCHANGE HAS NOT UNDERTAKEN
TO PROTECT THE CUSTOMERS OF THE F1RMS WITH FUNDS FROM THE TRUST FUND. IN REFUSING
TO DO SO THE EXCHANGE HAS CITED THE VOLUNTARY NATURE OF THE TRUST FUND AND THE
APPARENT EXHAUSTION OF THE MONEY AVAILABLE. AS OF THIS MOMENT, THEREFORE, CUS-
TOMERS OF THOSE FIRMS MUST FACE THE SPECTRE OF NOT ONLY INEVITABLE DELAY IN RE-
CEIVING THEIR FUNDS AND SECURJT1ES, BUT ALSO THE POSSIBILlTY OF NEVER RECEIVING ALL
TO WHICH THEY ARE ENTITLED.
THIS LEGISLATIONL.THEREFORE, lS DESIGNED TO EFFECT TWO AlMS. IT WILL ESTABLISH lM-
MEDIATELY A SUBSTANTIAL RESERVE FUND WHICHWILLPROVI6E PROTECTION TbcUSTOM~
ERS OF BROKER-DEA.LERS SIMILAR TO THAT FOR:rv.iERLY PROVIDED BY THE EXCHANGETRUSL
'JUNDS. T.HIS WIlL REINFORCE TfiE CONFlDE£!9~ THA-'rINVESTORS ]-]AVE IN THE U._~. SECUBJTIES _.
MARKETS. IN ADDlTION, THE REPORTED BILL WOULD PROVlOE FOR A STRENGTHENING OF THE
'"F"INANCIAL RESPONSIBILITlES OF BROKER-DEALERS.
HISTORY OF BILL
'-' .~
16
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H.R. REP 9J-]613 Page 9
ENCY OF ANY BANKRUPTCY, RECE1VERSHIP OR OTHER SlM1LAR PROCEEDINGS, AND ALL SUCH
PROCEEDINGS ARE REQUIRED TO BE STAYED PENDING AND UPON APPOJNTMENT OF A TRUSTEE.
THE REPORTED BlLL DIRECTS THE TRUSTEE TO COMPLETE OPEN SECURITIES TRANSACTIONS
FOR PUBLIC CUSTOMERS. IN THE OPJNI0N OF YOUR COMMITTEE, THE COMPLETION OF SUCH
TRANSACTIONS \J.llLL BE IN THE INTEREST OF THE PUBLlC AS WELL AS INVESTORS. IT IS DE-
SIGNED TO MINIMIZE THE DISRUPTION CAUSED BY A FAILURE OF A BROKER-DEALER, PRECLUD-
ING THE 'DOMJNO EFFEcr OF SUCH FAILURE. ACCORDINGLY, THE BJLL REQUIRES THE TRUSTEE
TO COMPLETE ALL THE DEBTOR'S OPEN CONTRACTUAL COMMJTMENTS RELATING TO SECURI-
TIES TRANSACTJONS IN WHICH A CUSTOMER HAD AN INTEREST. EXPERIENCE MAY SHOW THAT
THERE ARE CERTAJN TYPES OF CUSTOMER TRANSACTIONS WHICH SHOULD NOT BE COMPLETED,
AND CERTAJN TYPES OF NON-CUSTOMER TRANSACTIONS WHICH SHOULD BE COMPLETED. THE
COMMISSJON IS, THEREFORE, GIVEN RULEMAKJNG AUTHORITY TO PROHJBIT OR DIRECT COM-
PLETION OF THESE TYPES OF TRANSACTIONS. COMPLETION ESSENTIALLY JNVOLVES A QUES-
TION OF THE ADEQUACY OF WORKING CAPITAL. ACCORDINGLY, IF AND TO THE EXTENT THE
DEBTOR'S AVAILABLE FUNDS ARE JNSUFFICIENT TO COMPLETE TRANSACTIONS SIPC IS TO PRO-
----
VIDE THE FUNDS, WITH REIMBURSEMENT TO BE MADE TO IT ON A PRIORITY BASIS.
YOUR COMMITTEE ALSO BELIEVES THAT IT IS IN THE INTEREST OF CUSTOMERS OF A DEBTOR
~~----- ..- ..... ~
-. THAT SECURITIES HELD FOR THEIR ACCOUNT BE DISTRIBUTED TO THEM AS RAPIDLY AS Po·ssT:-
/ BLE IN ORDER TO MrN1M1ZE~rB:E·p)::R1.9b~-15UroN(rWHJtHfHEYARE-tJN'AJj[EfOfRAbEAND
':-CONSEQUENTLY ARE AT THE RISK OF MARKET FLUCTUATIONS. THE BlLL REQUIRES THE TRUS-
~TEE TO PUBLISH AND MAIL NOTICE OF LIQUIDATION PROCEEDJNGS TO CUSTOMERS AND, WITH
CERTAIN EXCEPTIONS, REQUIRES CLAIMS TO BE FILED DURING A PERlOD FIXED BY THE COURT,
BUT NOT MORE THAN 60 DAYS AFTER PUBLICATION OF THE NOTICE. TO THE EXTENT NOT PRE-
VIOUSLY DISTRIBUTED, SECURITIES WOULD BE DISTRIBUTED PROMPTLY UPON THE EXPIRATION
OF THIS PERIOD.
SECTION 60E PROVIDES FOR THE RETURN TO CUSTOMERS OF FULLY PAID SECURITIES WHICH
ARE 'SPECIFICALLY IDENTIFIABLE' AS THSIR PROPERTY. THE BILL CARRIES FORWARD THE 60E
CONCEPT OF SPECIFIC IDENTIFICATION EXCEPT THAT, AMONG OTHER THINGS, IDENTIFICATION
NEED BE MADE ONLY AS OF THE FILING DATE OF THE APPLICATION FOR APPOINTMENT OF A
TRUSTEE AND EXCEPT THAT THE BJLL MAKES IT CLEAR THAT SECURITIES HELD IN BULK SEG-
REGATION OR IN CENTRAL CERTIFICATE SERVICES ARE SPECIFICALLY IDENTIFIABLE. TO PRO-
VIDE FOR FUTURE DEVELOPMENTS TN THE PROCESSING AND CUSTODY OF SECURITIES, THE BJLL
GIVES THE SEC RULEMAKJNG AUTHORITY TO ESTABLISH OTHER TYPES OF CUSTODY WHICH
WOULD CONSTITUTE SPECIFIC IDENTIFICATION.
*10 SECTION 603 ALSO PROVIDES THAT PROPERTY HELD FOR CUSTOMERS (OTHER THAN SPE-
CIFICALLY IDENTIFIABLE PROPERTY) CONSTITUTES A SJNGLE AND SEPARATE FUND IN WHICH
CUSTOMERS OF THE DEBTOR ARE ENTITLED TO SHARE RATABLY. THIS CONCEPT IS CARRIED
FORWARD TN THE BILL, EXCEPT THAT II IS INTENDED THAT, TO THE EXTENT POSSIBLE, THE
. TRUSTEE WILL DELIVER TO A CUSTOlYrnR AGAINST HIS CLAIMJOR SECURlIIES,--IHE.S-AME-BE=-__
'CURiTIES (THAT IS, SECURiTIES OF THE sAivrn ISSUER~C[ASS~·ANi5··SERIES) WHICH WERE HELD
FolfHrs ACCOUNT ON THE FILING DATE. FOR PORPOSES OF VALOI~r:AIMS OF CUSTOMERS
FOR SECURITIES AND THE EXTENT TO WH=IC:::;H~T=HE'"""""Y"""""HA""""-;V""'E-;:B~E:-;::E~N;-:;D::-:;I:-;:;-S";:;'CH;-:;A-;-R=G:;::;:ED:;::-,-;S::::::E::-::C::;;-U~RI:7;T::::::I=E=S-:-:-W·ILL
BE VALUED AS 0FTIm
FILING DATE. *5264 TO THE EXTENT THAT PROPERTY r.NTHE SINGLE AND
SEPARATE FUND IS JNSUFFICIENT TO DISCHARGE CLAIMS OF CUSTOMERS PAYABLE OUT OF
THAT FUND, SIPC IS REQUIRED TO ADVANCE FUNDS TO THE TRUSTEE TO DISCHARGE SUCH
CLAIMS. SIPC WOULD NOT BE REQUIRED TO ADVANCE MORE THAN $50,000 PER CUSTOMER. FOR
THIS PURPOSE A BROKER-DEALER IS NOT CONSIDERED A CUSTOMER OF THE DEBTOR EXCEPT TO
THE EXTENT THAT CLAIMS OF SUCH BROKER-DEALER ARISE OUT OF TRANSACTIONS FOR CUS-
TOMERS OF SUCH BROKER-DEALER, IN WHICH EVENT, EACH SUCH CUSTOMER IS DEEMED A
SEPARATE CUSTOMER OF THE DEBTOR.
THE BJLL, AS REPORTED, GIVES THE TRUSTEE THE POWERS OF A TRUSTEE IN BANKRUPTCY
AND A TRUSTEE IN A CHAPTER X REORGANIZATION. YOUR COMMJTTEE CONSIDERS IT APPRO-
1'7
© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.
H.R. REP. 9]-1613 Page 19
MEET lTS OBLlGATIONS TO CUSTOMERS AND THAT THERE EXISTS ONE OR MORE OF THE CONDI-
TIONS SET FORTH m SUBSECTION S(B)(l)(A), SIPC, AFTER NOTlCE TO SUCH MEMBER, MAY APPLY
TO A COURT FOR A DECREE ADJUD]CATlNG THAT CUSTOMERS OF SUCH MEMBER ARE IN NEED
OF THE PROTECTIONS PROVlDED FOR BY THIS LEG1SLATlON. SUCH APPLlCATIONS COULD (1) BE
COMBINED, WlTH COMMISSION CONSENT, WITH ANY ACTION BROUGHT BY THE COMMISSION,
AND (2) BE FILED NOTWITHSTANDING THE PENDENCY OF A BANKRUPTCY, MORTGAGE FORE-
CLOSURE OR EQUITY RECEIVERSHIP PROCEEDINGS AGAmST SUCH MEMBER.
SECT10N S(B) PROVlDES THAT, ONCE AN APPLlCATlON HAS BEEN MADE PURSUANT TO THE
PRECEDING SECTION, THE COURT SHOULD GRANT THE APPLlCATlON AND ISSUE A DECREE IF IT
FINDS THAT THE MEMBER mVOLVED: (1) IS mSOLVENT OR UNABLE TO MEET ITS OBLIGATIONS
AS THEY MATURE; OR (2) HAS COMMITTED AN ACT OF BANKRUPTCY; OR (3) IS SUBJECT TO A
PROCEEDING m WHICH A RECEIVER, TRUSTEE OR LIQUlDATOR FOR SUCH MEMBER HAS BEEN
APPOINTED; OR (4) IS NOT IN COMPLlANCE WITH APPLICABLE RULES WITH RESPECT TO FmAN-
CIAL RESPONSIBILITY OR HYPOTHECATION OF CUSTOMER SECURITI~S; OR (S) IS UNABLE TO
MAKE THE NECESSARY COMPUTATIONS TO ESTABLISH COMPLIANCE WITH FINANCIAL RESPON-
SIBILITY OR HYPOTHECATION RULES. IF WITHm 3 BUSmESS DAYS AFTER THE FILING OF AN AP-
PLICAT10N PURSUANT TO THE PRECEDING SUBSECTlON, THE MEMBER INVOLVED (1) CONSENTS
TO THE APPLICATION, (2) FAILS TO CONTEST THE APPLICATION, OR (3) FAILS TO SHOW FACTS
SUFFICIENT TO CONTROVERT ANY MATERlAL ALLEGATION OF SUCH APPLICATION, THE COURT
SHALL GRANT THE APPLICATION AND ISSUE THE DECREE. THE FILmG OF SUCH AN APPLICATlON
GIVES THE COURT EXCLUSIVE JURISDICTION OVER THE MEMBER mVOLVED AND ITS PROPERTY
WHEREVER LOCATED. THE COURT FURTHER HAS THE POWER TO STAY ANY PENDING BANK-
RUPTCY, MORTGAGE FORECLOSURE, EQU1TY RECEIVERSHlP, OR PROCEEDINGS LOOKING TO THE
LIQUIDATION OF THE MEMBER INVOLVED.
*20 ONCE THE COURT HAS GRANTED THE APPLICATION AND ISSUED THE DECREE, THE COURT
WOULD BE AUTHORIZED TO APPOmT AS TRUSTEE FOR LIQUIDATION OF THE BUSINESS OF THE
MEMBER mVOLVED, SUCH PERSONS AS SIPC WOULD SPECIFY. HOWEVER, SUCH PERSONS
WOULD HAVE TO BE 'DISINTERESTED PERSONS' WITHIN THE MEANING OF SECTION 158 OF THE
BANKRUPTCY ACT.
THIS SECTION ALSO DEFmES THE TERMS 'DEBTOR' AND 'FILING DATE.'
SECTION S(C) PROVIDES THAT THE COrvITvlISSION MAY ON ITS OWN MOTION FILE A NOTICE OF
1TS APPEARANCE IN ANY PROCEEDmGS UNDER THIS ACT, AND THEREAFTER MAY PARTICIPATE
AS A PARTY.
SECTION 6(A) PROVIDES THAT THE TRUSTEE SHALL: (1) RETuRN SPECIFICALLY IDENTIFIABLE
PROPERlY, DISTPJBUTE THE SINGLE AN~ATE FUND, AND-PAY THE CUSTOMERS MONEYS
ADVA;NCED BY SIPC AS PROVIDED FOR IN THE LEGISLATION; (2) OPERATE THE BUSINESS OF THE
MEMBER INVOLVED IN ORDER TO COMPLETE THOSE CONTRACTUAL COMM1TMENTS SPECIFIED
IN THE SECTlON; (3) ENFORCE RIGHTS OF SUBROGATION; AND (4) LIQUIDATE THE BUSINESS OF
THE MEMBER INVOLVED.
SECTlON 6(B) INCORPORATES THE TERMS USED AND DEFlNED IN SECTION 60(E) OF THE BANK-
RUPTCY ACT WlTH CERTAIN EXCEPTIONS SPECIFIED IN THE LEGISLATION. IT FURTHER PRO-
VlDES THAT CUSTOMERS AND THEIR SUBROGEES WILL HAVE ALL OF Tl-JE RIGHTS TO RECLAIM
SPEClFlCALLY JDENTlFIABLE PROPERTY AND ALL OTHER RlGHTS AND PRJORITlES PROVlDED
FOR IN SECTION 60(E) OF THE BANKRUPTCY ACT AS WELL AS THE ADDITIONAL RlGHTS PRO-
VlDED BY THIS LEGISLATION.
THE TRUSTEE MAY USE ANY PROPERTY (EXCEPT CASH OR SECURlTIES SPECIFlCALLY JDENTl-
FlABLE AS THE PROPERTY OF PARTICULAR CUSTOMERS) OF THE DEBTOR TO COMPLETE CON-
TRACTUAL COMMlTMENTS. IN DlSTRJBUTING THE SINGLE AND SEPARATE FUND PROPERTY IS
VALUED AS OF THE FlUNG DATE AND ADVANCES BY SlPC TO THE TRUSTEE *5275 FOR COMPLE-
TION OF OPEN CONTRACTS AND CERTAIN PRJORlTY CLAlMS SPEClFIED IN SECTION 64(A) OF THE
BANKRUPTCY ACT ARE PAJD FlRST FROM THE SlNGLE AND SEPARATE FUND.
TO THE EXTENT POSSJBLE, SECURJTIES ARE TO BE DEUVERED TO CUSTOMERS IN KIND. TO THE
EXTENT THAT SECURJTIES ARE IN BULK OR INDIVJDUAL SEGREGATION OR IN A CENTRAL DE-
POSlTORY THEY ARE CONSJDERED SPEClFlCALLY JDENTlFIED AND THEREFORE DIRECTLY RE-
COVERABLE BY THE CUSTOMER. IN ADDlTlON, THE COMMISSION MA Y DEFINE OTHER METHODS
OF HOLDING PROPERTY AS CONSTJTUTING SPECIFlC JDENTIFICATION. CUSTOMERS SHARE
RATABLY IN THESE SECURlTIES IF THEY ARE INSUFFICIENT TO PAY ALL CLAlMS. EACH CUS-
TOMER HOWEVER, SHARES RATABLY ONLY IN THE POOL OF SECURlTlES OF THE ISSUER AND
CLASS W'rUCH HE OWNED.
SECTION 6(C) PROVIDES THAT THE TRUSTEE SHALL BE VESTED WJTH THE SAME POWERS AND
TJTLE AS A TRUSTEE IN BANKRUPTCY AND A TRUSTEE UNDER CHAPTER X PROVJDED THAT THE
TRUSTEE SHALL HAVE THE RlGHT (l) TO HIRE AND FIX THE COMPENSATION OF ALL PERSONNEL
NECESSARY TO UQUJDATE THE BUSINESS OF THE MEMBER INVOLVED (SUBJECT TO THE AP-
PROVAL OF SIPC) AND (2) TO OPERATE THE BUSINESS OF THE MEMBER INVOLVED IN ORDER TO
COMPLETE OPEN CONTRACTUAL COMMJTMENTS AS PROVJDED FOR IN SECTION 6(A). EXCEPT AS
INCONSISTENT WJTH Tlffi PROVISIONS OF THIS LEGISLATION THE TRUSTEE SHALL BE SUBJECT
TO THE SAME DUTIES AS A TRUSTEE APPOINTED UNDER SECTION 44 OF THE BANKRUPTCY ACT.
THE SECTION ALSO PROVIDES THAT, WJTH CERTAIN EXCEPTIONS, PROCEEDINGS UNDER LEGIS-
LATlON SHALL BE CONDUCTED AS IF THEY WERE UNDER CHAPTER X OF THE BANKRUPTCY ACT.
*21 SECTION 6(D) PROVJDES THAT THE TRUSTEE SHALL GIVE NOTICE OF THE PENDING PRO-
CEEDING BY PUBLICATION AND BY MAILING SAME TO EACH CUSTOMER. THE PROCEDURES TO
BE FOLLOWED BY CUSTOMERS IN FILING CLAIMS ARE ALSO SET OUT.
S CTION 6(E) PROVJDES T IN ORDER TO PROVIDE FOR PROMPT PAYMENT AND SATISFAC-
TION OF THE NET EQUJTIES OF CUSTOMERS, SIPC SHALL E SUCH MON-
EYS AS MAYBE REQUIRED TO SATISFY THE CLAIMs IRFULL OF E~H COS I O}..1ER;131JTNOl'10~
E~CEED $50,000 FOR ANY ONE CUSTOMER. THE SECTION FURTHE PROVIDES lRAl (1) A'CUS-
TOMER WHO HOLDS ACCOUNTS IN SEPARATE CAPACITIES SHALL BE A DIFFERENT CUSTOMER TN
EACH CAPACJTY; (2) NO SUCH ADVANCE SHALL BE MADE TO SATlSFY ANY CLAIMS OF A CUS-
TOMER WHO IS A GENERAL PARTNER, OFFJCER, OR DIRECTOR OF THE MEMBER INVOLVED, THE
19
© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.
H.R. REP. 91-1613 Page 26
.~ •...
sew
•• t!ou 36(a).
speaker, I Jdeld such time as he
and security holders as well.
Sixth, performance fees are extra fees Eolling
Blatnik
Frelingbl.lysen Pollock
Gallagber
Gllbert
Powell
Pryor. J,,-rk,
> • or,sUIDe to the ge.'1tleman from
.~t llllDGlS'.nnf .c (Mr SPJUJ'GER). givEn to fund
S k I U .• 1. better than usual returns.
managers who bring in Brad:
Brown, Gali!.
Green. Oreg.
Halpern
Purcell
Rees
.•• iI SpRINGER. Mr. pef:. er, lUll\, Burtqn. Utah Hanna Reifel
1,~'l!re seven subEtantial parts of this Both bi1Js recognize that while per- Button Holifield Reuss
Cabell Jarman Rivers
Lb~ercnce report that ought to be caDed formance fees may be an incentive, they Carney Johnson. Pa. Robison
ClOthe attention of the House. should not be a oDE-way street and de- ChamberlaIn Karth Saylor
lDone of the most import.ant of tbese creases in fees are in order when ~r ChIsholm Kazen Scbeuer
Clark King Shrivel"
:otbe question of how much the sales formance slips. ClaJ' Kuykendall Sikes
.<·\l~ShOuJd be. This conference r~port The differences are somewhat compli- Collins, Tex. Landrum SuDivan
"' iiliuts 'the funds to 1112 percent OJ the cated. but in the opinion of the House Corman LoOng, La.
Lujan
Teaglie. Calif.
Tunney
liIes'load,beginnlng January 1, IS71. conferees, this compromise was as fair Cramer Davis. Ga. McKneally WBldie
C'"S,::T1iIS'is ,a little mOTe like the Senate a one as we couJd get. deja Garza Madden Watson
."');'lbJl.ll:!Jfe House Vel'olOD, but the cutoff Seventh, there was a question in the Dickinson Dennis MailliaTd Weicker
Mann Whalley
\.cWt(iS· ours. . . subcommittee as to whether or not oil Diggs Meskill Wiggins
"seCol1!i, the bills differed .on how the and gas funds should be inclUded. The Darn Minish \Vil.son,B~b
es";1oiid shouJd be determmed only as conferees accepted that with some report Dowdy h100rhead Wold
Downing l\:iorton Wrlgbt
\'Uiir'Janguag e assuring industry a language in the same vein as the lan- Ed wards. La. lviurphy. N.Y. Wyatt
"'re:t-o make a reasonable return. guage included in the onginal commit-
"ate .language was adopted. but tee report exhorting the industry to work The SPEAKER pro tempore (lvIr.
ait of .both was the same. out a proposed statute with the SEC for BOLAND). On this rollcall, 341 Members
OuSe, language does allow the the Congress to consider. ' have answered to tileir names, a quorum.
give, some break to small com- I wouJd assume that that wouJdcome By unanimous consent, further pro-
::iri;',thisregard, and that was in- before our committee at a later date. At ceedings under the can were dispensed
:Jiithe conference version. which least I think that is a reasonable expecta- with.
'.]sa distinct improvement. tion.
·fl;i~1Jla.nguage concerning banks Mr. Speaker, those are the important SECURITIES INVESTOR PROTEC-
ded;and the matter was left to differences in this compromise that we 'I'I01i! ACt' 01' ill70
"t.'Jaw',and pending lawsuits. arrived at between the House and the -
···.'say-there is pending at the Senate conferees, and I believe consider- Mr. STAGGERS. lvII'. Speaker, I move
A,a,lawsuit which will deter- ing everything that they were abotit as tnat the House resolve itself into the
utcome of whether or not good as we could expect to get. Committee of the Whole. House on the
"operate mutual funds under 'Tllere are still some differences be- State of the Union for the consideration
L\Since there was a decision cause this was a very hotly contested bill of the bill tH.R. 193:33). to prOVine g:r:e-aeeF
ding· that we shouJd leave in th~ subcommittee, and it was ,only protection lor customers of registerei-(
'Qwts. and not mandatorily after weeks and months of consideration grokers and dealers and memBers 0'f1'i'R=
.. 'within this legislation; that we were even able to get it out of tiona) securities exchanges
:i$Dt~end load plans Dosed the the subcommittee and up to the ,cornlnit- The motion was agreed to.
're,the conferees in regard to tee. But we finally did get it 'Jparid over = THE COMMITTEE OF THE WHOLE
: shares. Many questions here and got it to the other body. .Accordingly the House resolved itself
ed on the fioor about that. I believe this is a lnatter in which theJ;'e into the Committee of the Whole Rouse
en contacted by many of has been a great deal of public interest on the State of the Union for the consid-
:,With reference to front- involved and even though everybody.Inay eration of the bill HeR. 19333, with Mr.
'tbiswas one of the most not, agree with all of tpe comproiilises CHARLES H. WILsoNiI:dhe chair.
ated matters, may I say, thathavebe'en mactewith the'other "The Cle~k.readtbe iitleof'the bill.
·ttee .and the fujI com- body--';'Ibelieve we did the·bestwecouJd. ,':SY"Ullil.nimousconsent,the first read-
:' '!i,arrived at a decision, For that reason, I recommend the pa:5- ing of tbebill was ,dispensed with. ,
:ebrought the bill to the sageoLtbe conference report. " The.:CHAIRMAN. Under :.the rule, the
ouse: . . . , . Mr. STAGGER-S. Mr. Speaker, I.thank. gentleman from West Virgil1ia (Mr.
'. erence there isa di1Ier-" the 'gentleman from Illinois (Mr. STAGGERS) .will be recognized for 30 min-
:;'" :V~ars and repayment of SPRINGE!!) for his remarks. utes, and the gentleman from Illinois
,¢.,.ti)ent. of the Commission, I move the,previous question,.on ,the (Mr ;'" o:lP'D~TGER)
~, 'will be~ r eCOgnlZ'ed f or -0 il
Q. "20'percent was a com- nun' tes
conference report. u .
yide that a customer m a Y : T h e .Chair recognizes· the gentleman
':l:Jis plUtual fund plan up' ~e pre~ous question was ordered. from' West Virgi.T1ia (Mr•..,STAGGERS) .
pd '-receive back all pay- The comerence report was agreed to. Mr STAGGERS' Mr. Ch ' thi
,'.
,ercen'd:t f th e·total.The Arnot·
,~,,' lOll
to 1".'econSI'a erwas I R;,'Oll
'd' ·th·e, 'lSaolIT1hatwecorlsider"verY1lIlPortant
.. .'. aInnan, s
"'siJ,dnsbrs did not par-' table. to' America. : It is .designed ,to provide
(this'agreement, but we greater protectIon for' customers of
the best compromise we CALL OF THE ROUSE broker-dea.lers, iJY" creatiligaBecurlties-
",•..." ' , . Mr. ASHBROOK. Mr. Speaker_I mao:~.~ ~ P~tive .CD~a Donprofit;'"
,'Gnarged the fund man- . J:1lembership ·corporation·which. would
eii' wf' 'iiducianes: . Both the. point of order that a qtiorllmis ,no:t· not be.an agency Dr establishment of the
eng-lng hiS perform': present. '. US. Goveinmen.t:' .....' .. "
'lloldef;'arid uphold ,The SPEAKER pro tempore. Evidently .. ¥embership in thecorporation.;would
;.'T,he'" Hous'"e,v'ersl'o'n' a' q'uorum.· is notpresent.·'i":"-;:: '.".'." ..' cons, . ist··:0 f''. a u' ,. b1'0k er-
. a'eel'.sregLS.
al '-. t.er.e.d ..
"'i-to'I1IIe otit 1n.;JlIIi. WAGGONNER. Mr. Speiil!;etj'):: rinder.theSecuritles.Exch8.nge,Act'. of:
,::~~~;~l~KJ~:; ~ftri:~~~:e~~~~~~~,~;der~:'\~J~~~~;;:J~e~~~~:~f6~~i:~1ie#;.df,
:.,:
3934G CONGRESSIONAL JRJECOlRD - HOUSE December 1 , 1,
. n-i I)
The recent extended decline in the se- under wl1ich repayment will be made and under this bill that they can bar ., ..
curities mar],et has focused 8 LLention on tl1at plan will have to satisfy the SEC, tJ1e Treasury. At that point t~O\·'. _'lu,r,
problems wl1ich occur when a b]"oker- the Treasury, and the Federal Govern- dent t.hen appoints fOllr. ~"11' el "':':"j.
deale]" encounters financial difficulties ment before any lending is done. 1113 J.:"ES 1. h e. pU tl
" In t.he . nlnjOl'i\"..
i lC
Ic 1 " )',:Y:
"'llich result. in the closing and Jiqllida- Mr. GROSS. Mr. Cl1airman, will the when publIC funds are used. t.h~;l· ,:"";'
tion of the firm. In t.his circumst.ance, gentleman yield? Government itself, representing I.h; I,"',';
t.he investor sometimes has:; l1ard Ume Mr. STAGGERS. 1 am happy to yield IIC, sre lJ1 the maJorrty and h.;.·.···,·
getting his money back. Sometimes he to the gentleman from Iowa. majorlty on the C0l11nljs~jon and ca~·j\.:'il
does not get. it.. Sometimes he does not Mr. GROSS. Jf this bill is designed to ulate. as tJ1e gentleman Hom Iowa I •."
get it all. protect Mr. and Mrs. John Q. Public in nlind. 1,,:-, :!1
In view of the condition of our market their investments and dealings in the Jt is not assumed they will bone.-
today, as chairman of the Committee stock mar](et, wl1Y are there only two money from tlle Federal Government r;';'
on Interstate and Foreign Commerce, public members on this Board o.f seven the minute they do, then the makeu' ,(,t
I would like to state at the open- to administer SIPC, the Securities In- the Commission changes. )I ~I ,.;,
ing that I propose to have the commit- vestment Protectio;) Corporation? Mr. GRO~.'3. Mr. Chairman, will tt,. '.:o-~,
tee make a complete study of the secur- Mr. STAGGERS. I might answer the gentleman YIeld so I may ask a quest; .:;
ities market and exchanges in the com- gen tleman in this way: It is only to use I wiJl be brief. .0.,. ."
ing session of the Congress. the money that has been raised by the Mr. STAGGERS. I yield to the gent";~.:.)!'"·
Mr. Chairman, I would like to em- industry Ll1emselves. They are only using n,an from Iowa. '~'. 'i.t·
'15hasize at the outset oj tllis dlscussJOn their own money that tl1ey have all paid Mr. GROSS. But all the financing \,.:li t P
, ~E]Jropnsect-reg,'Sl1It1mr15Ll~d in. eventually come out of the public POCk(-l.
.-l;(rpl'Citt:eLcustomers;-the-more-than-26 Mr. GROSS. Let me ask the gentleman There vnll be added costs, and the ;'e'i~;/'
willi on Affierrc-a:l1SVJlTIJ-111l,re-tIfV-ested this question, if he will yield further. tJeman well knows it. ~//; ..
part oj theIr savmgs 111 shares 01 AmerI- Where in the world do you suppose the Mr. SPRINGER.. L~t me say this.W;;
can corporations. The bill is not designed stockbrokers are going to get the money are bopmg that thIS Industry can reglii"
to protect or to save Wall Street or any that you call "their money"? They are late Itself. We have noted in many 1..'1/
broker or dealer or any stock exchange, going to increase th eir cost of doing stances that tIle attempts at self-regi.J~';
because they go in to business with their business and take it cut of the pockets lation have be~n very good. We coull!
eyes open. But this is intended to pro- of Mr. and Mrs. John Q. Public. This pomt to many mstances where the Na~
tect the consulm!TSilnd-IJw&e--wJ:1G-i.l'l= business about using their own money tional Association of SecuritiesDea"
'vest. It woWd protect them 0:9 ll"qUlr- just does not add up. .' bas done a good job. In fact, somer
iIlg the new SecullLIes InvestOl PJote-c- Mr. STAGGERS. The gentleman does they wanted to go beyond what theCa
diall CoIPOl atiOlI to est-a-bmh-a-fun-ct-into not understand, because be.fore they can gress or this committee or the SECp!
~Cll a!',sessments Imposed upon m~.~ increase any payments from John Q. posed, so I do not say they are not·S
bers oj the SeCUritIes busmess woWa be Public, as you call him, they have to get sponsible. I just say there are cert
PB.-ld. I~e lUn~ woo:terbe uSed to protl'!ct approval from the SEC. This is regulated. firms which are not strong. For thes'
tlie pu IC cus omers in the event of fi- Mr. GROSS. If the gentleman will pIe reason that we do have a martaT
nanClaI insolvencIes of broker-dealers: yield further, the Members of the House rate when we have what I would·£~{
WIt1lli11mi ta tion of $'5iT,OOlTforeJI'C'hlll-" are ca]]ed upon here today to pass upon a recession in the stock market, so'
vestor on ·the market. The initial fund thk bill and not something that may be thing had to be done about it. So··t
would be $75 million raised by a one- worked out in the dim and distant future, would like to regulate themselves by"
time assessment of one-eighth of 1 per- and, for the life of me, I do not under- sessing themselves. But if they do co,
cent of the gross revenues on all mem- stand why, and I hope someone will ex- to the Federal Goven1ment for that' "
bers of.the corporation, and by confirmed plain, why there· are only two pUblic pose, then there must be four new'i:Q
lines of credit which have been nego- members on this Corporation Board of bers appointed, which does guard':'(f
tiated by representatives of the industry seven members that is designed to pro- funds. I will explain this further when
with private lending institutions. The get a chance. '
bill would require assessments of one- tect the investing public. Mr. CELLER. Mr. Chairman, will,:'
half of 1 percent of gross revenues to be Mr. STAGGERS. I would say this to gentleman yield? . ,':'::
levied until the fund has been built up the gentleman from Iowa, that this is a Mr. STAGGERS. ! yield to the ge .
to $150 million. regulated and self-regulated industry. man from New York. .,
We are not trying to take 'over that in- Mr. CELLER. Mr. Chairman, 1, to<k:
I should say at the start that $3 mil-
dustry. We are trying, with two public concerned, as is the gentleman";(
lion would be paid into the fund by the members appointed by the President, to
broker-dealers themselves out of the Iowa, that there is an insufficient re
trust fund they have. and the $7 million keep an eye on what is going on and to sentation on the part of the publi
raised by the assessment of one-eighth see what is going on regularly and to the first stages of this matter, ther
of 1 percent. The other $65 million would have them report back to the SEC, which five members, all professionals, who.
is the public agency. The SEC is the rep- familiar with the' stock exchange::'
be raised by lines of credit from banks. resentative of the public;' appointed by
Then the assessments would go to one- we have only .two members of the pu
half of 1 percent until the fund is built the President to serve in this agency' and There is a vast public, interest over,.'
up to $150 million. . to oversee all the broker-dealers of the beyond the second stage, where ·Gov.
land. This is just an added oversight ment may be called upon to lend ',n
The lines of' credit would then. be which we are. providing for in this bill.
phased out until there is a cash fund of a billion dollars. There are some -30..
$150 million, and then the Corporation Mr. GROSS. If this is a self-regulating liOn investors in secUl·ities in this.c
can raise or lower the' assessment. as industry what in the world are we doing try. ., "",
needs be to keep the fund at this level. with this legislation here today and why Most of those tradings with refer
The bill then' further provides that,. in have a Securities and Exchange Commis- to t,hose securities go through tpes
cases of e)llergency, they may borrow $1 sion insofar as the SEC's interest in the changes. If that is not the public'
billion indirectly from the ·U.S. Treas- broker-dealer phase 'of the stock market? est, I do 'not know what is the .p
ury. But-Imight say this,that the Direc-. Mr. SPRlliGER. Mr. Chairman, will interest. . . '.
tors of the Corporation' are·made up of the gentleman yield? . The stock exchange is under,.ex.
five men 'Jromthe exchanges and two Mr. STAGGERS. I yieJd to the gentle- criticism now because of its condu
fromthepiiblic.~·:rftheyhaveto borrow
man from TIlipois. has been condlicting itself like a·,p
from the Federal Goverllli:lI~rit, then the Mr. SPRlliGER. Mr. Chairman, I think club 'and not in the public int'erest,
President has to appoint four more pub- if 'all these assumptions of .the gentle- high tiin"e that direction was ,foe
man from Iowa :were tr~e, I would, be upon the stock exchange to see tlJ)!..
licmembers' iODJake a majority of public inclined to agree with. him. As long it is no longer conducted as membe
menibers
roWing Can
onbe 'ihe~:i3dar!'i before· any' bor-
made; . . '.. .. ,as i:n:iblic funds are .notused-;-;fu.other ~pri'irateclub but that. thep)l~lie::_
words,the assessments aI:e individually est' aJso must be' considered. . 'i:
The corporatiOIiIiiust siltisfY the Fed- upon the members wh(dake' part-then Wheit"we"ha've'this grcnip of',
eral Government that they have a plan they are in the majority. It is possible seven directors, only two of whom a
21
December 1, J 1970 CCNGRE5SJONAL RECORD - HOUSE 33<147
l1
_ b rs of the public ano, fi \'E.O j W"
),on
1 wiLll this lOG liE-r by clarifying the ruJe· h~r. GR,OSS. 1\.)r. (2hali'lTlan, 'will the
·"el e bel'S of the industry, oetermm- making 2.utJ1C1j'j'i.y of the Securities and gentle111an yield?
: :': ~;e;operations of this corpora tion, Exchange Commission Witll respect to i'JJr. STAGGERS. I would rather not.
,'e., -:l on we also rememt,er that every- tl,e fin:tncial responsibiJity Rnd relater] yield right now; I wi11 in a. fE,V nlinutes.
:".,?",,~e embraced in. this picture-the practices of brokers Rna dealers. In ad· I sl10uld like to have the other side use
. ~~~ the bad, the inOlfferent, the solvent ditiol1, tho biJJ would give t.he Commis- a little time.
o'::""the insolventr-then we can realIze sian substanl.iaJ oversight authority 'WEr M1'. SPRINGER. Mr. Chairman, I yield
";.'":'e must be somELhing mare than the ope!'aLions of tlle proposed corpora- mysell 'Sucn rime as I may consume,
"<':", two members of Lhe publIC as lion, Tile Commission would have au- 1111'. Chairman, I know the questions
""~',d~t fiv p members of the stock ex- thority to disapprove the initial bylaws in that have been asked by many Members
::-,,',Jl1Se ev;n in tJle first imLance. whole or in part. Further it would have of this body. What is being done about
C;;;')11'~ STAGGERS, I thank the gentle- tl1e power, by ruJe or regulation, to re- the so-called failures of the various
- t ouire the adoption, amendment, or recis-
"'~;'-doforwant
"'I his commen,. .
to say this m reply: 8mce ;ion of any bylaw of the corporation
brokerage houses around tlle country?
There have been two or three major ones
" r.~3 the broker-dealers have set up a whenever adopted. It is the expectation and eight or nine others.
;.': ~,t fund of their own. In tha t fund they cf your commi ttee that the Commission One company, Goodbody & Co., has
;;c~;e acquired $55 million. They .have and the self-regulatory organizations in- combined with Merrill Lynch. It is my
'-:;,n able to take care of practJca]]y valved wm be alert and vigorous in the ul1dersta!1ding that all investors will be
~ ..~rY broker-dealer who 11as failed. exercise af the authority granted to them paid in fuJl, that there will be no losses .
. We are in a depressJOn now, and we by this bill. Only with strength from That. is my understanding as of tltis time.
h~ve been in a time when things looked these organizations can this legislation However, we did have at least LWO large
, ~d on the stock market. They are be- see its fullest effectiveness. failures and we also had some smaller
~gto pick up now. We are hopeful During our committee deliberations on failures: inland and away from Wall
they will come out all fIght.. this bill. much has come to our attention street.
It is our duty as l'epresentatIves of which raises substantial questions about Now, why did we get to that kind of a
t.he public to do what we can now, 8:nd the effectiveness of the regulatory struc- position today? Simply because there has
110t to let somethi!'g happen whlCh ture of the securities industrY with par- been no regulation, no regulation of
would frighten Ameflca and hurt every- ticular attention upon the effectiveness o.f funds with regard to investor :Jrotection.
self-regulation in this industry. We all
~ogat is the reason why this legisla- recognize that (·he securities busll1ess has There has been no adequate regulation of
tion is brought here. gone through a period of strain because
The reason why five members of the of a declining market and its attendant
how customers' funds may be used. There
is and was no segregation of your money
if you deposited it with a broker or
Industry and two from the public are faet.ors. However, the events of the recent dealer. The brol,er, or many of them, and
provided for is that this is going to be past have raised substantial questions it is pretty hard to find out exactly what
their money and there is strong over- about the ability of the regulatory Sys- happened, in most cases had their cus-
"sightbythe SEC. . tem as it is presently structured, to an- tomers' money put into one account.
7Istated when I started, and I W1]] state ticiPate' and deal effectively with the Everybody's funds were merged in one
,'ihis two or three times, that the com- stresses. Understandably, many are dis- account. Of course, accounts were kept
'mittee,is making an indepth study of tlITbed and perplexed that the present separate on the books, but the money was
, t:6e:structure of the regulatory pattern situation on Wall street has occurred un- merged. The cost of the operation was
iri the Securities Markets. If we have to del' the existing system of statutory regu- taken out of that. I think this and the
'take' over, this Government wi]] take lation. lack of business, combined with declining
'over, but I do not believe we need to do It is evident to me that a thorough stock values, caused the collapse of these
·:~o)I believe that With private initiative, study and evaluation must be made of two companJ.es which sort of triggered
Under'the direction of the SEC, we can the role of self-regulation in the securi- the necessity that we felt existed for this
.' .:'toiitinue at least close to the present ties industry-including the question of kind of legislation.
'.... ·'strUcture. the coordination between self-regulation
"(The bill provides that the corporation and the regulatory role of the Securities May I repeat again that it was brought
Jillay bon-ow up to $] billion indirectly and Exchange Commission. It is also evi- about because when you took money
,,'Sfromthe U.s. Treasury. Such loans would dent to me that such a study must be down to a brokerage house he anml-
';b~,technicallY effected through the Se- undertaken by the elected representa- ,gamated these funds all into one fund
'J·cirrities and Exchange Commission and ·tives of the American people. Accord- and paid his expenses therefrom. The
';COUld be granted only after the Com-. ingly, as chairman of the Interstate and result of that was about what you
:h'iiission had made necessary statutory Foreign Commerce Committee; I propose would envision when you invest in a
ballle I take it if the same situation had
'hlIidiDgs. Your committee has set the that very early in the 92d Congress the occurred in a bank, and the bank failed,
\'1'i-'easurYborrowing authority at $] bil- Committee on Interstate and Foreign you would be in exactly the same posi-
'llti'iias' a figUre unlikely to be required Commerce undertake such a careful tion there that you are here.
::"ih':apy' situation except one of extreme study and evaluation. The study must be
;::fffi~nCia1 stress. How~ver, for protection thorough and it must be comprehen- Now what did we try to do to remedy
"'f:the type: contemplated by this bill, sive. In order for future Congresses' to this situation insofar as the public was
oVis10ns for the most extreme situa- legislate effectively in this area; it is nec- concerned? By the public I mean the
"'; .no matter' how remote, must be . essary that we now examine whether or individual investor. What have we done
under this legislation to· remedy this
e;' not the regulatory system, which was
.. other significant feature of the bill created in the ]930's and refined in the situation?
he procedures it establishes for the 1940's 1950's, and ]960's, is adequate to First of all, we created what I would
l11pt ana orderly liquidation of mem- meet 'the challenges of the 1970's and :lilie to term tne pOle of the securities
~broker~dealers when required. Sub- beyond. illvestors. Tl1:efJ'lei)ry of FDIC, which IS
:to specified conditions, the bill pro- Mr. Chairman, HR. 19333 has the t1TeJ'i'm:lTrrat-I'Tepus:irrnsurance Corpora-
es'thatliquidation proceedings be con- unanimous support of your committee, ti1ll'1":VTltlnh---governs mostJJanll:s ill tills
.. ted in accordance with, and as though the' Securities Rnd Exchange Conunis- 'Co~trY, IS to create a fund tiJl'eiml1111'Se
eYwere being. conducted under, cer- sion, the Department of the _Treasury., aePositors of defunct banKs.'Tl1etempe2:.,
~prescribed provisions of the Bank- and the Joint Securities Industry Task or-thiS-Jl:g'iSll:rtiOn''l:IDclt1ITf1n:tmtor-trlls
leiP.SIatiOii;nowever, lsexactly"the-same:-
.)jt.cy Act.. , ...' '.. " Force. The bill will not only protect }lUb-
What do we-tloTTnlsteSllmJjJesFDIC.
e creation and establishment of a lie customers of brokerage Iirills'and .r.e - in 'tllatwe-fO:tmeCl-a-Corporat~Tl'fe
tFtdprotect public customers in these enforce investor confidence in our Na- funds-in--thi5"'-corpo:Fation-WiIl~come
.,., .. c..Urn.stances is re8J.ly orily an interim ···ti· k ts' but ·l·t ....." also
''''''r''
:;<'~ .. ~P. tion's securl esmar e •
Along:':range solution to theprob- mandate a g~neral up'grading of finan-
WLU . from brokers ami exchange memiJe:I's-bY
i,;li;njifcbnfronting the industry today will assessment. " . ,.. . . . . ..
,,'1Je' fo llndin ,the ultimate raising of t.he ci8.1 responsibility requirements of brok- . Secoud, five tif the seven-man Board
:<~general financial and capital condition of ers. and dealers. I urge favorable 'action of Directors is appointed by the members
:<:-the brokerage firms. HR. 19333 deals on H.R. 19333. putting up the money. So you have five
22
39348 CONGRESSIONAL RECORD - HOUSE Dece1nber 1 , 7 n·
....... I'.'
of t!le SEven appointed by the people who under its protection. No questions are to $1 billion. 1 do !lot anticipatr- ..
put up l.he money. The other two mem- aslted. Under the FDIC there are regu- WI]] be any borrowing of that 11a'. t." .
bers are appointed by the President. lations which det.ermine whether a banlt . But may 1 ,say in reply tD t~~\·",.
The distinguisJled gentleman from or a savings institution is qu&lified t.o be- tmgUlshed gen t.lema n from PennsYl"~o:·
]o','a IM1'. GROSSj raised a question, as come a member of the FD]C. There are that the bllJ provloes additional -a;;:""
did (.jie distinguished cJlairman of the examiners who periodically examine ments to Jl13ke t.hat up, a.nd that !ll;'~~":"
Judiciary Committee. here a few mo· their books. There is nothing Ji~e this done under the statute so that the]' .;::'
ments ago. Tl1e committee Jlad t.he feel- contaiJled in this bill. Therefore, the question of borrOWing without ~::,:.,
ing that as long as they had their funds analogy which the gentleman from Ii- ances to the Treasury t.hat it \';'iit.' ..
involved in this in t.he form of an assess- linois has drawn is not perfect. When repaJd. f.
ment they ought to be able to regulat.e YOU have a situation where everyone M1'. MOSS. Mr. Chairman, will .
and should regulate themselves. ~omes in, whether they are bankrupt or gent.leman yield? li .
Now let me say this: They do not form insolvent or whether they are vicious, or M1'. SPRINGER. I yield to the gen",
t1l.is corporation and operate independ· sain ts, or sin!1ers. I think the public cer- man from California ' .. ,
ently. The rules and limitations on the tainly ought to have the strongest kind M1'. MOSS:]s it. not a fact that. rat l" ..
operation of. this are laid down by the of representation. In the Senate bill they than an e~ldence of failure, We ~;:.
Securities and Exchange Commission. do provide for a situation where the pub- merely proYJdmg a. means of CUShioUit;·.:
I do not want somebody to tillnk that lic members far outweigh the profe~ to prevent failure in the event th;,':,:
here is a corporation which is operating sional members because of what I have should be a collapse of one or two mai~:
out in the open air without any kind of indicated just now. I do not see why that houses. but not exceedi~1g the size of i.!~,:
supervision at all. And. it will have to should not be done here. I am going to f':ll1d plus the pnva te 1ll1e of credit. a!!l~
operate within those rules as they are vote for the bill. I am in favor of the gIve access to tile Treasury line of cred"
laid down by the SEC. So. ypu do have principle of the bill. We do not pass a precisely as was provided in the OJ'icrLlJ":
a Government body and authority cre- bill like this because it is barely possible FDIC? b Col
ated by this Congress. and an arm of the that we will have some cataStrophic fail- M1'. SPR:1NGER. I think the gentleman
Committee on Interstate and Foreign ure on Wall Street because of a panic. I has explamed It. There are-I dono',"'.,'}
Coinmerce, which we created in the SEC. am for the bill, but I do think there ought know how many houses on Wall Stree;'
Our committee had jurisdiction of tills to be more public members on thIS board and if you have tv"O failures. that, i~ . :,,;.:.
problem entirely on its own and we gave of diJ'ectors in the first stage particularly enough-but the reason yoU have FDIC
part of that jurisdiction to the SEC. when there is $1 billion of tl1e public's was that you had literally hundredsr.f 'Of'
Now. we did realize that when this money involved. In the first stage you baJlks all over the country fail. We ha\'e. "'<'f':
corporation found it necessary to go to have thousands of investors involved and not had too many failures in tills indufciii".};\
the Treasury to borrow money, if it was that is a public interest. When you con- try. and we are trying to preventtl1nf..
necessary to go and borrow money. at sider that two members of the stock ex- from happening. It is too bad that';'!!' ' ..
that point the public interest was So change-their presidents--complain bit- have had two, that is enough, but oIthe. \,}.:i!
great and there was of necessity Govern- terly about the operations of the members hundreds of investment houses that..we···...
ment funds involved and the· President of those exchanges, speaking of all .sorts have' we have only had two majorfiiii:':
then appoints four more members, giv- of gadgets and maneuvers. all :kinds of ures. What would have happened iI!'V:'~.
ing the public a majority on tills board. irregularities and skullduggery that ex- had had 50 such failures?· Everybod\c
.Mr. GELLER. M1'. Chairman, will the isted between the custOmer and the would have been outraged. What we'are
gentleman yield? broker, then you must give' consideration trying to do in this bill is to bring further
Mr. SPRINGER. I shall yield to the to the fact that the public is properly responsibility into the industry itself,alia
dtSting:mshed gentleman from New York represented in ·order to see that there is they have been willing to accept this}e-;
in just Ii moment after I have completed no repetition of t.hese irregularities. sponsibility, and by forming this corp' .
my preliminary thoughts. Mr. SPRINGER. I thank the distin- ration and assessing themselves they .
Now, what happens if'you invest your guished gentleman from New York for t.rying t.o meet the responsibility, as
money through a brokerage firm, his comments, although I may not agree see it. But we are leaving them under'
what happens if it fails? That is what with the gentleman in what he says. But, supervision of the Securities and':
you want to know. You do not come nevertheless, I respect him. change Commission to be sure by the
running. to the exchange to see about Mr. FULTON of Pennsylvania. Mr. ulations of the Commission that .
getting your money back, or' you do not Chairman, will the gentleman yield? carry out exactly what the intent is
go and ask the company with willch you Mr. SPRmGER. I will yield to the tills bill so that we get.some resul
invested for it. You come directly to .gentleman from P~ylvania. Now. if it came to the point w
tills corporation Just liKe you would do we had, as the gentleman from C .
vIitilreference to a barik under the.FDIC. N'.cr. FULTON of Pennsylvania. Why rna has mentioned, a whole g;roup':j
.'You-make your ap:plicatlQR-d.4:ec.thJ.o must we have tills authority ahead of failures, they certainly would probap
the corporation wfiIC111s formed. The time to borrow $1 billion from the U.S. go the Treasury with this, butili.~
fUD'tlls made up of assessm-e-nts-ltg-ainst Treasury, and. then it is conditioned upon would have to be assessments, j ..
thevaIioas hIVestur houses, and you get the fact that the' carporation has really under the FDIC. It is true that unCi
fail.ed? .
up··"tlJ$'59,999. It is my l'eeol:1eclJtm tlTItt provision of this, if there are no f '.
under the opelations of the' :FDIC YDU You see, the ·way tills bill is set, the over a period of years you would·acc
are9llsurea, I believe, up t6 $20,tlOO. It provision for the borrowing frpm the late a lot of money, and they.n:Jay·l
may be more than that but I thifik tilat U.S. Treasury comes into eil'ect only after the assessment. I think that is reason
is WEant has been fill SUIhe tIme. You failure' in the private sector, and then But I think you will see a lot closer SUil
ar.tt·insm:ed up to a denmte amount mrt the public interest takes place. vision by the industry itself of this·pi
not beyondtn:J.t. ,Under thIS bill you are This would be the first time that I ter .by virtue of the fact that we are C;.
insureq UP to $50,000. . know of that on such an indefinite occa- ing up with this kind of legislation .
":-Mi', CELJ:£:R,. Now, 1\11':' Chairman, will sion there has been authority by this you would have had had we ignored it.
the gentleman yield? . . House .and the Congress to borrow $1 . Mr. FULTON of Pennsylvania..
. Mr.SPgING1!R. Yes, I yield to the billion from the U.S. Treasury, increas- Chairman, if the. gentleman willy
!iiBtiJ:Jg:uisbed'.chairman of.the. Commit- ing the debt, unper. ciicurastances thflt for one more question-'- .... X
t.ee ontJ1,e;!I.,u!llci,uy. :..... '. . '. we cannot tell at ,this time what tbey Mr. SPRINGER. I yield to the gent,!.
Mr; CEI.LER.· Ida not. think it: Is 'fair might be~wpy not put that oil' until man from Pennsylvania. ...,
t.o .make. the .. eomparison between t.he later? . Mr. FULTON of Pennsylvania. l:t,:
, setup. as-contained1n this bill and the Mr. SPRINGER. May I say to the dis- is so similar to the FDIC in. policy! '."
operation t;>f.tI:!e FDIC!. r .' . tinguished gentleman from Pennsylvania administration, but in an allied field; W...
case.
In the ofj,he FDIC ab i.i::Ii.tio every- that~ order toassur.e, tills. should. be establish a new separate ,agency? •. ,c
one is not' adn'Jittep into the scheme. Un- cove~ed. very similarly to .the FDIC. The not have the' FDIC broaden its poWe
der tills bill everyone, ,the good, and ·the gentleman has rnentioned $1 billion.. That and doit? " . . ",.
,bad,'aIld the. indiil'erent are embraced ~;aot the way t.h~ .bill reacis.It ,says up Th'f'!l'e is one'tillng ida not undrm'i t
jJ/i(f),Uer 1, 18?'O CONGRESSIONAL RECORD - HOUSE 3'9'349
• ,;.," f.< that when people own stock. at this situation and, third, what we are sion to make these brokerage firms walk
":'~ \;'~l~;ght be in a street name, but attempting to do about it. the chalk line.
".,,1 ,:.~:.dess the ownersh1P lS clearly m There may be disagreement here as to Mr. SPRINGER.. The gentleman is mis'
n('::\";;di~idual investor or theeustomer of wl1etl1er or not we are doing exactly the taken there.
;~~" i;;okerag e house, J:ow 15 1t that thos.e right thing. Some of these Questions Mr. GR.OSS. No; I am not mistaken .
....... ":2 cannet get theJi stock nght back, have been quite intelligent-son;e of the Mr. SPRINGER. May I say they did
;.,(.,,!.', 'i~kIY? What is the trouble now? suggestions that have been made, I not have this authority. This is one oj
"",0, flllS-PRINGER.. The mere bookkeep· I.hink, perhaps have been good. But I the problems we have faced, and this bill
... ~",~iOl1e-and I am talking about be· think the subcommittee wrestled with is an effort to try to do something about
~·':;.:'r1Je computer system-tl1ere were this tfJing for weeks and Jor 2 or 3 it. The SEC did not have that autho1'iLy.
"-:':'\'~ of from 30 days to 3 or 4 months, months before they tinally worked out Mr. GROSS. Instead oj creating a cor·
!l~~;~ej~ from tbe paperwork involved but something here that they thought was poration wH.h two public members and
~~~'stionable practices have aggravated respon.sible and that we could bring over five members of the brokerage industry
. Ct1.C 'ituation . . here to the House and that YOU could who would control this corporation. in·
"'1'i~\1' they have been trymg to remedy see fit to pass. . stead of doing this, why do we not try
. ,;: t by coming up with a computer sys' Personally, I am inclined to believe giving the Securities and Exchange Com-
U.rl.·tJ·l~t would make this more rapid. that the subcommittee did a boood J·ob. mission the necessary authority and see
len1 TIle ~. criticism 0 f tl1e gen tl eman 1S
. We certainly had no trouble and no dis- to it that they enforce it?
>C;.'l1iid;mayI say. agreement on it so far as the committee Mr. MOSS. Mr. Chairman. will the
MrMOSS. Mr. Chairman, will the is concerned. gentleman yield? .
'!teiltl~Jllliny:ield? . But this situation in 1970 is tlle situ- Mr. SPRINGER. I yield to the gentJe-
';':.ND..;·SPRINGER. I y1eld to the gentle· ation we had to meet. Perhaps it should man from CaJifomia.
:"R'i.all.. ' . . • have been done a long time ago. But I Mr. MOSS. On page 94, section 15(c)
:''J'1>f:{MOSS. Mr. Chairman, I think we guess like everything in American life it (3) we do in this bill considerably expand
.. C1le ' 'falling level on the combined takes a few failures before you finally the authority of the Securities and Ex-
"ges of about 25 to 30 million measure up to the responsibilities that change Commission to maintain super-
fesK daY several years in advance the Government has in this great broad vision and exercise regulation over these
.ti#~·:p;rojected studies. This load did, field. When we had bank failures in the phases of the business of the broker-
·eedli"ov.ertax the abilities of the brok- .1 930's;1 remember 1 lost money Jl1 two dealers and of the security houses in this
'i!¥i)louses to effect a tran.sfer. There _banks ana how happy I was to see when Nation.
luLiiirtoo much lag and, as the gen- 'yoU haa a OF Metal Deposlt Insurance Mr. KEITH. Mr. Chairman, will the
"lUi':"!illows, the committee has indi- "'""eorputatlOn a'"tj~tugmrrantee your gentleman yield?
'ts very strong concern and its in- 'money, to whatever the figure was, Mr. SPRlliGER. I yield to the gentle-
" a t this matter be overcome; , ~[9und $10,000. man from Massachusetts.
ess is being made. It is. not ~. I think we are attempting in a way. to Mr. KEITH. I refer to the report, which
problems will continue for do the same thmg m th1S bm that we our colleague from Iowa read so thor-
. But we are keeping a very 'ella then. oughly. One pages 13 and 14 the fo1Jov;'ing
':Sigbt on the activities both of Mr. GROSs:J.\m"'. Chairman, .will the statement appears:
Di.nd the excbanges. gentleman yield? Because of theSe events the Commission is
BRINGER. Mr.Cbairman, may Mr. SPRINGER. I yield to the gentle- of the opinion that its authority to adopt
rules dealing with free credit balances and
lJ'O er points and then 1 will man. segregation of securities bas been made some·
Mr. GROSS. Does this bill provide that what uncertain. To the extent that that has
1;Iave assessments by this cor- there be an examination of the sOUnd- been a problem, the reported bill ·remedies it
o "maintain . a fund that we ness of a brokerage firm before they by making it clear that the CommIssion has
be liquid enough to meet all come'under this corporation? authority to promulgate rules with'respect
.risibilities, put routine' assess- . Mr. SPRINGER. Yes; we have left to the' financial responsibility' and related
'take into' account various this to the regulation of the Secur1·ties business practices of broker-dealers includ-
ing, but not limited to, the acceptance of
'ctors including business prac- and Exchange Commission. May I say custody and use of customers' securities, and
tl:ie brokers themselves. Tbat is to the distinguished gentleman . from the carrying and use of customers'· deposits
. imIJortant. Iowa, you cannot bave a' bm of this or credit balances. In addition the amend~
.d may be built up to $150 mil- nature wij;hout leaving with the Secur- ment to section 15(c) (3) would give the
eVen more if the SEC under its ities and Exchange Commission its own Commission such rulemaking. power over
i(jri 'sees so fit to do. This would power to put' into effect rules pursuant both the exchange and the over-the-counter
communities. Now that the matter has been
.' sessment of one-half of 1 per- to this--and that is what we expect them clariJl.ed, your committee directs and expects
,.the·gross reveilUe,,-,one-half of to Qo. the Commission to be alert and strong in
t.of .the gross revenue. Of this Mr. GROSS. Yes, but the gentleman is tills area. This will, of course, reqUire similar
i!iply $50 million may be credit well acquainted with the fact that before . alertness and strength from the self-regula.
ust be gradually phased out. a .bank can become a member of the . tory organizations, and if that is not forth-
.ents may drop, but they must FDIC, it must stand a searching investi- coming, the Conimission and, I f necessary,
en the fund dwindles s'o there gation by the FDIC as to soundness. I the Congress, will have to insure it. .
@ce of the fund going down al- find no such provision in' the legislation Mr. CELLER. Mr. Chairman, will the
which would create this proposed cor- gentleman yield?
.. we put in here this"borrowing poration. . Mr. SPRINGER. Mr. Chairman, may I
"ifF,ederal Gover=ent only on Mr. SPRINGER. I think if you go back ask how much time I have consumed?
lythat if we had. an unusual to the beginning, you will find that was The CHAIRMAN. The gentleman has
'arise,' then of course we would, probably done under a nile. I do not consumed 24 minutes.
••FDIC, come to the Federal Gov- know all the intricacies involved. There Mr. SPRINGER. Mr. Chairman, I am
tfqr assistance. But may I say may be 'several thingS that ought to be sorry to say that I eaIlllot yield to the
)?en they borrow from the Fed- done.. But I think we can rely on the gentleman. I have only 6 minutes re-
yerI1lIl ent, then the assessments Securities' and Exchange Commission to maining. I yield that to the distinguished
',cuP. That arrangeme..."'1t must be put this into. effect right.· gentleman from Massachusetts, the
h the Treasury and it JIlust be IVlr. GROSS. Mr. Chairman, will the ranking minority member of the sub-
Gtory. with the Treasury, that the gentleman yield further? committee. .
.,.el:1ts. an d other charges must be Mr. SPRINGER. I yield to the gentle~ . The CHAIRMAN. The Chair recog-
.n,t.;to .repay whatever is borrowed. man from I o w a . ' nizes the gentleman from Massachusetts
. 'are, I think, the essential parts. Mr.. GROSS, We are in tbe condition for 6 minutes. .
~.')Vant to give to the House how in which we now find ourselves because Mr. KEITH. I thank tbegentJenian.
"fJipJhis situation where :we are on of the failure; somewhere along the line, Mr. Chairman,' the gentlenienfrom
',+ e).',. 1, ,1970, and why we arrived of the SecuritiesHnd ExchangeCommis- Iowa' and New York have raised ques~
24
Vtcembel' 1, 19';'0 CONGRESSIONAL RECORD - HOUSE 39'35]
,;,,;,t fail before eIJad.menL. at the have a reinvestment credit w]1icl1 Mr. SPRINGER.l'."r. ChainTJ8J1, I yie!c
n;ilc--;i~ta law. 'We early aOllCJpaLed tIllS amoU11ts to a payment for the use of SUCll Lime as he lTIay consume to the gen·
b,.~ db'lit.V but we have speCiiiCally de, the customer's funds. Lleman from Nortll Carolin~ l]\1r
1':. \0·
15... _ make the bill retroactlve m lts Am I correct that under this tm it BROYBlLL) •
[!111"'::.. _ The bill is prospective from is not intended Lllat this new insurance Mr. BROYHILL of North Carolina
"per~~~':'~f its enactment. be used to toste)' a new form of savings Mr. Cllairman, I urge the passage Gi
l-1',~.of lC~·;'il''''e
1jj. J..Gl
U..l ,
in recent mont])s, of the account? Is it not our purpose to protect H.R. 19333, which
• I represents a balanced
""'"~Devonshire Corp.. Plolln /;) Co.. and the public against loss from insolvencJ' Judgment reac led by the House Inter-
r ':'I~i.JlSon & Co. has recelved a great deal rather than permit a type of deposit that state al1d Foreign Commerce Committee
R,,~ .'ention from the press and from might compete WitIl banks, savings and (·0 provide greater protection to smaD
?,~nli.~~}I1I.i1ittee because the ~ew York loan associations and credit unions? investors il1 the securities market. Our
s;':ck Exchange has decJmeo to make Mr. MOSS. Let me say to the gentle- eonmlittee 11as, I believe, pI'epared legis-
:'~"':.iltlble from its trust fund moneys men, this bill adds in no manner to, nor Jation that meets a current and future
~ ~1Jrotect the customers of these three does it in any manner diminish, the need in tl1e establishment of theSecuri-
iifUlS. . present authority of broker dealers to ties Investor Protection Corporation .
. The committee has been 111 close COl1- handle free credit balances. It ha.s no The New York StOck Exchange has
Eul!.2.t1onwith the officer~ of. the Ne~ effect whatsoever upon that. That will be maintained that no public customer 11as
,-orkSto ck ExchaI;ge-wlth l:-S presl- a subject for the rule making by the suffered losses because of the ipsolvency
dent, Mr. Haack, WIth the chamnan of Commission. of a member firm. Such a record has
itsbollrdof governors and with the vic~ Mr. McCLORY. Mr. Chairman, will the been possible because of the "trust fund"
I oirnlaIJ of its board of governors-ana gentleman yield? established by the exchange to advance
~:~"havereceiVed firm and unequivocal Mr. MOSS. I yield to the gentleman money to liquidators or receivers or
.'ll',surruclC ''';; that they will recommend to from illinois. broker-dealers in' liquidation.
.',:,!the,.,b,oanl of governors tbat they take Mr. McCLORY. I thank the gentleman Recent declines in the market have
.~,'n",i ",,,,,ion within their power to pro- for yielding. seen difficulties develop where losses by
··;~~~t;B~~E\~:torn~:r~of tl1ese three firms I am very interested, in behalf of the investors have occurred and their inter-
.' customers of First Devonshire Corp., ests have not been protected.
I ~l;f.~~~'~Il~~itt;~thatthat commitment
will be met by the
many of whom reside in my congiessional
district.in lllinois, in this subject. Do I
The stock exchan
.
the requirements of the Sectrrities and
°
g e I'eguJ.atl· n S and
~
~'jl~I~~~ili~GofYork Stock Exchange
governors. We are correctly
ances understand
received that from
from officers of theassur-
New Exchange for
safeguards Coinmission assure
the investor. many
However.
move rather promptly to York Stock Exchange the gentleman re- they have proved insufficient to prevent
legislation if that be- gards this as a firm commitment +,hat losses as a result of financial misman-
because we would regard these customers will be indemnified agement by a broker-dealer or the insoJ-
as a selious breach of against loss? veney of such a finn.
committee and with the Mr. MOSS. The. commitment is that This legislation would establish a non-
profit, membership corporation whose
the"worst of the securities they will go to the board of governors members would consist of all brokers
crisis seems to be in the past, and urge that the board make use of and dealers registered under the Securi-
again caution my colleagues, every power it has to protect the cus- ties Exchange Act. Contributions' by the
oned' them at the time of the tamers of these firms against loss. members would create a fund to protect
l.the mutual fund bill in Sep- Mr. McCLORY. I thank the gentleman. customers-wbm'l-a-b-l'elfei'~delrrerfarrsw
ot'to think that this bill will Mr. MOSS. As I said earlier, Mr. Chair- meet-his-fi'l'.J1li!'le-iflJ-€lb1igatie~NirFed-
f:the'problems of the securities man, weare reactiDg today to a crisis. Ie:rai-:f1j:!Ws-we-l:lttt-~lVedin this
for: all tinle. This bill is useful believe this illustrates the need for the fund.
'. y'and it'is good legislation. committees of the Congress to maintain I believe this legislation will restore
ard, 'however, to a wide-rang- far closer oversight aDd to act in antici- some of Ule puElic' coiffiQence in the 111 ~
'. '"ation of the structure of the patlon of problems which can'be seen 'vestlTIffit market which has 6een ~
(itistry'\n the next Congress. I down the .road several years in the fU- -turned by recent events and that it will
. at· there are many problems ture. - also strengthen the financial responsibil-
ain, problems tl1at may well Frequently .when we discuss legisla- ities of broker-dealers in the securities
';'j;;ignificallt"updating ·of otrr tion in committee and on the floor of market. . .
unties Jaws, which are now this HoUSe we are asked "Where is the Mr. STAGGERS. Mr. Chairman, I
i'ly'earsold and have,scarcelY demand for it?" Well, you always have yield 2 riiiJ:itites. to the gentleman from
tIed in the interim. I had hoped demand when you have crisis. We need Texas (MY, EcxHAR:n:rJ.
. e significant guldancem more planning to meet problems, to an- Mr. ECKHARDT.' Mr. Chairman, I
hen the SEC completes its ticipate them, and· to see that they do served on thesubco:iIi.i:nittee ill which this
Yof institutional impact not unnecessarily jolt the economy of bill was di-3.fted. Imu.st·be frank to say
tieS markets and submits it this country. .' , that I am as concei-mid about the public
ess on Januaiy: l-"-but in The great significance of this legisla- interest a::; my friend from Iowa, Mr.
".~ tconfessto a sense ofdi$- bonIS the role t'lmt""1t"""W:i1~choss, who I think is one oJ the finest
ithe value oJ that stu?y-'-at restoratlOfi of cmmaen(Je ill me se1!iIlIty guardians of that interest in the House,
.d: on. rum.ors now commg to '"fi'lai'lrets of thiS" Natiol1. TEe surVIVal Of'""" and as my good friend from New York,
on;· but WIth or without it the those lIiMkets is of vital importance to the chairman of the Committee on the
.' .,!!',done. .. . tl1e sul'V1val of our System of tree ent"e"r- Judiciary, Who has brought up some
~n, at this time I YIeld to pnse.VVe cannot" however, leave such questions bere.
~~ed gentleman from Penn- ~ entirely in the .?ands of indus- I believe the questions that have been
fMi.·BAJUlETTL . trIes that expect they mll always be able raised have been answered in this act.
RETT: Mr. Chairman, I. lise to step forward· and say" ':TlJ.i.s is wh~t Originally the act included a provision
,'~f-·this long overdue bill. I we need to take care of thIS problem ill for subordinated loans ,to the brokers
.:t:g e. ~.'?n:mittee s~oU]d be co~- the future," . . ' . . .... .... themselves. I f that provision had re-
~f:,:b~!Pllg the bmout at t.,l],is .
>.,.." ". .
Qur. role IS to. antIcIpate s~chprob-' mained I wouid gO with my esteemed
lems and we have not, ill my JUdgment, ,
,P)re..t!J ,ask the gentleman this exercised it as fullY as we should: I as- colle~gUe from New Yor~
13ince this bill provides for in.. sure you that to the extent that I have pUb~c.boardfro~ the begmnmg~ut that
::n d favor a
e.iiine lor funds left. with it .. the power, in the future' we are going to proVlslOn was stncken out: There IS noth-
question as. -eenJ;aisedas look milTEi caref@y'as we move along at ing in this bill that IlrOVlde~ the use of
'illt.{ oOriterest payID'entson the' practices'of .all of. the personS who funds for any otber jjiIrpose than to pay
3itStI
:_ i.:
:;_'~i
'am: 'told 'that some firms engage
-. ',. "'::' - .. , -
iii. this irripoi-tii:ri.i
",
~.,,,_.: ,~
business: 1,..... back • the
..- ':.' - . ", - . ' . .
cust0
- - 1l1
ers ,of
' -
the brol~er.
.
gealers
25
39352 COI',JGRESSIONAL RECORD - HOUSE DecembeT 1 , 1 vlU
0 ,c r
and not the folks who are running tl10se tee, has agreed tl1at this is tl1e best These have long been standard p _
companies. bill they could bring to the fioor and tices .within the industry, but With tt.~'.
Furthermore, the bill includes surveil· were tmanimous on tills bill. mass)\'e expansIon of the mid· 1960's the;
l2nce by the SEC with respect to the We do have two subcommittee amend- grew t~ unmanageable proportions. Th~
board's rules. No rule may be adopted ments that we want to offer. NatlDn s largest brokerage, for exaJn I
wiLhout approval of the SEC, and the Again, J want to recommend passage holds $18 billion in customer CTedJt ~,e;
self -regulatory organizations are subject because J have every confi d ence in t h E can cI 31m . corpora t e assets of Only ' $18
Je,
to investigation by extended autl10rity in subcommittee and in tl1e full committee bJlhon. Should that firm sUddenly fii-
the SEC tmder the provisions of this act. and their jUdgment. ~or bank:-uptcy, the cas~ and secUritie~
The SEC is then permitted to go into So, Mr. Chairman, I recommend to It holds m .cuS~OdY for ItS investors cal~
courts and obtain injunctions if any vio- the House the passage of this biJl with be claImed ny ItS own creditors. 1\Then .
lation of its rules and regulations or the the two amendments to be offered by the c.omp'a:w's. assets cannot Cover it~
provisions of this act occurs. subcommittee. liabilitIes, Its customer's funds may b~
But the most important thing of all is With that, Mr. Chairman, I yield back used to payoff debts-and there is no
the triggering device. Let me emphasize the balance of my time. guarantee that these customers will b
this as strongly as J can. If you set up a _ Mr. BOLAND. Mr. Chainnan....l..ris~~n :-eim.bursed. This p:oblp.m was not so CTit:
board in the beginning to protect the sUEJ:lort of tills legislation to protect the Ical m the happy tImes of the mid-1960'.
public interest, who do you get on it? 'sma]l invesE~W1ienPTiikeragefiOuse's~wben the industry fiourisbed along With
Persons wbo are not of mucb conse-' fall and, in tbe t l ~ a f everyone else. Now, however, tbe Prob-
quence. They are persons upon wl10m the LaBay's Wall Street, they fall oft-en=tiTl: aJ:lility of brokerage firms failing is mUch
President wants to confer an honor. You small' investilr IS the prmclpal""Victitn:Jl. hIgher.
put a number of persons on the board .ventable l'anYi'111LlrLi:t'lltigatiull awaits Most of the country's large exchanges
and you expect them to watch the public bim should he seek redress in the courts. bave taken steps to prevent them. In
interest. Indeed, he is lucky to recover a fraction 1964 the New. York Stock Excbange
The CHAIRMAN. .Tlle time of the of bis losses in most cases. created a $25 million trust fund to Ineet
gentleman bas expired. 'TIle RgI now before us would create a claiIl?s arising from broken dealer inoo!_
Mr. STAGGERS. Mr. Chairman, I Securities Investor ProtectThn Corp., vencles. Already, bowever, they have had
yield the gentleman 1 additional minute. eventuaJ1y lund.ed at $150 million, to al-=--to augment this with another $30 mil-
Mr. ECKHARDT. On the other band, IdWt11e small investor recovery o1ll):rto lion from their building fund. This
wbat we have done in tbis act is to pro- $5],000 of hIS losses when his orokerage witb the collapse of 10 member
vide that the board may be enlarged by houSe fails. TIm-bilT; stl'lrfITl"ther, would and tbe imminent failure of l;wo
four members at a time wben public at~ gIve the SIPC authority to seek courtc there exists a real possibility that
tention is directed toward the board, be- room redress if any member firm fails trust fund will be exbausted. If the
ca use public ftmds are to flow in through to meet its obligations to its customers. is to retain confidence in the securities..
loans from tbe Treasury. This will give A nonprofit corporation whose mem- industry and if individual customers are,"
an enlargement that can really cbange bership would consist of all registered to be guaranteed their casb or securltie.<i?'.
tbe decisionmalking power in tbe board. brokers and all members of the national cremts, a larger trust ftmd must. be:
Unless you bave an industry-dominated securities exchanges, the SIPC would created for tbe entire industry, not just'
board in tbe beginning, witb a relatively protect the small investor and encourage for one exchange. ."""
small number and a margin of as many new confidence in the stock market The Securities. Investor ProtectionActF.7~
as four' to add, you really do not sufii- among such investors. of 1970 would establish a private, non~.'"
ciently cbangethe tenor of the board. Tills is a g-ood bill, Mr. Cbainnan, and profit industry insurance fund 'backe~e'"
I think the triggering device is an ex- I urge its immediate passage. by $1 bi11ion in U.S. Treasury cremttoi,~
cellent metbod of protecting the public Mr. BROOMFIELD. Mr. Chainnan, in protect investors from brokerage bome.<
interest, far better tban attempting to the past 2 years tbe. stock. market bas insolvencies. The basic fund would ;J)~:f
anticipate by appointing persons of no steadily declined from the record levels financed by assessments of the memo'
particular stature prior to the events of tbe mid-1960's. While oversized prof- brokerage firms. Initial assessme
which cause dipping into public funds. its dividends and volumes have largely would be 0.125 percent until the f
Mr. STAGGERS. Mr. Chairman, I be~n left behind several of the proce- amounts to $150 million; wben as
yieid mysel! sucb time ~ I may consuIl?e. dures adopted by'tbe securities industry ments will drop to 0.25 percent.
Mr. ChaIrman, I tbmk we bave dlS- to cope with the unprecedented activity customers of member brokerage bo
cussed the bm rather thorougbly. Tbe of that boom remain. Amidst the general would be guaranteed a return up to$.5P
subcommittee beld extensIve bearings. bearisbness of the 1968-70 period. tbese 000 on their ,cash or seQurities credit.,
Certainly, it took along time in its mark- procedures once.s-o vital to.the continued fund would be admInistered by tbe.p
up in executive session. When it got strength of the brokerage. houses, have curities Investor Protection Cprporatici
througb it unanim0l;lSly reported t?i s bi11 revealed a more dangerous side: they whicb in tUTIl wi11 be. gOverlfed by a.fly,
to the. fuJ]commlttee. Wben It was threaten now to undermine· the entire man Board composed of three Gov.!;.
brougJ;1t to the' ~ull committee, the. full industry-investor and brokeJ: alike. ment officials-the SEC Cbairm',
cOmmJttee unamrnously· reported It to The major problem involves the use Treasury Secretary, and Federal Reser,
this House.. ... by brokerage houses of customer credits Board Chr;tirman'-~d t~o indlis.
Mr. ChalJ:~an, tbis IS not a bill that and securities. When investors build up representat!ves. It wi11 remam under,W
was reported ill a ;burry: The~e was lo:r;g funds from the sale of their securities, control of the Securities and Exchang
and . careful conslder~tlOn gIven, to. It. they frequently leave tbem on deposit Commission.
Manyother,;:JJternatlve? were stUdied: witb their brokers. Although the cus- Mr. Chairman, the Interstate an
A.:t:te~ we wer~ through WIth all the stUdy, tomer may withdraw his balance on de- Foreign Commerce Committee has' ill
thIS IS tJ:e bIll that we brough~ to the mand, the funds are usually left with the problem of brokerage house failur .
!louse ;mtb.every recommendation that the brokerage bouses as a convenience, head-on. It has produced a bill whic
It passm thIS lorm,. .. . in anticipation of future purchases. Like almost everyone concerned has support.
Iknqw. tba:p~l1ere 1S probably gOIIl g to a bank's investment of cristomerdeposits, ed enthusiastically: the broker, the·ip..
be an (JbJectif,Jn .made to the effect that the ,house is free to use this cash for its dividual investortbe exchanges ,e';Ve.
the Sen.ateisgoing to pass a.bill som~- own purposes. The same applies to se- the Government 'agree on the n~ed;fo.
Whatdillerept. Well, they ll1lght do It. curities which tbe'investorleaves with this measure. I do not think it can. ,',
I ca=otsay :vhat will ultimately hap- the bouse for safekeeping .01' to securities postponed any longer. This bill deserv,:
pen,but that Will have to be a matter to whicb have been'only partiany'paidfor- i m m e d i a t e : p a s s a g e . ' :
be resQly.e¢!,in,cf)I1fe:ence. In.oth.er :Words,' those held on margin. These, too, can be _ Mr. ROSTENKOWSKI. Mr. Cha~.
these difference§, .Willhave to be rroned traded . loaned or used as conateral on man,' I rise in strong support of II.
out:n c.onfer_eIl<;e~·... ,. ......,. , loans, They are freely transferable,ena- Q1iJ33, ,the SecuntJes IIl;vestor Prote<::1;i
Mr. Chairman, .tl,le ComWittee on In~ bling brokers to fill ,cmiwrr;ers' .orders Act 01 19.6. Tim legisia:t:lmrwl:lltltrcr
terstate and ForeignCommei:ce, not oilly promptly and easily but also'creating the "l"ed"enrl-B~ urance
the'subcomiiiftte¢, but the fuJ] commit~ risk of incorrect transfer. ' . . . ' whic would protec mves rs rom
r
Dccei1loer '0"'0
1 ,1" / CONGRESSIONAL RECORD - HOUSE 38353
0"< r. of the fallill'e ot broker-dea!.er, is tlle prompt paymen t feature which establishing the COl"P01'aUon as a private
t:~;;.,.:==.-~illd--a!ro-grll;nt'pro'tectiOfi'to a voidS the lengthy delay which 111igh t, club, dominated by people from t.he S5,J11e
tl!'~rt,. ~'iC Clk«tomers of broker-dealers otherwise result if c\lStomers had to wait sector Who, it is urged, we are trying to
,d . ~:r.~k cleRTing corporations throngx: lIDliI the completion of the liquidaLJon protect the Investing public from, In
:\~1:: ~~ of lO fund which could be usea PTOceeding. maul' respects, tIlis crea tion bea.rs the
NcZ'. Chairman, I am happy and proud control earmarks of another Federal Re-
: '~-'2cover losses in the event af the fi-
',',,:,o;al iDSOlvency af these brokers, to support this legislation because it will serve type operation, and since the Fed-
I ,~t.~-, ~'ould be a limitatIon of $50,00(1 provide the investor with the type of se- eral Reserve controls credit and the
'TilEl'e ~l
I~nr errch cllstomer. . , curity aJ1d protection necessary. You money market, it will DOW be able to in-
" 'Tilers have been same who have saw will reca!! that President Nixon sup- vade the private investment market.
t
."1 tilis bill was designed to serve only ported this concept in his address to the This bill is clearly special interest leg-
:;;~ interests of Wall Street. Mr. ~peaker, Nation on economic policy and pro- islation. Tbe taxpayers are again being
;t,iS is not the case. H.R: 19333 IS a ve- ductivity in June of this year. The bill called upon to make good although not
;,; 'Ie that speaks to the J.I??ort~nt con- is especialIy timely and crucial at this all taxpayers are stock investors,
~"':'of'the entire securItIes illdustry, juncture given the financial problems The comparison of the new SJPC to
ce,ns , t to th II plaguing the securi ties industry in re- the FIDC is meritorious but there is a
Tiusbill is just as lillpo~ta? e sma
II;wstor in chicago as ItIS, to th~ s~an c'''11t months, I am convinced that this considerable variation between tbe as-
inrestur in New York. This legISlat.!0n legislation will help to restore confidence surance of $50,000 per investor W1der this
\;:;Jl afford those thousands of small ill- in the economy. I therefore urge my col- act and the right of the SEC under sec-
rc<tors across the country the needed leagues to join with me in supporting tion 3 to make loans to tIle SIPC when-
;'tEotion that they presently do not this measure. ever it appears that the Corporation
h~~'/Ijvish to congratulate ~y co!- Mr. VA1'ITK. Mr. Chairman, although does not have sufficient funds to pay any
le.~gUe50n the Conunerce CommIttee, ill this legislation is essemlal ill orGel' to incurred liabilities.
orticulll!Chairman STAGGERS and Sub- PUlVlde a, greater degree 01 secunty lor Most unique is the authority granted
~6inlnittee,ChalrmanMoss, for their ex- the investor, I regret that this legislation in section 3 (h) to authorize the SEC to
, ~~l1tnt",Grkw~ch brought forth this inclUdes coverage for 'all registered deal- issue to the Secretary of the Treasurv
, 'very::ne=;sary bill. ers. It is like issuing a policy of health in- notes or other obligations n0t to exceed
':,t,1i:} ' BRSON of minois. Mr. Chair- surance without an examination. Al- $1 billion for use as a public debt trans-
man !O,m support of H.~. 19333, th: though most dealers are men of integrity action in obtaining funds for loans to the
:"S&c" , , ,,::':£nvestor Pr.otect:on .Act o! and responslbility, some effort should SJPC. No matter how laudable in intent
::;3970"T1i¢purpose of this leglslation, put have been made to qualify covered deal- this is creating more credit and is in-
"i"iqilite;~plY, IS to provlde adeguatepro- ers and to exclude those who deserve ex- flationary.
",'",~IDvestor in the event that elusion by either prior conduct or other Nowhere in the bill is there any re-
".. e er encounrers anCI' lack of qualification. quirement or provision for poiicing the
Pro~ IOn wou e provl It seems to me that the laws relating real cause of the problem, that is, the
"of 'a speCIal fund to be de- to the handling of securities should pro- fleecing of investors by commingling pri-
'assessmen 'If"" all brokers vide for a complete segregation in escrow vate and trust funds.
S, registered under tbe Se- of the funds paid to a dealer by the pur- We have been led to believe this bill
arige Act of 1934 and all per- chaser of a security. These funds should is the answer to the problem, but I dare
e, members of a national se- be sequestered and held in escrow,' and to suggest it will prove ';0 be nothing more
'bange. Assessments would be perhaps under bond to insure that they than a subterfuge under which invest-
"the fund woilld " be admin- are not used by the securities dealer as ment brokers, dealers, and bankers wm
;:a newly formed nonprofit, security for his own debt or for the pur-
be able to now manipulate taxpayers
"'ental Securities Investor chase of securities other than those de- dollars to cover up their own shortages
,~Q:m.--SIPC. Under tbe pro- sired by the purchaser who advanced the and mismanagement. It appears to me
'this bill, SIPC would assess purchase money. that this is just another means of estab-
n 'j,1i cash from its members It is my hope that this legislation will lishing Federal control over ptivate en-
;,'days of enactment. Another be accompanied by more detailed legisla- terprise.
'\in,credit'would make for an tion outlining the responsibility and in-
',',' gate reserve fund of $75 suring the integrity of the security dealer I do not feel that this is good legisla-
tion and plan to cast my people's vote
tually the fund will grow who is provided the benefits of this against it.
oIdncash and wiUbe main- legislation. , ' ,:
Jl~yel.,' ,,' " Mr. RARICK. Mr. Chairman, as I un- Mr. BIAGGI. Mr. Chairman, H.R.
'ts .:on· member brokers and derstand "it, three security investment 19333, the Securities Investors Protection
"~be' based ,on one-eighth brokers have gone under, supposedly be- Act of 1970 will help'secure the small in-
f, gross revenues from the cause of mismanagement, with threat- vestor from financial disaster, due to the
'cis during 1969. On the ened loss tothelr stock 'customers, and failure of an investment house.
',formula it is estimated we in Congress are being asked to inter- The bill itself is an excellent exa,,lnple
1 assessment will net ap- vene in the business coinmunity by pass- of Government working witb industry for
7 million, while another ingHR.19333, to establish a Securities the benefit of all': concerned. with a. cor-
'accrue to the fund in the Investor Protection Corporation 1p pro- 'poration as the 'vehicle for protection'-
,fers'from other... tni.St tect stock inv,estors.'· ',' . '.. . similar to:the Federal Depos{t Insui-ance
One wonders why the Securities Ex- Corporation for bank depositors-public
pecirieEi criteria under wNch change Commission-,SEC-has, 'toler- and private interests will join tOgether
.;;.9perate in, determiiling ated the collllD.ingling (jf customer trust, to protect ,the customers' of registered
"of its members has failed or funds with the moneys of the broker, brokers and dealers and members of na-
::Cot ;,doing so'. At. that: point dealer, and banker'so as to,' allow such tiQnal securities exchanges.
."apply to Ii, 'court of compe:: inCidents to occur. Certainly, it seems The funds for the corporation will
cj;i.bn,for 11 decree adjudiCat- that if these brokers defrauded their come entirely from the industry with
e'Scustomers of the member customers they would· be crinIinally standby credit available from the Fed-
h:'are'liDtitled to the protec- l~able. Yet, nothing lias been said about eral Government. Representatives of the
,',' p,rpYldi#, in tbis JetiislafJqIi: criminal proceedings nor of any-sucb in'"' public will serve, on the board of di-
:'iliciition,the, court would tenqed actiops to be ,used 'w;; a deterrent rectors as well' as representatives from
"ij;~e~ior the ',purpose,' of to mism,anllgement,of: trUst funds by, the Wall Stree:;,tirms., '.
~,..9jzsin~s of the member.' other stock brokers. dealers, and bankers. The recent collapse of several Wall
'li\en;advance to the trustee Tbe only concern appears to be who Street inl'estm(lntfirms cleai-lyerripha-
et::~sary:for making prompt will dominate on the Corporation Board. sizes the urgent need for thisJeiislation.
'ell:Clistomers','clalnis not Iriretaining five members fromthesEicu-' In the recent cases, other firms on the
" OOOfpr anYlme cnst6mer. rity exchange ,business, as' against two Street were able to take up the obliga-
'(~~~~::~~f~Rrc!rt~f'pr°visioii f~9ITi'thegerieraliJ11blic;'we,'a ppearto be tions of the financially mned dealers.
:r
I~
'0 COl'IGR:::SSIONAL RECORD - HOOSE 3S3GI
gO ,~ . .,tdoes not 7l1EEn I have to t-flke e'/c;:y the c,'Edj~orsSEized [.he secL'rities and ihe teed Ihat the Dier:.Jccr ,,'ouJd be r~:-j;:l:njLv
~~·:;\·i~ijOi1 of tJle bill. 1 think the bil) hns '-,lGn2VS Lha L bciongeci to the customers. cC'ncerned with tlle !Jub~ic jr11 ej'eE l? .
se ~~:e or two fJ3\\'S a;~d it i:: our d1..1t-y-it i!: Th~ CH.';IRMAN. The time of the gen- M1. CELLER. I think l,E wowd be
l-~e
l"'~V dlit::-ta POil?t theril out: ~ . t·Jere'":J frcm New York has expire~. n10re. !E~e]y to be con':::2-jied than the
,d ~~]e dirncuHy IS, as I ,5Ee it, 3ilQ WJ1;C11 (By u11Enirncus cCl1sent, I\'lr. C£L:"ER selfi~!l p€:r~Qn \"0'])0 h:;,~ 2 ~clf-.l::1terc:.;.
el 10 ~l1Y lllil1d is as jTJ'H2ti~}g as ~ hang~aiJ, was ~JJo,,:ed to proceed fc·r 5 ndd;ticna) who ]~3S 2n ax to g:dT"ld. w~""Jo \'~·b11t= tc
I :5 the fRet tl1a 1- tller~ ]5 an :].J~UfflCh:lnt H1inu~es.) protect hin1seH and his feE 0','.'.". I ~j;h:;.:
I- !"";i':nber of pubHc 1Jle1l10ers en ~nlS Baal·d. r"lj·. CELLER. The Pre:3idEl1t of the j~ is :s.r tetter to l'J.QvE E. r:'-ij;:'li·:' '':1;":::':;::"
\;\j~ ha . . . e heard it said t~at the n::oney New York Stock Exchange, M1. Huack, than La llave a director wbo he5 a n:lEn-
i] :l1vclved in U1e first stage lS the lTioney of speaks, and this is his e:-~act langUage: CJEil ~nterest in tlle prOCeeGiJlgE.
n ~he broker-the ]'es~jt ,cf assesane,nts ~f 111trj2uE5 ::ind n19chi::Jations, bjatar:,t l?in1- j\1r. STAGGERS. My. Chairmen, will
11 t'le b;-d:e:·s. That true--but tnat m:ckry ~ all EClrt.s c·f cadges 2.110 piays oct;·.e.en
IS 15 the g€Dtleman yield?
-, 0;11, half of the story. There is grea t. brake:i5 a;;d their customers ~o avcid prQpEr
j
lVlr. CELLER. I yield tv tl1c §Ent1<:iT:f!.l
~ut]jc interest invclved in tnls matter. regulation and CC·Duol. frGm West Virginia.
T
e
'.i TI\i2J e 31 e 3D IJ!ilntJn Investors In ::::eCUri- Ralph Saul, p!e~j~ent of the AnlericRn My. STAGGERS. Mr. Cbairman, !J,e
,~!6st Oi wlucl1 pass tnrilugh the Ex~hange, speaks of the "exch~l1ge's gentlem::.n said t!-Jat the public member
s ;1.
ilan~--ur-tlre members 01 tne vancus -" "flimsy capital struct.ure." would have a greater inte,;eEt in th:5
'f
1 '~,~.ll31}i1es.
~ c
Il that hct is not of public ~, e 1
J:jj'C.~ rage ~10uses use
t1' t
_1eJT CDS on1- than the man on the stock exchsnge. I
)
in teres danoi Know ,,-,hat. is cf p-.lblic ers' mcney freely to condEct business, disagree with the gentleman wlJoleh"&rt-
. interest. r2~nJ' to specl21ate, with no segregation. ed:!y. The men who pay the money into
'-wtraThas hap!Jened heretofore? There They use also their capital reserves, the fund are going to wa tcl] over that
llave been great derelicticns on the part supposed to protect customers' asset.s fund. They will be people wbo know whet
of the members of the New York Stock against loss, for their own speculation. they are doing. They will say to othrrs,
Exchange and other exchanges. They Thus two heads of the exchanges, the "You will not take any more money." It
have conducted their operf.tions as a pri- American and the New York Stock Ex- t.akes a crook to catch a crook. If they
vate club. "What is good for the New changes, show exactly what the prac- have somebody who does net know what
York Stock Exchange members," ~ara- tices are of many of these brokers. is going on, tbe wool will be pulled oYer
plJl"asing the language of Charlie Wilson
of General Motors, "was good for the I want to say this. I ail not want to his eyes. A.ed 'l.~e must re!J1elnber, it is
country." Wen, it has not been good for bring an indictment against an broke:-s t.hei.r n-!oney. Let us Jet t.henl watch c,'er
the countn'. The results we know of. and all brokerage hOUSES, because of the it.
Some concerns have gone into banJ;:- derelictions of the few. It is these bad M"r. CELLER. MT. Chairman, I am
i'uptcy. ones that taint the atmosphere and af:-aid I c:;.nnot be F.S naive as the gentle-
. It is time to can a halt. The responsi- cre2.te t.hese bad impressions. We have to man frorn West Virginia.
1::l1'e'members of the New York Stock Ex- have criminal laws not for the good P20- l'.l'r. STAGGERS. IVir. Chairman, 1 am
~lJange want to call a halt. It is time the pIe, but against the bad people. We must not as naive as the gentleman frilm New
e;;:change cleansed its Augean stables. forfend against bad operators. There- York about the'se matters.
To change the simile, the boil has been fore, we must be sure that the laws we MI. CELLER. While the gentleman
-'ia:i1ced and lots of bad stuff is coming pass will be eflective. from West Virginia may trust them,
out. But not enough. We do not know We hear tell much about the SEC, there are some members of the New York
Jl0W many more firms may be approach- as fu as the law is concerned-that law Stock Exchange that I do not like to
'iug bankruptcy. We do not know how has been more honored in the breach trust.
nJallY more are teetering on the brink than in the observance. We seem to have Mr. MOSS. Mr. Chairman, I rise in
'Q:f:how many may be insolvent. VlIe are lost confidence in the SEC, and when opposition to the SUbstitute amendment.
:n'ot toid. we say the SEC will do this and that, Mr. Chairman, the easiest thing in the
'oj',Thisis .very strange. The members of I wonder what indeed the SEC has been world is to step into the weU of the
'Jhe exchahge and the boards of gov- doing all this while. If the SEC had been House and level an indictment against
",.'ei·nors of, the two exchanges are lill- doing its duty, we would not have had the securities industry, particularly at
I;)uslmiJy silent. They do not tell us. And this sorry state of affairs. Therefore, this moment when it is caught in a
\:,·'the. very committee, which I commend because of the machinations and the in- rather tight squeeze. Of course, if we loolc
)",.,peGause of their bringing forth this bill, trigues of these brokers, I want more for the reasons for the difTIculties of the
"-':'does not know the exact state of facts. public members on this board. indllstry, it is easy to point the finger
'.:1'I.,qmore does the SEC know. And the There is more involved here than the at the Securities and Exchange Commis-
:".~\=cUrities and Exchange COJ11..ll1ission nl0ney. There are 30 million investors sion and say, "You gentlemen are re-
. :~']j6,uJd have known long since about who have their money riding here. They sponsible because you have not done your
itW=seoperations. But the SEC has been must have protection against these in- job."
'lrlo:St;apathetic. Self-regulation has not trigues, against these maneuverings of But let us look a little beyond that, The
\w.tirked. some of these brokers, and I think we Seourities and Exchange Commission
CVntiLthe New York stock Exchange will get some protection if we have the is an arm of this Congress. It has on
/anilithe··,American. Exchange put their substitute amendment offered by the numerous occasions asked for mare au-
:\lse~in order, there will be no recrea- gentleman from Iowa. I intended to of- thority and more power the.n the Con-
--of confidence in those exchanges. fer a similar amendment, but he beat me gress has been willing to give it. Had we
ten to those g'entlemen on the high to the punch. I welcome it, of course. I given it at the time it was requested, and
ee of importance involved in these am siding with the gentleman. I d6 n6t had we permitted them to exercise it, I
.apges: always agree "\Vith him, but certainly I doubt if we would have the problems
.'·the beginning of 1970 New York Stock am in agreement with him now. If we here as serious as they aI"e at this mo-
_!illge .members held approximately $3 do not have more public directors, it ment.
l'l0f...customers' free balances, funds would be very much like setting a cat to I happen to believe that the commit-
i:lra-oiiable on demand. These free crecUt watch a bird in a cage. t:;e showed a great deal of care and a
cis are used by member firms to main- We just cannot have implicit faith in great deal of responsibility in fashion-
-,poEitlonE In securities, t<l finance mar- many of these brokerage houses in New ing a rather uniaue Board of Directors.
<purchases of other customers, and for
~r'general purposes. York because of our sorry exPeriences I believe it is a better Board of Directors
;·,Js.estimated that the total of cash and v.ith them. I want to forfend all these than the SUbstitute would create, because
: 'I~Ies held in the custody of brokers for excesses and all these difficulties. \¥hat we have representatives. of the ex-
..,!,,,,,punts of customers is approximately is wrong with having more public mem- changes, of the National Associati-on of
,billIon. These assets, In many cases, can bers? Why should we not have more Security Dealers, which isa quasi-gov-
,,~~plied 1Jy credltms of br<>kerage firms public members, since this is a 'public ernment agency, alreadY engaged in the
,_ ,t~···adequate .segregation practices have corporation? . regulation of the' licensing of security
.tibeen followed. IVfr. MOSS. Mr. Chairman, if the gen- dealers, and then we haye two public
±hei·e. was no se~egation. And when tlema...>iVi>il1 yield, when has the appoint- members. . ' '. .... . .. .
.:e·brokerage houses got into trouble, ment of a public member ever guaran- If there is any in::Iuceme]'~t in.the in,.
2'0
.'. V
]0, 1970 OeCembeT 10, 1970 CONGRESSIONAL RECORD - SENATE 408G7
n,j lr.n'ltr to 'TRAINING OP PAMILY PHYSl- menl to gel t.he programs underway, we minimum ra te of royally Lo be charged
,tCllJ~lJ" btlti i CIANS-CONPERENCE REPORT agreed on 58 million, under geothermal leases, The Senate ap-
la tIO!);,! StCUt_ I consider this program one of the proved 5 perc en l. The House insists tha t
ry 1,1910,10: !]>1r. YARBOROUGH, Mr. President, I major llealLh bills of this session, H ex- the rate be 10 PErcent. This change is
'lance to eu,_ ~'Jbmit a report of the committee of con- presses the policy of Congress that we acceptable to me, and has been cleared
xch.og E, sbe21 ,('renee on the disagreeing votes of the are not going to let the health of the on both sides of the aisle,
10 'ueh lru,: :4'10 Houses on lhe amendments of the
ncorne Lo .,,;: 0,jbuse to the bill IS, 3118) to amend the people 01 the Nation be neglel:ted from I have jillt finished a long discussion
nder aoy pre: "",'.:blic Health Service Act to provide for inaction in the area of health manpower. on the question with the Senator from
, COde of IG5, ," , h 1 We must develop the necessary doctors Colorado (Mr. A LLOTT), the ranking
ootribullon Gt' i1,e maki~g of grants to medIcal sc 00 s to see tha t better health care is possible minority member of the Committee on
n aS51OSsInenl; ilJii,~hospltals to assIst them m estabhsh- in both lhe rural and urban areas. Interior and ]nsuJar Affairs. The change
II) (4) 01 th,,'~~specJal departments and programs m The PRESIDING OFFJCER. Tlle
,talUS, as Oldi: " ",field of family practice, and other- meets with his approval. as does the en-
question is on agreeing La the conference tire bilL
under seel!c,,, e to encourage and promote the train-
e Code of 195~- iof medical and paramedical person- report. The time has come to complete con-
lions IDfide t~ the field of family medicine, and The report WdS agreed to, gressional action and seDd the biJl to lhe
, a L any tim, ' 1 t T While House for the President's approval,
dissolUtion ~;, leviate the effects of rna nu n lon, so that the potentially enormous geo-
let assets ShEll to provide for the establishment of ORDER OF BUSINESS thermal power resources underlying our
I its member:;,': tional Information and Resource
fUlly absL'1lC~ r for the Handicapped, I ask unan- Mr. MUSKlE. ] suggest the absence of public lands can be developed and used
'Its to his 0,,';' ' consent for the present consider- a quorum, in the public interest.
, or embed,,;:, of the report. The PRESIDING OFFICER. The I move that the Senate concur in the
amendment of the House of Representa-
;beO~\t!~1: PRESIDING OFFICER (Mr. clerk will call the rolL
tives,
6ballbe,'J1i,j,jj- L Is there objection to the pres- The assistant legislative clerk pro-
ceeded to call the rolL The PRESIDING OFFICER. The ques-
mpJ;isoned'1l4i nsideration of the report?
tion is on agreeing to the motion of the
,meIl~,,~j,~i{ ee~e~gc~~i~~~e~~i~~'e;~:t.senate
Mr. BIBLE. Mr. President, I ask unan-
imous consent that the order for the Senator from Nevada.
's PurSUJmt"fr.; 'conference report, see House pro- quorum call be rescinded, The motion was agreed to.
e) of thi~ ,', , s of Decemter 3, 1970, pages The PRESIDING OFFICER. Without Mr, BYRD of West Virginia. Mr. Presi-
-por!' '" --, 9874, CONGRESSIONAL RECORD,) objection, it is so ordered. dent,I suggest the absence of a quorum,
So 'ARBOROUGH. ] urge Senators The PRESIDING OFF]CER. The clerk
~'7" "ort thi~ conference report on S. will call the rolL
, e ,Family Practice of Medic,ine The legislative clerk proceeded to call
DISPOSITION OF GEOTHERMAL the rolL
970.' Stated simply, the purpose STEAM AND ASSOCIATED GEO-
,iegislaLion is to encourage and Mr. MUSKIE. Mr. President, I ask
THERMAL RESOURCES
,..the training of doctors in the unanimous consent that the order for the
family medicine, where there is Mr. BIBLE. Mr. President, ] ask the quorum call be rescinded.
"dous shortage of doctors. Chair to lay before the Senate a message The PRESIDING OFFICER. Without
ample, Wrangell Island, in the from the House of Representatives on S. objection, it is so ordered.
teof the distinguished Senator 368.
'ka (Mr. GRAVEL) has 3,000 peo- The PRESIDING OFF]CER (Mr.
',are without the services of a 'BIBLE) laid before the'Senate the mes- SECURITIES INVESTOR PROTEC-
", octor. In areas in the eastern sage from the House of Representatives, ..-, TION ACT OF 1970
.oregon and Washington. 3.000 as follows: ' . - The Senate resumed ,the consideration
,8 without the aSSIstance of a Resolved, That the House concur in tbe f h b '
amendments .of tbe, Senate to tbe amend- 0 t e ill (S. 2348) ,to establishlli,Federal
'o,clor. , ' ments of tbe 'House 'numbered 4, and 5. to Broker-Dealer Insurance Corporation.
,over 75 percent of the physi- tbe bllJ (S. 368) entItled ';An Act to au- _ Mr. MUSKIE. Mr. President, every
this country were engaged in thorize tbe secretary of tbe Interior to make Amencan has a stake in guaranteeing
raetice; by 1949 less than 50 dlsposltion of geotbermal steam' andasso- the healthy and efficient functioning of
':ei~ in 'general practice; and ciated geotbermal resources; and for other the American securities markets. ',
",'are only 20 percent in gen- purposes,", ,,', " 'I;'oda3T, more, than 30 "million ,people
'ce, ,The ngure promises to Resolved. That the House- recede from lts participate directly as investors' in securt-
'er;'since less than 15 percent ~~:~s~~e~;~Lnumbere? ,I, 2, arid, 3 to the ties of one class or anotfier.Perhaps an-
'emcal school graduates have Resolved, That tbe House recede frpm lts 'other"J 00 ffij]Jjon' partiGipat~ illi:lirectlY,
'hi tention of going in to gen- amendment numbered 6 to'tbe aforesald blll through mutual funds, 'pem,ion funds,
.,lll other words, while there ,and- agree to a further' amendment, as and the like: Moreover" every :sector of
,"ly doctor for every ],000 folloW6: ,,' , oUI: ecpnomy is heavily dependent on the
'3.1, this figure is now one for , In section 5(a) of the Senate ,engrossed 'strength and Viability :of ouI"Nation's
,rsons. ' bill, strike out "5 per centum" ,and ,insert securities,inQustries:' :', '-.'",'" ::',: '
, em,is compounded by the '''IO'P';'T centum.... '. ',''-: ',,--'" • The ,Congress has long recognized the
" have a shortage of 50,000 The PRESIDING OFFICER. Without' ,great . impact of the, securIties markets
,"s country and the induce- objection, the Senate will proceed to the 'On o:urnabonal"ecopomY~aIld the crIU-
:,lJ:ito; 'specialized practice are immediate consideration of the":rilessage. ~e that publiC confidence,pl1l:Y5-in
.",' iii ,.the fainily pra,cUce of , Mr. BIBLE. Mr. President, I shall make )h,i:i ~trength' 01 ,theSe_mar1t~ts.· 'To ,::en-
'statUs and stimUlation it a short explanation. ", , 'r': '" .-hance public, ,confid~nce, the, Securfties
mh. ,~reating' separate de- S. 368 is my bill to authorizeithe Sec- . Act of 1933 wasenacfea so ,that, thTffi-,
-.1ai:nily medicine, in ,our retary of the Interior to issue leases on 'v~stor would have the necessary fuforma-
:is we may be able to re- the public lands for the,'dev.elopment oftron to e,xerclse sound,judgmentin mak-
end. Already 15 medical the Nation's geothermal energy' re- 'ingsecurities purchases. ADd the, Securi-
,such departments in ,the sourceii. The Senate passed, this ,bill Sep- ties Exchange A~tqf 19?4, i::I:o:;.1des
e fur
,and '20 ,other schools have
, tember 16. The House sent it back with safeguards ,to assure :thatthe '''mvestoi-
certain amendments., ,Last;F'riday, ,the Will, not, be viet.iiriized ",hy.;i:ralldulent,
MY' hope of getting badly Senate accepted a number of the House manipulative or 'de~eptive,::i';-s'elling
,JaIlS, into our ,rural and amendments, concurred in, ,others with schemes. ' " , ' ',;i,;i
,~t .will ,be by giving em- amendments, ,insisted on certain Senate These two statutes are largely succ~ss
'stige" to the family prac- provisions, and sent the bill back to the ful,in accomplishing ,their ,piuposes. But,
!,:}VJP~ll this bill ~oes. " House. The House aded again today, and as recent experience. pas' shown, tl;lere
";medical schools and hos- has accepte'd aU but one of,.the provi- still exists a serious,g:J,P in 'ouI;',secpiities
'erees"agreed on' authCiri- sions agreeduporLby the,State.:r'he only laws which neither,o;C t,he-<;e;stl>tutes cov-
:,'inillion ,over the 'next, 3 remaining di:tIerence ,l;>etween ,th,e Sen- ers. An investor" ,',may .:exercise ',sound
",;:mJ;'l~g and ~evelo'p ate and House ve,rsi0rLS deals --with the judgment in his choice of stock.- and he
~.~' ~'~'. .
1.....;,.:;'.
. ' :,.-. ..,~:
40S6fJ CONGRESS10NAL RECORD - SENATE Decel"J1beT ] 0
,
] 0- ..
..... liJ
may plr;ee his order with 3 reputable TIlere is uncertainLy about what new avaiJable onJy in the event ind
brnl,er Nevertheless. he fIlay sliJl lose emergencies, wha, new losses, may bnc-kerJ--nTITITfl:hTg-'is---e·)(·hauSled USlr )'.
llis entire investment ij the broker :iub, emerge in the near or disLent future, tranS31:1Jons C'l'l1:f'l1res--t-o-in'Vestors wA-nc
sequently faDs IJeeause of operational or There is uncerLainl1' about how much be Jmposed only 1.0 repay funds oUJe
financial dJrneuJty. relief the industry' iLself can provide rowed from U1e Treasury, I belieVe t bo:,
M:. Pre.sidenl., since J934, 1.J1E United against such emergencies if they shOUld meCl1311lSmS for establishing and b~>E
StaLe'!;'-has JILSured lJ1llJKOep1JsJLs under arise, And there is cause for concern taining an insurance fund to prote1l:ltalJ1-
theJ"pl:J'enrl-J3epustHTISTIral1ce-eOTPOra- about the customers of U10se broker- curiUes invesLors are both realisti~ se~
UOJ'aTlcli.111:Fel:teY:rrSaviTrgsa,rd·':Coa n deaJers who are not members of an ex- equitable. ana
JnsuTan~orpomTIfTi':'J-h-e:se-m"tlTa-fle-<: change with trust fund protection, These Second, in order 1.0 minimize del .'
,pnJgnmiSj'lTorecroank"epusitel'S-l-P0m customers are fully exposed and have no meeUng 111e legitimate claims of ay ;~'1
-lliSSoJ1~ngsDec:w:se-or' bank protection at all. tomers msured by the insolvency CIl3_
taJJures. And IhT1i3'SJ];t1IJ1n-ut-tlTIrde" In my judgmenL, it is clear that the broker, dealer, S, 2348 introdUces ~f "a
----posiTTriSuj.-ance·JiaS·bec(iJm~--a·wTITCe'of Congress must a.ct now to protect the in- tam procedures for prOlnpt liqUid t e.-
corrn-ae.rrt-e]n- [he-S-6iln-dn ess' -of-'Ou r-sa v~ vestor and to restore public confJdence of 31PC mem bers when required al~ll
iDg;'H-nst:it-ntiDft5':-------- ----- .---" ... in the securities industry. SJ'd e th e t'Jme,consummg
" machinerYbf.DUl_
S~le Security Investor Protec- S, 2318 is a najor step toward accom- bankruptcy proceeding, The· bmls'"
U OJT7',,:rOJT9iO-;wouJd-acc-0lTI)51JS)1-jf'STm- plishing these goals, 1t does so in three would establish procedures for makin°
iliiJjJurpose Jor secunCres'iri\;es'LOrs by ways: prompt dJstnbutlOn and paYmellt.'o~
prOLeCLmg them HOm Josses-because--of First, S, 2348 proposes the creation of clalms under certam conditions '1171"6
-me lalTIj'i"eo:n:Jle1TbTiiKers. ThJS bllJhas 1he SecuntJes InvesLOr-PlliteCLJOn Cor- out, the need for formal proof of Cl~
bE'en r~ported unammously by the Com- ~er.-a"']ITiV1tte'1mrn:i'1'OfIT c or- as lS now reqUJr,e? by the ban!rniPlc1:'
mffree on Ban~=YJoll{)w poration wITicrr-wou:lu--a-dminister'an~in- laws, These provlsJOns, I believe ai-'<'
fng 4 days of hearings. That there ls surance fund coJllpcsed of indus·try-f\;IDds highly desirable ~djunc~ t? ,the~r~~n~
·'an . urgent need lor this legislation, 1 ~raISedlJY annual assessment, t5'a'"CXetl"'Up bank~uptcy laws m mmlmlzmg the'djj:..
think, is clear. by Ireasury oorro,VJng authority, This ficultJe~ and delays tha~ inves~rs1\7)')Wd
The stockbroker is not a simple pass, -insull'lllce frunl'C'Wotdd PJUGed" investors ot~erwJse, expenence m havlDg ..t1:Jek
through agent for the p.iuchase and sale from the serious hardships that can clalms satlsfied under existing Jaw::.'':!~\
of securities, Customer accounts with follow the failure of a brokerage finn, Third, the establishmentofah'iii§m:.2:C
brokerage firms in credit balances, cash, Customers of c01'ered broker-dealers ailce fund to protect· the assets :of~:lli:/
and securities are maintained on a con- would be insured against financial losses vestors JS not su:flJ'C1-e Wl out:' "':,.
· tinuing-bas]s. These balances provide the up to $5.0,000 caused py the insolvency of :tional corrective measures to el' .
· lnvestor with liquidity for future trans- the broker-dealer, ill a manner broadly some of the problems which are c·
actions, And as is the case wHh banks, parallel' to th'e operation of the Federal broker failures, S, 2348 would
these balances are used by the broker to Deposit Insurance Corporation, Securities and Exchange Co
'finance the operations of his buslness, ·'Thidundwoi.ild be fin anted initially by greater ability and authority lii'd'
Recent estimateS indicate that the ]jabil- themdtistn" itself ill the amount of $75 these problems, It does so bv furtheJ'
'iUes of brokers to their customers-in miJ1Jon: This fund would be composed ofiJying certain powers of the' Set'u
credit balances, cash, and securities ex- $10 million.ln . ca.sh ass-essments and'$65 and Exchange Commission to iTnPlt':
ceed $50 billion, . 'million In firin Ilnes of credit negotiated rules to safeguard customer li.sseb:
The willingness of investors to entrust · with commercIal hanks, And to provide is done by affirming the ruJema' "{-.
aSsets 'of, this rna,gnitude to brokerage addltional protection for inve'stors, cus- thority of the Commission with reg
firms attests to 'the great, confJdence of tomers would have the assurance that all practices of brokers that bear,
: the Ameiiean public has hadln 0)lT secu- ,$1 billion oCTreasury borrowing author- nancial responsibility, expressly ,
'lities'lndt.istTYln the past,But toqay that ity would' beivaii~ble to coyer lasseSin ing the custody and use of a'c'tisf
con.ftdebddsjeopardized, . '.case t~e' ihClu5tiY~financed fund .is ex- securities, cash deposits,or cie~i
·C5ver'thepast year, insolvencies'ln the · hatiBtea,: i .•" : ' .... . ances, '.'
.securities indUstr,Yhave been mounting
sharply:'S'everaf maf6r firms have 'suf- . The bin also provides that the initial The bill also provides that the'
fered serious fuiancial difficulties, Some industry-financed assessment fund will mission's authority' in these ,"
have faijeircomplete,ly: . lor have, beep be enlarged over a 5-year period to $1~.0 wciil.Jd extend to broker-dealers"
iorceil·to merge with healthier firms, In milJion,Cthusreauclng further' the possi- business only on an exchange;',
the past 18moJ1tbs,a lanienum)Jer.'of bility ilI'having to draw upon Treasury them on an identical footIng-wit
brokerage j'j'rfus';'includil1g 12 major ones, ,fund~, ,.I\CWitionally, the ballJr .line of 'firms which are not members 'of
have failed, hid,' si l1 ce A~gusL'aloiJe, c,re4iLwhichwouJdprovide $65 million change, Thus, the SECwouJd >
th:ree members 6:r·forinermeinbers of the ,. in initial funding; wlll be replaced over :arectly with member .firms,· wit.B.
New, Yoik'stcll;Ji;' Exchange have been period of 7 years by cash raised through intermediary of a self-regiliato'
lOre'eno 'g-6 into 'balilO-uptcyor to com- · annual aSsessments against theiIidustry. Mr, P:i-esident, i believe S,,2:j~
menceliquidation proceediJigs, .. ' Initial. assessment 'rates' for )n'embers go a long way toward provic:iIDg:
"ThidndusirY itSeU'hits attempted to of the Corporation would be maXimum' of . of publlc confidence whith is' s
·stem the' tide ,'oJ: failure and to proVide , one':'haIf,.(jf·y percent of' gross revenuessarY'to 'a llealthy securities fuduh
some]:irmection fbYthe·:ciilitOhiers·off3.tl- ·Jor the,precediIig 12"month. period. This· I recognize there rernaln some 'v'fi
'mg'firi:r1S,Iii 1964, tbe·N'ewYork.Swck ,:~ate 'of .ass~sinentmaYb~lowered as the . proqlems 'withincertam parts ,Cif
Excl1ange;"Joi 'exii.rijIpie; es~abiiShei:l':a '. total furidreaches$150 million; or raised :cui-itl~s industry, There are,propl
trust· 'fUnd:toprotect 'irives~6i-s' from again to repay any 'Treasury borrowing 'obsolete management techni<:ju,e~
'loSses dueto· insolvenCles,·:B'iit .that trust that.may-"becoine nec'essary; ..... , "'. l~ss Qusrnesspradiyes, jlna,de9~'"
·fimd alreadY hascoriiniit¢ei::itstO trou- .::·F1nally., to 'assist in :the 'repayment of regulation, and occasional. fra,
bled firnistotaling $55. mi.ll)pn·, Beyolid , anYTre~tiiY.-frinds.borrowed tinBerthe '.a.~.t~irities.All. of these acctnii:if/"
. this;'the·ExCh8.ng'e recentlY rriadeacom- , a'uthontyestablished in the' bill, S. 2348 part for the industry's' ftnaz'!t:t
·rmtment lor im' additional a.ssessmeri't.to also .proVides'" an: :a::dditional finai::icial .cUltie,s today, ..
indemnifYOlle lare e:fi:nn il.g:iiifutiosSES : safeguard 'In··the 'form" ofii' transa'Cticins '1' 'am'J:iyno means the 'fust
it may incur because of ltsai;gUisitiolf of . charge.. This charge ";woUldbe iIhposed these serious weaknesses:'irij
another fir'in'which was close,.tci'·i5aiik- ','ll additibn to' eXisting coinmissioniiltes, SEC published a monument8J:~
ruptey. '" " ..:.' . ·but the .'aggregate :emay- not:-exceed 20 'the securitiesindustry, whicl:i4.as;
· :,:'Mr::President, the'·custom.ers ·:of .the centS Pei-:$1.0006i-'~ecUritiest,r'ii:isac- 'Sbinething of a Bible to s~ude:Ut.s:
firms which the' stOck exchanges' have tions. Thisiiharge m:ay be levied by,'oe- 'i-JBes'seif-"regUlatimi,Thatsiud:v'
·managed ·:to p'rcitect are fortuil;J.te:, )3ut terminatiori'oitheSJi;C,otl1y intbeevent yjr,t1,lai,jyevery ,a5pec't:'Ot' thbFi
wE'h:!lve now reac1:led the·.p0ibtw)iere t1}e .oLa TreasUr.y.borrowiDg- by·SIBC,,·· ..,. ";from capital' iequireIl!ents. to::,e.}j
,ability :'or, the.mCiustf.y 'to' h a.i:J.d1~ :id<!j.- ,:' ThiiS,Mt,,;Piesident;'S..:;~348 ~alls ilii- fprentry: .lind most'6fw1;il),~:lt
"l;jonal'losses on a significant scale is. i:i.P- 'tially loran mdustry-±1ri3J.1cedi illsii'r- . say 'seems equa1l37 Jriiportailttp
:'certalnif beSt.' ",,' .' ."., . 'ance' fund.'Publiihunds woUld JJeCOme . faCt, it is'safe to say that'iYtiie'
~ ~ 30
...• ...,.£LfE~ •• ,~.~
· ", HEARINGS
, BEFORE THE
U.S. GOVEk~'MiA,fr'£ki1:rfi}r~OFFICE
<G-', '
65-114 0 WASHIN(j'l'ON : 1976
\ ... '~.
1.[" -. I \,'
,51
Mr. STUCKEY; Our first witnesses thisrnorning are HOll;HughF.
Owens, Chairman of the Board of theSecuriti~s Imiestor"Protettion
Corporation, and Mr. Theodore F . Focht, STPC's' GeneralCoun:s'el.
Mr. OwenshasapP,earedbefore tl1is subdomI1littee as a Commissioner
~'ofthf~ecu'ritiesand Exchange Commission, but:'this: is his firsfap-
pearanceAs Chairman of SIPC,Mr;Fochtis,'a, forrrll;r'member Of the
pr9feSsio:lals,t'iff oHhis comii~~tte~aridplayedan iml:lOrtant~pf;li;ttn
'the draft111g o'ftheSIPC legislation» .•.• . '.' . , . "}. ..' i
·';Twou~·a:,likeWsaythisdjn1iriittee "'arid myself personally, :welcome i
'y'oll':badffl this 'Illorning,'and,:w'ithhut b,bjedion; the writtgnsUite-
:mentsof illwitnesseswho:appearbefore)the'subcomriiittee'thls'moi+i-
11 'ingwill.be'ihcluded ihthe record' if t4ere are 'no opjec£ions, ltn'<IJhe
]
;Vit?:ef~thesJ:e,aYd',~iglilight th~ir re:na~k?9~~suinrn'ariz.~91ern:thisim-?rf1-
':lng,' 1 , ey so eSlTe. ,"., " .. , . .( ';' C
c• . Chairman Owens, we, will start off with you this p1orn~ng.
"I
01.
; :':~.~.~:~. ;"1:, :~: __ '.l1',~i'_'··' '~';:r~,,' ;"!' ;<;~·i.?:~'ii~__~~:_~~- ;:;.::7':i·:·_·-~:_'~:.:-''':·'_i';-~:-: ..<,~.: :1-'
:1, tions with claims for cash [md/or securities which were Qver the limits
III of SIPS protection. That is about one-tenth of 1 perceilt of all cJainls
11 rec·eived. In terms of donal'S, the amount of these chimswhichcolllc1
Ie not be sa-tisIiecl came to approximately $:2 million, represent.ing less
than 1 percent of the value of all ca.sh a-nd securities distribllted to
g customers.
k . Hn.d these proposed higher limits of protection be<:.n in effect. as to
II cbims satisfied to date In liqnidn.tion proceedings, the moneta.ry im-
Lt pact on SIPC would have been relat.ively small-thetota] aclditiol1ill
:s cost would have been approxima.tely $1,600,000 and only 17 customers
in all liquidations ,vould not have had their entire claims sntisfie.cl.
1· Of course, the experience with these cln.ims was in a program with
P the cmrent $20,000/$50,000 limits of protection. It is possible that
" ]lad theJimits of protection been higher there wouldlnve, been more
;t large claims, but this cannot be demonstrated with any degree of ac-
c1 curacy. In 0111' best judgment, the addit'ional costs to the program
s caused by tllis recommended cha.nge are reasonable in light ofa1l the
.factors. We believe that it .is only proper that the limits of protection
to secmiLies investoi'sbe kept on f1 monetary 'par withproteetion to
e bf\.lllrdepositors., .' ..' '.', .
r .' 'The j;roposed amendments ,call for chmwes in th~. actl''I'hich wonld
1 e~l~ble.t le .rus ~e, ·0 ,a muc gTea Br extent than IS' now JOSS] Ie, to
1'l\ner accOlU1 S ,0 cus .omers 111 le same forni as they stood when
fhe fum went ont of business.
u·U~rder.secbon 8 (b) ot the IJr61jOsec1 amendments, the trustee wonld
• be author'ize0 to go in~?~heniark~t and p1.Jrl3hflse secili'itie~to l1}~ke up
!CI~' th()Se whIC-h arB ml~~ng, so long as thIs could b~donem a, nl.lxa,ncl
orderly ]~larket..Tpe t~ustee would also be empowered under s~ctiol1
'7 (b) (2)' tblj[(·y, subject tuSIPC approval,bankJoans collateralized
by se<:;.urities, including margin securities, thereby reClaiming those
securities foi' distribution to custolbers. , . '.
: Tn airpiopriate cases, SIPG would be authorized to a'dvance funds
for this pui'pose. l\1~:Lg-jn custo~ers ,would be permitted to pay theil:
qebit .balailces and l;eceive the securities posted to tlleir aCcoilllts, If
these;rec.ommenc~atjoD s u:re.iTD.pkrpented, th ~ cl~rren1, practice of pay:i'D'g
cash: ill heuof m]SSlllSecuntles would be ehmmate.cl for the most part'.
'~J'tiStomerswou reCeIve illstead the secul'lties ill t leIr accoun s. {,
.'e, .... eCtationis t lUt in 'almost all cases a customer's Claim Jor' secur-'
r~would be satisfied by the deliverJ a .secl.mtles, an ,-iV' lere nec'es-
sary, to accomplish this the trustee would go ]11to the open market and
<'"'purchase seeur iLies. . .'. ' ..
c.. 'W,..e...§eheve, however, that it is ~dvisable to provide that the trl.lstee:
w~uld not be reqUlred to mrchase-secunbes where that 'could not be
done ill a all' an or er mar et. ne chief eoncern IS t lat le trustee
. not e requlrec 0 make )urchases in a market wInch IS bem 1m 1'0 J~
er y co' a e or malllpu ate .
.' 1'his may be of partlCufar significance where the firm being
liquidated was a market maker. Under those circumstances, the
trustee should decline to, purchase the needed securities and should
instead satisfy the claim for securities by paying cash in lieu of the
se.cu.rities based on the market value of t11e securities on the filing date.
'As I have ahead mentioned one of therinci al O'oals of the
pro osed leo-islation is to make it possjble for t e us ee to re~l 1\i'
accounts
." ( . . to: customers as'1, ley
, ...
stoo w en e I'm, al e. ne .way a
60
time attending 'numerous suboommittee meetings, studying problems, and draft·
ing and refilling proposals. I believe' that this active participation is reflected in
the quality. of thought embodied in the recommendations of the Task Force. I
should like to express my personal appreciation to the members of the Task
Force who served without compensatiDn, for the many tireless hours 'of work
which each of them devoted to this study, and for the important contribution
which each made to the completion of our task. I should also like to thank the
oraanizations which thDse members represented for the valuable logistical sup·
po~t which they provided.
On behalf of the Task Force, I should like to express our appreciation to cer-
tain individuals who have met with and worked with the Task Force throughout
its deliberations--namely, Roy C. Chapman of the Securities and Exchange
Commission; James W. Giddens of Bughes Hubard & Reed; and Harvey R.
Miller of WeB, Gotshal & Manges. These men, each of whom had special exper-
tise which he shared with the Task Force, have contributed gTeatly to our work.
In addition, we wish to note the excellent contribution made to our work by
Francis L. Carter of the SIPC staff who served as the secretary to the Task
Force. .
.The Task Force is also deeply indebted to numerous other individuals who met
with us from time to time, either on their own behalf or as representatives of
organizations, interested in the work of the Task Force. These individnals, iden-
tified generally in the introduction to our Report, contributed their time, insight,
and. expertise, and our discussions with them have proved most beneficial to
our study.
"It should be rioted that the recommendations contained in onr Report are ad- .
dressed primarily to the situation which arises when SIPO determines that it
must act .to liquidate'a member which is unable to meet its obligations to its
customers. It should be recognized that an improved SIPO program, standing
alone, will not alleviate an of the problems which today beset the securities
ind,ustry. ~he, Tasi!:.Fo.rce firmly believes, however, that prompt legislative im-
plementation of its recDmmendatioris coupled' with continUing vigorous surveil-'
lance 'anel 'enforc'ement oil the part· of the regulatory and self-regulatory' organi-
zations ·.will make an important contribution to the maintenance of investor con-
fidence in securities firms and securities markets. '" . .'
We, of course, anticipate that the Task Force's recommendations and Report
will serve as a focal point as amendments to the·1970 Act are considered. We
appreciate the opportunity wliich you have glven to us, and we offer any further
assistance which you believe may 'be usefuL
Respectfully SUbmitted,
THEOOORE H. Fo.CHT,
G~man, SIPG Tas/;:, Force on Amendments.
INTRODUCTION
a December 30, 1970, the President of the United States signed into la IV the
Se'Cutities nves H <-0" er
prQtectwn·for customers of registe>red-bTukerS-:a:ITcI dealers all(~ memBers oi-fta-Hon-
ljI1 seCliiifiese}.changes." The Ace created the SecLltitles Investor Pml;eeti:t>ft,Cor-
poration (."SIPO"), a non-profit membership corporation of which (with certain
limited ·.exceptions) 1 all registered brokers and dealers and all members of .
natiOnal securities exchanges became membes by operation of law. The Act
required SIPO to build a fund by levying assessments on its members based
upon their gross revenues from the securities business. That fund was to be
used for the protection of investors who were secUlities customers of members
liquidated under the provisions of the Act.
In January, 1971, Byron D. Woodside was appointeel SIPC's first Ohairman. In
April, 1971, the first trustee was appointed under the 1970 Act. Thereafter, SIPC
applied for the appointment of trustees to liquidate a suc<;essi-on of relatively
small broker-dealers. By the end of the first year, twenty-four trustees had been
appointed; to date, a total of 105 trustees have been appointed.
1 Exempt from SIPC membership pursuant to Section 3 (n) (2) of the 1970 Act are:
... • • persons whose husiness as a broker Ot· denler consists exclusively of (il the
distribution of shares registered open end investment companies or unit investment
tmsts. (ii) the saie of variable annuities, (iii) the business of insueance, or (iY) the
business of" rendering investment advisory services to one or more re~istered investmeut
companies or insurance company separate accounts." 0
63
whpre SJPC 'must i1ct to ljl)uillate iI member in financial distress.Clem·l.\", t.he
lJP"'t. protection fur cn",tOlJJl,rS and the best source of in"l'estor confidence lies
\vith the continuing effort", of the reguliltorr :lnd self-reglllatory org::mizatil.llls
aimell ill. preventing praetiees whic-h milY re:::nlt. in injnry to enstomers.
I. Basie PoUcy Determinations
The recommendations of the Tasl, Force are basell npon t,he follo\ving jloliey
det.erminations whieh gnided all of its deliberations:
11. 811'C's role should remain that of it liquidator not a regnlator.
B. Broker-dealers in jjnancial difficulty whose cu;;tomers reqnire 1he proteetion
of the Act should continue to be JiQuidat,ed rat.her than rehabilitat.ed.
C. Once it becomes neces;;ary for SIPC either to apply to a conrl. for the
appointment of a trnstee or to sati;;fy eustomers administ.ratively (see p. 2,)
the t.rnst.ee or SIPC shonld have greater f1exilJility than is eurreutJy affonled by
t.he is/neE III uTdT!r to prol,jtle prolbpt sabsInctlon of cnstomer claims, more
at~ customer protee:tlOn, anG greater eCellomy of "<1Jllilli,,f.~
'1J."""The prot.ectIon alfoiided cnstomers by the 1970 Act sl10nld be adeqnilte,
both quantitatively anu qualitatively, to enable SIPC to fulfill its fnnctioll il1
maintaining investor confidence in securities finns and securities market:::.
The 'l'ask Force believes tllat tIle present regulat.ory structure of the securities
indust.ry, whereby regulatory responsibility is divided between govemment and
self-regulators, has performed effectively and need not be modified to implement
the ,amendments recommended for tJle 1970 Act. Tbe 'I'asl;;: Force recommends,
therefore, that SIPC remain solely a liquidator :and believes thatSlPC can
curry ant that role effectively without becoming a regulator. The Task Force
deems it inappropriate for SIPC to use its resources to rehabilitate a mem]ler
in financial difficulty, as it favors neither premature SIPC intervention in ~he
affairs of a financially troubled member nor grant.ing toSIPC the regulatory
power andstll,ff capability consistellt with such an undertaking.
The Task If'orce strongly recommends that SIPC be granted fleXibility ilnd
discretion wit.hin its role as a liqUidator. Once a member has reached a point
where it has failed or is in danger of failing to meet its obligations t(} it.s
customers; the expanded powers to be given SIPC would COllJe int.o play.
The protection provided by SIP.O to customers of brokers lil]uidated under the
Aet must be adequate to maintain the high level of invest.or confidence envi-
sioned by the Congress and, endorsed by the Tasl, Force. E:\,-perience indicates
that maintaining investor coiIfidence is not solely a function of the do]]ar amount
of .protection available, but depends as well on the nat.ure of the protect.ion nro-
vided. 'I'he Task Force has, therefore, attempt.ed to formulate its recommellda-
tions'so tbat the protection proviDed by the Ad will conform t.o the'reasonable
expectations of public investors. Maintenance of investor confidence is essential
to the continued vitality of the American capit.al market and the securities indus-
h'y, which serves that ornarket.
II. Majol' Policy Recommenrlations
A. The basic frarnewOTk of the 1970 Act in regard to satisfaction of customers'
claims should be modi,fied to better meet tIle legitimate expectations of cus-
tomers. The Task FOl'ce rec()Jl1mends the following:
I. A customer should ,receive securities to the maximum extent possible in sutis-
~action of a clarm for securities. Oustomers whose claims fall within t.he limIts of
,~.FotectlOn provrded by the Act should receive tbei-r accounts as they st.ood on t.he
fillllg date." In !urtlierance of uus end, the trust.ee slJould be authorized to nse
'~OIDer-related<l"Ssels Or SIPO funds to: ,
" a. Purcbase secmilles ill the open market or complete open contracts. as desired
hilie trustee to obtam securrties needed 10 Testare .customers' accollllts.
. b. Payor guarantee Iban;;: oans an Jere y rec arm hypo ' leca:e securit.ies.
2. All cnstomer-Telated property available to the lr:l1stee for distribution sbonld
3 SectJon5-lb.) (4) (El of the Act' defineR "filin~ elate" as follows: Filin;:- Dntp.-'l'he
term "filing- date" means the date on which an application with respect to anJ" debtor is
filell unr1er subsection la) (2) : except that i i -
(i) n 'petition was filer1 before snch date by or against the debtor under the Bank-
rnptcy Act, or
Oi) the Ilebtor is the subject of a proceellinl!' pending- in any Colll't 01' !lpforp anJ'
Rg-ency'of"the United States'or any state in which a 'receiver. ti1lstee, Dr li~lIillatnr
for sllch' (lebtor was appointp.d which proceeding was commenced before the 'date on
which snch nnplicntion was filea: ' "
then tIle ti'i-m"fillng ante'~ menns the date on which snch petition was filed Dr sllch pro·
ceeding commenced. . '.
64
be allocated to customers ratably prior to the application ofSIPC protection to
the accounts of customers.
3. Margin customers' should be included in such allocation, and should not be
accorcled a lower priority than cash customers.
4. Property in the possession or :control of the debtor which should have been
set aside for customers pursuant to applicable rules and regulations shall be
deemed to have been to set aside. Specifically,
a. To the extent securities required to 'be in possession or control of the debtor
pursuant to the requirements of Subsection (c) (3) of Section 15 of the Securities
Exchange Act of 1934' and the rules and regulations thereunder, are not iil
possession or control in non-compliance with such rules and regulations, hut
s'ecnrities of the same series and issue are
(i) in the possession or control of the debt'or in a firm account,or
(ii) held as :collateral together with securities purported to be proprietary
securities of the debtor pursuant to'a loan to the debtor and are or could be·
deemed in excess of the loan balance due the lender,
then such securities spould be used to satisfy the claims (for cash or securities)
of customers or SIP,b as sub'l'ogee. . .' . ' .
b. To the extent cash or qiJalified securities required under Subsection (c) (3)
of Section 15 of the Securities Exchange Act of 1934 or the rules and reg1llations
thereunder to 'l)e d~P9sited and held in a special reserve bank a'Cicount fol' exclu"'
sive benefit·of'·c·usforp'eri3. 'or in a special account· for the exclusive benefit of
cilstomershave "not' Deen so' deposited and held, then: cash· otherwise held' by the
debtor should betrsed, to that extent, to satisfy claims (fol: cash or securities)
of customers cir"S!PC as 'subrogee.' . .... '.' '.. .-
5. ':rlie' re.sOli1'ces·pi'ovided through the use of·i."ealization of the debit items
includable iitthe''Jj"'oi"riiula for Detetmination of Reserve Requirement for
Bl'oke'rs and'Dealel:s}i UJider 'Rule 15c3-3, shouldbe'usecl to satisfy the claims of.
customers or Sr;t>C''ii;ssubrogee and only the excess; if any, ShOllldbe allocated
to the general 'estateY':' '.., ' . " . . :
.6. The trustee sJio:q.ld .be authorized, without the .consent 6f customers, to ~ell ai'
otherwise transfer customel' accounts t.o another broker-dealer'.
7. Where ctistome~ -accounts cannot readily be so' transferred, customers who
have debit balan'c'e"s'$hould be allowed to pay their c1ebit"-balances promptly and
l'eceive seclu;ities:'tq''-fwliich they are eiltitled within the limitations prescribed
by the Act,' : . , ' .' .. '. . . , ' . "
S. The hustee' .sI:(o'uld:lJe authorized to indemnify the transferee or Ilurchaser
of customei"s";acc,ounts"against shortages in sncI;1a;ccounts;· 'ProviMd, however,
that the 'reasop.a1;Jly anticipated final cost til the; SIFC fund arisiIig" from sU0h
i,nclerimity' may l)-ot 'exceed th{l amount whichSIPG reasonab-Iy estimates would
otherwise. be"'requlred to .satisfy the' claims of ·"Ci.1stomers,· with respect to the
accounts transferted;'up to the limits provided by ·the Act and to pay necessary"
-costs and expenses of liquidation.
9. Expenses of administration, that portion of a .customer's claim in excess of
the limit,> of proteGtion, .claims of persons other than C1.1stomers, and claims of
SJ;PC as subrogee' (except a-s otherwise provided), should 'be allowable 'onIy as
claims again.st the general estate. . . .'
These recommen,datioljS in conjunction with the' ·plaJ1 of allocation discussed
IJelow form tll,e 'c,ote of the' recoinmendatiQljS of the Task Force. They are designed
to modify, the .,1970 ACt to provide protection which better comports with the
expeCtations .of"cash andmargiu customers alike withont significantly' increasing
the .bui:de·n on"the SIPC fund.' .
The recolllmend od a fundiment!).l departure from the' 197 ct.
Til Task Force. .'believes that cus OlDers accounts should be reconstituted as
thEw existed on the. filing date With due i:egar or e I I IOns 0 protection
ll1:DvlCled in we Act. It also believes that tIns 'Policy best meets the 1ei;lbulute ex-
pectatIons of customers.
• lllOreover, the knowledg-e that his account "ill be returned in the form in
which it existed on the filing' date, allows the customer to con,tiuue to exercise
investmentpr'erogatives with respect to his portfolio with minimal disi·uption. If
the account· is 'promptly transferred to another broker-dealer, the customers may
"While the Ta~k Force llnticipntes thnt certain recommendations will'reduce fldmluis-
tratlvp. expense~. it does not -believe. it is possible to accurately predict tbe financial·lmpact
nr p.ach recommendation nor tbe imnnct of tbe recommendations of this renort as a·whole.
i\[OI"p.over. it should he noted thnt these recommendations are substantially integrnted so
that modification of one may affect others.
'+' '.
87
Go., deleted as 1JH'lPIJi"opi'inte, since the aim of a Eection 6 IJrOceeding is the Iiquida-
ticll1, uot reorganization, of a member.
Ilap-
Existing 6(c) (2) (A) OJ, defining the term "property," is deleted. Since t.reat-
mellt of cash lind securities is not always tbe same, it is consillered prefernble to
s to iridicate in the su:bEtantive provisions themselves wbetber they apply to cn~h
the or securities or bot.b. "Property," therefore, is no longer a l1Sefl11 term. Til',
pro- refer'e·nce 10 "property of a similar character" hns caused confusion, and has
led. been .deleted in favor of an inclusive definition of the term "securities" ill sub-
IIDe se<:tion {3 (c) (3) (0) of the Act.
one §6(c) of tbe Act-Redesignated as 6(c) is a portion of existing subsection
ute fHc) (2) entitled "SpeCial Provisions."
§·6( c) (1) of ·t11e Act-The definition of "customers" should ind11l1e only per·
fer- sons who enj·oy the type of fiduciary relationship with the t1ebtor that c:1lar c
ley. acterizes customers in general. Recent decisional law is codified into the c1efinitiim
IUY to provide that only securi'ties received "in tbe Or(lin,1ry course of bu::;iness a;;
a broker or dealer" may form tbe basis of a customer claim. (:~ee .':I_E.C. .);-". P. O.
'ed BaTotJ Go., 497 F. 2c1 .280 2n(l Cir., 1974.) Also, the 'l'ask Force agreed that
, of
customer status· shauld not b·e extel1f1e(1 to lender,~ of secnri ties to the dt'btor
where sud): fenders' h:ive l'eceivP<f eitlier collateral or consi(1l.'l'ation for tbeil'
lie loans. Lenc1el.'s of se[;ui·ifies· in ,':;1](']) eircUl11stailCeS (an reasona'bly be expeeterl
led to beai' tbe risk of the faili.l1'e of tbe debtor's busilless (See TFR II. 33)
ect Acconlingly, some langl1age from the current denllition was dropped since it
:he llus:'been used oY·soine lenuers- ili an attempt ,to gain for t])em",el"es tbe ·iJi:efeITetl
:11e. position of customei·s. Tlle deletion of the language is not intf'nded to challge
PC tbe rigbts ot' cash- or mar1,rin customers w1Jo-lend securities from tlleir tr'1Cliilg
irri accbunts to their bj'ol;:etf"vithout taking back collateral or receiving addlticinal
ith consideratjon). It n3'- fmfhel' proyided that· contiibutors to capital emmot
le;; become customers by avoiding the contracts pursuant to which they have celli·
;y. tributed capital, e.g., on the grounds of fraud. Whatever their rights may be,
e1' it is not appi'bpri:ite fo treat sl1i:'h persons as customers.
E~isting 6 (c) (2) (A) (iii) is deleted. ·The concept of "cash customer," a:
ccnfcept closely related to' that of "specifically identifiable propeli.y," iwnQ l,)llger
'·11seful. (See 6{a}(1)(AJ lllld (B)',above), Further; the"Task l?orce"inr)ica:ted
that the di.stinction made by SIPAnH now in effect betwe.en margin and cash
eust6hlei's ilYnot in keet'iing Witlf the' goal of retnniing securities wherever'· prM·
tit-able, oj' with tlie Ju:Stififttile 'expectatioll' of margin customers and others awl
they wiJ1'be entitlhrttn1Jeir aceorfilts llpoir payment of debit balances. (See TPR
Pri.lO and 11)'
§, 6 (c') (2) of tb'e' Act.c.-Chimges' to the (lefiriitiori of "net etj1Jity" reflect the·
"iews tbat min'gin and· cli:sli crtstoii1'ers shonJt1 be- trea ted 011 an. ~qu~1 basis
and that a, c.ustomers wbobas· e;nterecl into transactions in gOO(] faith' after
the· filing dite ShOlild not-.be hhl"l"e'cT from certain .prOt ecti om:. (See :I'FJi' !lp. ,-' ,,-
10 ancl 42) SIPO adva'nces" fOl"' the' prbte-etibji of such late tr'ln~actioti.<;, lim\"-
t ever, are sl1bjeot to the·, cUscretion of SIPC llndei" subsection "}(a) of the A:ct.
Amenc1m·ents to this subseclion are also madeneCeSSfrl"Y by the modificati'on (If
the' concept {)f "f:,pecincal1y imlentifiable property" . (cUscllssecl in 00nnectibh
with subsection 6 (c) (5') of tlJeAct lJelow) and' by.. tlle liew 11l'OYisians coy(;'.riilg
c}ose-Duts of -open -colltrlieturrJ commitments (cl1sCl1$$ed in connedJ0I1, with 15ltO-
secUollSfc) below)'. .
-§ 6(e) (3) of the Act-The new definition of "securities" is essentially P:,lt-
ternec] after tlle 'refitlitioll 'in tbe 1934 Act. However, in recognition of ·the· fact
tha t the -defiliitlon in- the ifi34' Act is for the purpose of enforcement, and regultl-
tiOJi and tbat tbe pni'poses of. SIP.A: are (lifl'erent, certain alterations in tlJ{~
rJefinitiOJi ul:e m3.cle. Celtlficates of 11eposifand short term p~per are incluflM
iJi thedefinltioTI of s-ecurit'ies for ::'lIPO pnt110ses;- ilivestment COlI tracts, projj·t
i;hUring plans; oil and gas leases ftnd ·commodities contracts· are exc1rided.
§ 6 c C4 of the ,(ct-Till,s siict10n defines "customer· propeTty." the concept
ivhicll ta es the place 0 ' . . e a s ra· ii.ne 0 ' . in·
tiff '. 'ustoiner property, brieiiy ex Jlained, ·c{lnsists of all cf\f;h aJ)( ·secun le·s
(nth·er iat, P ( f; iritles re":lS ere;d in the name of IT. customel')
a"v Ie to he trustee -for· the ,iatisfaction of cDstoiller claims. It includes all
[;asb and seCUJ1 leS Ie rom or or I. le accoun 0 cn ,: securities l1Pld
RS'llJe'property of·t1ledebtor which ·are necessary to meet the debtor's obligatioJlS
to his cl1b't{)merlf for: securitie,s or the same class and series of an issuer. (Cf.
DueL v. HoninB, 241 U.S. 5Z3 (1916) ; Goniwn v. LittLejl.e].c]-, 229 U.S. 19 (Una))
Also int:l1idetl is IjrorJ'ei"fy generated from the use of dehit items in cus-toniel's'
accouitt.':i-aiic1 prop'erfy·of the debtor which; upon complian'ce with UiPplicilble 13\\':;;;
89
property ueemed to be "l'oiclnble llnder SIPA. In addition to transactions void
or voidable under the Banlil'upte-y Act, this sllbsect.ion reacbes trans~e-tions
which have the effect of grrlllting preferent.ial treatment to indiviclnnl
customers.
§,s (b) of tbe Act-'l'bis sub~ect.ion, carrying Ollt ODe of the central recom-
mend:ltJons of the Task :B'ore-e, nl1fhonzes the trustee to pllrCIlase secllnti€S for
the purpose or n'stonng custom"'ls, <IS £<11 dS possJble. to then' jJusilio!J8 ;,,; or the
fjl~FItp. 9), Yo we e:nent mat TIe can' do so in,d. fair .<lid OInt'l'ly
mar];:et, tHe trustee wOl'fn1Ue expected to purChase secliJlh~~ to co vel lile
clefi~iency remiUnmg III a e-uf:'torners account after al:rocm:mg to such custciii:ler
bis sbare of customer pI0pelL.I' .i~ provH!ecL in subsectIon S(a) (I) of t~t.
'Tbis woOuw carry out a liey MecDve of the :task Force whJch IS the satisfatn-on
of~acust.omer's-claim for securities by the denvery of seclI1!ues wherever that
i~ lJOssible. tl'he only time it. is enVISIOned that a trustee woulll not denver se-
c-l1J:iJies til <iatIsfy a clanD for secuntIes would be in those situations where
tlIe market for tile seCUrItIes IS so thm or so closely controlled by inSIders that
it IV 'ee . I 1 rop)"], e .. n unWIse or e trustee to e required t.o pur-
e-halOe sep .' . s for e sa IS ae- .JOn a , S'. e rus ee may nse - _ 1D S
t.o purchase securities to replace r a part of ri'customers ueticlenclll securi-
t.ies \v ase va ue on e lllg a 'e I no exceed the limits of SIPC protection
provided in subsectJon 9 (a) or the Act. .
- § S (c) of the Act 'I'he ueoSlon of the TrrsIf Force, the present policy of SIPC
as expressed in tbe Commission's Rule S6d-l, and the prevailing practice' ·of
trustees with respect to contract,s of tbe debtor 'open on the filing date, .are all
-,
.J re-.tlected in tbis paragraph. In most instances, sucb contracts will be closed out.
r That is, the other contracting broker or dealer will complete the 'contract in
the 'best available market, and account.. to the trustee for his profits or :fiJ~' a
claim for his losses. If the closing-out ·broker or "dealer was acting for a customer
(as defined in subsection SIc) (3) of the Act) with respec'i; to contracts, he will
:- be entitled to SI'P.C protection up to $40,000 for losses sustained for that cUi3tome':t'.
e 'Where the closing-out broker or dealer was not acting for a customer, !iny loss
1- he sllffers will be a claim against t.he general estate, not paJ7i:lble' from' SIPC
allvftnces. (See TFRp. 31) .
If § SIc) (4) of the Act-The provisions of § SIc) will not apply. to a clearing
h corporat.ion -which has its own rules on close-out.s for its members. 'Losses:'by
Ie clearing corporations are ~laims against the general estate only, and not payable
b from SIPG advances. (See TFR p. 31) ,... :., , . ' . .
n § 8(d) of ·the Act-This imp'oi-tanf new s"tlbse'ctIon 'gives the' trustee the 'l'ight
's to transfer in wbole or in part the account ofa custDmer. In view of the benefits
r. to customers' and the ooving to SIPC that may '1'esult in an appropriate case,
SIPC flmds may be used to facilitate such transfer of -accounts. (See TFR p. 11)
in §. S (e) of the Act-'-Tbe subsection entitled ~'Paymentsto·Custo'lDers"·isretained
Id without' major change even thonghthe 'manner 'in which the trustee effects
"payment" will, in most instances, be substantially ·different. The trustee's power
37 ·to satisfy Claims in either' cash '01' seciIrities mllst be preserved, however, to
e- enable'him to 'deal properly with the situation, ill which theTe iSl not a '~fair
oy and orderly market" available within tbe' meaning'of §'8(b} and tbe situation
a ,in whicb·a: 'custom'er makes a late claim' tbat -.is 'nevel'tbeless entitled' t.o' protec-
tion under § 8(f). In addition, it'is made:clear tbat secul'ities are valued as of
the filing date for the' purpose -of dete=ining· what securities' a custom.er· is
entitled to receive.
er § 8 (f) of the' Act-,Since existi1lg' subsection 6 (h) is deleted, this section
of preserve tbe substance of that former section entitled "Proof of Claim by As-
al sodates and Others".
Je ,§ S (f) (1) of the Act-Here, again, specific incorporation of the Banknlpt.cy Act
ce is deleted (see discussion ill connection with § 5(b) (2) above). To'eliminate
ty any ambiguity in tlle use of tbe. term "customer", the trustee's duty to give notice
~r i 'is made'to 'apply only to·tbose customers who appear to have had art open' account
rt 'with the de-btor within the twelve months preceding' the filing date. Notice to
ed creditors is 'tIle same as under the Bailkrnptcy A'Ct, except that it is given by
.m. the trustee rntheT than by tlle court; ,
§ Sri) (2)· of the Act-The limitations of time in SIPA'as now in'effect are
rn altered' to 'fit tbe contours of'the new distribution' scheme. It is provided that
ed "Claims for customer property must 'be' filed' promptly, reflecting the tnistee's
need for certainty in regard to allocation of customer pToperty at an early date.
.SIPC protection,however, 'may be exten'ded to claims filed 'within six months.
100
1\11'. OWE:N:s.This is:m1l1earc1 of in my expei'ience of almost 10 years
l\s,a;n S:EC,GOlwnissioner. .
.' Mt~ STiJ:oli.Ex. I tllinkthat is. an indicatioil of the lleed for' the
'. bilkand:I' think it refleds .on the study group that made the study
and came up with the recommendations. . ,
So 'again, let me thank you and yourstaff for your testimony.
Mr. OWENS. Again, let me thank you, Mr. Chairman..
Mr. 'STUCKEY: Our next ,vitness before the subcommittee this morn-
ing is Mr. Robert Augenblick, president of the ICI. .
If.you would like, Mr. Augenblick, we would also at this point put
•your prepared testimony into the record, and if you would like, you
also may summarize your statement.
STATEMENT OF ROBERT L. AUGENBLICK, PRESIDENT, INVESTMENT
COMPANY INSTITUTE, ACCOMPANIED BY DAVID SILVER, GEN.
ERAL COUNSEL
Mr. AUGENBLICK. Thank you, sir. .
My name is Robert L. Augenblick. I am testifying today on behalf of
the Investment Company Institute, of which I mn president. With me
is the Institute's general counsel, David Silver.
The institute is the national association of the mutual fUllCl industry.
Its members consist of 389 open-end 'investment cOlnpanies-oom-
monly .called "mutual funds"-their investm.ent advisers and vrin-
cipal underwriters. Our mutual fund members have 'aibout 8 million
sharehold'ers and assets of about $45 billion, comprising ove.1' 90 per-
cent ofthe assets of all U.S. m.u:tual funds.
VVe r,ppear in opposition to so much of sections 3(a) ,4(ib) (8), aild
4 (f) of H.R. 8064: as would change existing law by:
(i) Imposing mandatory membership i~l the Securities Investor
Protection Corporation (iSPIC) on brokh-dealers ·whose business
consists exclusively of the distribution of shares of mutual funds,
lmit investment trusts or variable annuities, or of rendering invest-
ment 'advisory services to mutual funds or insurance company sep-
arate accounts; and
(ii) Requiring the inclusion in the SIPC assessment base of broker-
dealers doing a retail securities business of the revenues which theT
derive from the sale of mutual fund shares.
VVe confine our remarks to the mutual fund aspects of the bill, al-
'though our comments are also generally applicable to insUI'::\,llce
products.
At present, mutual fund underwriters-technically within the eate-
gory of broker-dealers-whose activities as broker-dealers are re-
stricted to -distributing the shares of mutual funds are exempt from
SIPC membership. In the case of r.etail broker-dealers who are mem-
bers of SIPC, their revenues derived from mutual fund sales ilre.
exempt from the assessment base for SIPC dues.
At the original hearings on the SIPC bill, we strongly endorse.a the
principle of providing reasonable insurance protection for investors,
We also stated our belief that the cost of insurance shaul d be borne by
those who c.ren.te t.he, risk and ur,g:ed that. the.re sh0111r1 be a st.atutor"
exe·1"'1nt.ion for t.hose broke.r-r1ea1ers who clo not, hold and ut.ilize i.n
t.heir o\yn busi.ness el1SrOIllers' free, eredit balances and customers'
·/
102
the fund to the public. Often the underwriter and adviser are a single
entity. -VV11ere they are separate companies, they are usually, but not
a,lways, under common control.
Because the underwriter distributes securities, tEnt is, the shares of
the fund, it is required to register as a broker-dealer uncleI' theSecmi-
ties ExchallO"e Act of 1934. A mutual fund underwriter usually dis-
tributes the ~hares only of the one or more funds in a particular fund
group. " . . .
Unlike broker-dealers dOll1g a general secuntles busIness, a mut.ual
fund ImdBrwriter does not use customers' funds or securities in the
course of its business.~~711ena customer purchases mutual fund shares,
itis the fund's transfer agent which issues the shares to the customer
against receil?t of the pu~chase mO!ley and sends" the money to' the
fund's custodIan bank whIch often IS the same entIty as t.he transfe.r
aO"ent. -VVhen a custoim'.r redeems mutual fund shares, it. is the fmid's
t.J~'u).sfer agent which issTlf;s the redemption.check against receipt of
the shares being redeemed.
The procedures for t Ilf~flow of money and mutnal fund shares in-
volved in purchases aJjd redemptiolls by investors are npt st.(lndnrd
throug'hout the D1utua.l flmd industry. This is to br. e:s:pedecl bec:HlIFP
some shares .are solclthrough independent brolmr-c1ec).Iers, SfJme through
salesmen ~1irectly employed by the flUId's underwriter and some by
direct contact with the fund without any intervening salesman, (tllC}
also becallse the transfer work for saine funds is done by an aJRliate
of the lUlderwriter rather than by a bank or some other outside kans c'
fer agent. . .
In many cases a eustomer's money or securities neyer go through the
fund's underwriter at all. In those cases where' the purchase money or
the mutual fund shares do come into the popsession of a mutual fund
underwriter, thelUlderwriter is normally ~cting only as a conduit
between the shareholder and the flUId. \
The important fact is t.hat the customer's money is transmitted to
t.he fund's custodian bank, and the maximum period of possible jeop-
ardy t.o any customer by reason of the underwriter's possession is
limited to the time which it takes for the underwrit.er to process the
trade-a maximum period usually of from 1 t.o 3 da,ys. Cust.omers'
flUlds and securities, therefore, do not come t.o rest for an indefinite
pe.rioel of time in t.he hands of t.he underwriteI'.
Mr. STUCKEY. Will you yield right there 'I
Mr. AUGENBLICK. Yes, sir.
Mr. STUCKEY. That is the anI ~
1'1llmi~lg off WIt 1the money?
Mr. AUGENBLICK. Yes, that is correct.. As I wil :}"I.£-.fk-~
ticular risk IS I'lUll1ln O' a Wlt.h t Ie mane an
r. TUCKEY. at IS 99.9 percent of the risk, and that is covered.
Mr. AUGEKBLIOK. By fidelit.y bonds.
Thus, not only does the !Tiut.ual fund underwriter derive no eeo-
nomic benefit from holding customers' money or seemities, bnt so faI'
as the underwriter's activities are coneerne.d, the risk to mutua.l funrl
investors is restricted to items in transit. The SIPC Fourth Anlllwi
Report for 19'74, page 8, admits that mut.ual fund uncle.l'writers do
not "hold" customers' securit.ies 01' funds but merely "handle" them.
104
./
139
Mr. NEEDH... . 1I!. The report. of, the demIse of tIle Exchange IS a Olt
premature. I understancl the President will only tax the dying u.ncl
the dead.
Thank you agf1in; Mr. Chairman.
My name is .James ,T. Neec1hnm. I am ehainIlan of the board of
directors of the New York Stock Exchange, Inc.. ,Vith me today is
Robert M. Bishop, senior vice president of the exehange. .
140
...i ....
SECURITIES INVESTOR PROTECTION ACT
i
AMENDMENTS OF 1975
i
HOUSE OF REPRESENTATIVES,
SmCOlILMTITEE ON CONSU1If:ER PROTECTIDN AND FINANCE,
COM1IfITTEE ON INTERSTATE AND FOREIGN COMMERCE,
I Washington, D.O.
The subcommittee met at 10 a.m., pursuant to notice, ill room 2322,
'.". ":'. .
167
which WE're enacted Riter the intro[lnction of B.R. 8064. Others, of course, rE'p-
resent l1reilS where the views of the Cl.llJJruission alld SIPO may lUffer somewhat.
I shaH not' discuss these commen ts generally since many are narrow ill scope
:md::technical and are well presel1tec1 ill t.lle memol":lJJdum. However, I 'wonld
like· to discnss a few broall issues wbiell shouH1 be cOllsielere.d.
, The OommiiSsioll'S experience in j'espomlillg to illYestor complaints regarding
tlle SIPC Act indic:at.es that the majority of tllese c:omplaint.s c:ollcem two prob-
Jems: the time required to satisfy a CUf:itollH'r'S claim, and the customer's ill-
ability to llnclerstanll the comp1exitfes of t.he liquielat.ion procedure, sucb as the
fac:t that he may not receive bac:]:;: an of t.he securities he had on deposit ",,'"ith
the broker-dealer. The proposed amendments \"ou1d help rectify both of tbese
complaints by streamlining tbe liqllida tion ].lrocednres and more nearly meeting
"Ih.a·reasonable exp€ctations of customers.
~'o streamline 1iquiOationf:i, the proposed legislation 11rovic1es SIPC with tbree
methods of satisfying t.he claims of c:nf;fomers of a bi:61,el:"11ea1er in financial
otUfficulty. First, SIPC may initiate a 1il}nidation' procedure an'alogous t6 'that
currently provided, in which an independent. court-appointed trust.ee carrie,s ont
"Ihe liquidation; second, it may aPIJoint itself or a member of its staff as trustee
in certain designated smaller cases; tllird, it may satisfy the .claims of customers
in the smfillest cases by paying- those cllst.omers directly," without initiating a
liquidation proceeding. In each type of procedure, the methods employed by
!:lIPO or its txustee to satisfy customer claims, wbich I shall discuss momen-
t.arily, would be· substantially more flexible t.han those methods currents avail-
able.
SIPO ha"s suggested that such flexibility is essential. We concur. SIPC's
experience in some 116 liquidations has highlighted certain areas where the
Ad, although adequate to protect customers, lacks ·the flexibility wbich mig)lt
'bave enabled SIPO to maximize the benefits t.o public cl1stomers without. incur~
-:i-hig ·unnecessary··administration e:ocpenses. ]\,Ieasn'r£>d .in: .t~i\];qs; of. the ratio of
R(1ministration expenses tq the number of customer clrtims·:s..i.tii'ffied; the current
Act appears to function reasonably well in larger liquidations. In the smaller
cases, however, administration expenses are usually. far out of line'. The Oommis-
sIon agrees with SIPO that .the more flexible liquidation. IJTOcedures proposed
:would ,be of significance in eliminating unnecessary administration expenses. Xhe
Commission also believes that the proposed alternative procedures wouldhel;p
to assme that customers receive their funds and secmities promptly and often
in less time than is possible under tbe current Aot. .
. In order to more fully satisfy the expectations of Pllblic cl1stomers, a number
of ehanges would be effected. Most .obviously, tIle limits of protection. would be
\'\
'"
r.aised to $100,000 for securities and $40,000 for tbat pOl'tion of a claim related
to cash. We ·think this change is entirely appropriate ,and will serve to maintain
investqr con:(idence. In ad("jition, to the pxtent· POfisible:. SIJ'C would retutn'to'
the ·cust.omer his account exaCtly as 'it stood on tli·e·':filing··(iate-:.-custOmer~·no
longer w.ould receive cash in lieu' of ·securities but 'would rec'eive ·the securities
claimed. This woulel have several important conseqnences. First, tlle customer's
~xpectations are met; see-ond, it eliminat.es from SIPC liquidations the chmice
drcumstance 'Of a custDmer's recovery depending on whether the .broker-dealer
]las much or little of a particl11ar secmitya t -the time tbe liquidation is initiated;
third, tbe i::ertainty of l.Jlowing that nn account will be :returned intact permits
the customer to hedge against market risk if he so wishes. .
.III order to satisfy customer claims for securiUes, t.he trllstee would determine
t]le ShOl,tfall in· securities .claimed by cnstomers, and would be-.authorized to
j:mrchase ,~uch securitie,"l in the 'Open market or to payor guarantee hank loans
.i:t:gainst which sec\lritieS bad been hypot.h~te~l. Finally, the ttustee:'1vould 'be
. flJ;!thinized to ,ul"ange thetransf.er of. customers' accot!iJ~s toothe~':brol,er-dealers,.
'f11#he1' reC1ucing the disruption e~perienced by customer,!. . '.' ' .. f;··:·
. ·A ano-es will assure more fle-nbilit speedier li l1id'atioi:l.~ and
be' tel' cus6i:lIrier prote¢ ,On. n one area, hmyever,. we suggest ~hat Congress
coJisrder !.ui:ther expanding the sCOIJe of customer protection.· The 'CommIssion
believes tllat wbere a customer has a contract. with a' broker~dealer fay' the
jmrchase or sale of· securities wh.icb is execut.ory on the filing' date-that is a
contract where money a.nd secllrities have not changed hands-such custo~er
sho.uld be protect.ed ag-ains.t risk on that tran.saction and permitted to receive
t.lle benefit. of his bargailf even if his broker fails. This shou1c1 be true whether
the debtor "lYas a(:'ting' fo~' 'tliecustomer as ,plincipal oi: 'agent am1 wliether .the
trade was o,n. aHelive.: y v,ei's~s paYIJ?ent basis. I sball not discuss t.he technical
186
STATEl'iIENT OF JAMES W. WALKER, EXECUTIVE VICE PRESIDENT
AND DIRECTOR OF GOVERNMENT RELATIONS, SECURITIES IN-
nUSTRY ASSOCIATION, ACCOMPANrED BY DAKIN B. FERRIS,
'CH~IRMAN, SIA MARKETING COMMITTEE, AND EXECUTIVE VICE
:PRESIDENT, MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.,
ANDHBENJAMIN L. LUBI~, MEMBER, SIA MARKETING COnilVIIT-
TEE, AND MANAGING PARTNER, BRUNS, NORDE1VIAN, REA & CO.
'\
Mr. VVALlillR. Mr. Chairman, my name is James IV. VValker, Jr., and
I am executive vice president and director of government relat.ions of
the S'3curities Industry Association, SIA.
SIA is a national trade association representing approxinmtely 650
securities firms headquartered throughout the United States which,
collectively, aceount for approximately 95 percent of the Nation's
securities transactions handled on behalf of over 30 m.illioll stockholcl-
ers.
Accompanying me today are Mr. Dakin Ferris, whom yon have al-
ready identified, Mr. Chairman, and Ben Lubin. And M1'. Lubin is
appearing as a representative of the· Marke6ng Committee of the
Securities Industry Association, and who is a representative to the
speeial task force formed by the Securities Investor Protection Corpo-
ration chairman, Hugh Owens, t.o review t.he operations of SIPC sub-
seqnent to its cr~ation in 1971.
lYe are here t.och}' to urge prompt passage of R.R. 8064, and my asso-
ciates will provide specific reasons anel explanations for our support.
First, however, I wish to bring to the attention of the subcom.mittee
the difference iIi the eondition of the securities industry today than at
the time, 5 years ago, when t.he Congress was engageel in developing
the 1970 act..
Partly as a result of the act it.self and the leadership delIlOnstrateel
by the Congress, partly as a result of regulatory and self-regulatory
action, [mel partly as a result of industry initiative, the firms which
make up the securities industry of 1975 are more strongly capit.alized,
better managed, more efficient, and better regulated tha.n ever h3fore in
history. The data brought to your attention Monday by SIPC Chair-
111an Hllo'h Owens well demonstrates this fa.ct.
DUl'ing the past 5 years II'hen the Nation ha,s experienced an extreme-
·.ly broad range of economic problems, inducling staggering inflation
and recession, the rate of SIPC liquidations has steadily and remark-
ably deelined. Of the 116 firms which have been liquidated by SIPC,
only 5 pereent of the total has occurred so far t.his year. Last year the
number of liquida.tions amounted to 13 percent of the tot.al compared
with 26 percent in 19(3) 35 percent in 1972, and 20 percent in 1971, the
yea I' of SIPC's inception.
. This improvement in industry conditions is certainly an encouraging
aehie:FE'.lnent. It. shonld not.. however, lea.d the subcommittee to con-
clncle that expeditIOUS legislative action is not needed simply because
there is no urgent and dramatic epidemic of potential liquidations
at hand.
Revisions in t.he HJ'IO act, as contained in R.R. 8064, will result in
greatly enhanced inYestor protection and public confidence in secn-
187
rities markets. These carefully and deliberately developed improYe-
ments should be in place for use 'when and if the need should arise.
It may be helpful to the subcommittee to know that I served on both
the industry task force established in 1970 to assist in the develop-
ment of the original SIPC legislntion and the 1074 Task Force appoint-
ed by Chairman O·wens. The second task force under the leadership of
the SIPC General Counsel Mr. Theodore H. Focht, who served ns its
chairman, was able to function without the pressures and controversy
surrounding the work of the first task force.
Thus, a careful and systematic review of the SIPC activities nnd
procedures and its denJings with many non-securities-industry organi-
zations and individuals ,vas achieved. The diversity of views represen-
ted on the task force plus the care exercised nnd the leadership given
should inspire greater confidence in the biJ1 developed from this work.
At this point, :Mr. Chairman, I wish to ask Mr. Ferris to expJain the
~IA position with respect to the proposed legislation.
58
189
REPORT
[Including cost estimate of the Congressional Budget Office]
[To accompany H.R. 8331]
The reported bill, -which would [lmpnr} the Secllrities Investor Pro-
tecbon Act of 1970 (SIPA), is designed to provide the federal courts
ilnd the Securities Investor Protection Corporation (SIPC) \yith
speec1ier and. more flexibJe procedures for the protection of C1Jstomers
of in~olvent brokers nnd denlers ilnd the nttenchnt hquicbtion of those
brokers and dealers. The bill woulcLJ)ltt]~f~BIP,L.LmDLQJJ''''i12Qn~i~~eJothe
reasona hIe eX-!dcdutions of public investors a.nd W01l1clJ2Tovicle in:\'C~s- ~
-tors .nt.h greater protection ngalnst the financial faj]ure of stock-
'~ers, thereoy-enl1anc-rrrg-iJlYestor ~confi(l enceni=I))£~~s~ili~itl~==
markets. -
~ce enactment of SIPA at t.he end of 1070, the. protections of the
Act. 11;1I-e been malIe RTai1able to approximately 105,000 customers in
1:2:1: liquidation proccE'cbngs across the ·country. In the course of those
proceedings secUl·jtiE'S nnc1 {'ash haying a value of approximately $277
million have been distributell to customers. In ac1c1i60n, SIPC has 1118.c1e
J1et achanccs to trust-fes totalling approximately $53 million. Despite
-the impa-ct w11ich s11ch protections haY6 had on investors who would
othenYise have lost millions of dollars, there are significant limitntions
'{In SIPC~s ability to sfttisfy customers' claims and to complete the
liquidation of the broker promptly and at reasonable. ,cost. In the over--
-Tiel\' the bill addresses (A) what the customer gets, (B) how fast the
customer gets it, and (C) how much it costs to get it to him.
A. TVhat The Oust01ner Gets.-A customer generally expeds to 1'8-
·ceive what he believes is in his account at the fm1e the stockbroker'
'ceases ousiness. But because secu:rif:res m1f:rhalfEnSeenlost,"lDlproperly
]'I}'IJITthecated mlsa )1'0 nated never rmrcI11i:S@ or even stolen this-
. IS not a. ways possible. Accorc1in~:ly, when the customer claims for a
--partlcular stock exceed the supply available to the trustee in the debt-
-er~s e-state, then customers generally receive pro rata portions of the
securities claims, and as to any remainc1er, they will receive cash based
on the market value as of the filing date (normally the day the liquida-
-tion proceeding is initiated). In addition, customers owing cash or
securities to the stockbroker (e.g., margin customers) are not now per-
_~nitted e-ither to deliver the securitie.s :in or to pay their debit balances;
mste.ac1 their acconnts are netted out. One of the principal underlying
purposes of these amendments, is to permIt a cllstomerto r~celve secur-
'Itles to the max:imum extent pOSSIble mstead of cash, ill satisfaction
. of a claim_for securItIes.),? seeking to make customer accounts w1101e
31 llC , returning them to Cl1.§.tOI!1~1~S 111 . ill .o·rm- Iey-e:nstecl on TI1e;fiTmg
{late,the amena]nent~ Ilot 0211)' w6l1ld~ satl~~:y'~h.e ~ustoIJ1~rs' :regrtilmlleo
'expectabons, but also \vour-craIlow hun to contmue to.~:xerclseOinvest
n~lt prero,atlves~nc1to. a-i-:'o:ic[Oftentimes adverse tax consequences.
B. H 0'1.0 ast He Gets 1 t.-The prese-nt llqmdation proc·e-aures al'8
:810:ve1' than necessary, particularly in smaller liquidations. 1I10reover,
wIllIe customers are waiting to receive their property, they are un-
.a-ble to effect transact.ions in their accounts, they stand at market risk,
.and the normal now of dividends and other distributions may be c1is-
61
22
rllpte.d and tax problems mfl,Y arisc. The amendments e:spedite the
]iquiehtion by minimiz.ing eumberso~lle ac1minist~:lt.i.ve 'procedllres
1,',hich have proven to be tlme-consllJmng anc1 by e]Jmmnhng- cPl·tnin
procE'elures ,yhich h,1Y8 proven to be lJnnecessnry. The bill "ould,
among other things, permit the direct payment of customer clnims or
the n.ppointment of SIPC or nn employee as trnstee llnder certain cir-
cnmst:ll1ces. In additioll, the bill ,vould allow for the prompt trans-
fer of cnstomer aCCollnts from the c1ebtor to another broker-dealer.
C. If ow JJuch It Costs.-The procednres prescribed in SIPA :11'e
mmeccssal'ily expensive in many cases. In every Jiqnic1ation a t.rustee
must bo appointeel by the COllrt a11(1 in aJmost every liqniclation C011n-
se] for the trnstee is appointed ftnd accountants ~.re r('tainc(1. This is
necessary and appropriate for larger broker-c1eale-rs, but, uncle.r SIP_,\..,
the same procedures must be utiEzed whether a broker-dealer has
thol1sanc1s of customers or only a few. In small li(luic1ation proceed-
ings the expenses of administration are disproportionately high.
The reported bill is designed to meet these slwrtcomings. Its pro-
visions ,vill rednce aelminist.rative e:s:penses whe-re possible and ae1Ll
speed and flexibility. In order to increase the extent t.o which cust.omer
cJaims for securities are sa6sf1ed ,vith secnri"ties rafher tJw.n caslr:-t1-re-
bIll wou1C1[i;ffi,1Thrtzethetnrst~l5rQKerage-nDn nnaerg.o1llg" Tj'g 11 ~
-Chrt15lltO make up fOr missing se.curities by pnrchasing shares, solong .
5.s this could be done in a lau and orderly market. Tlle wora:s"Ja!r
.- ana order! market" n.re used to assure that the trustee WIll not be
~a to purc lase securItles in a market control1ed by artificial in-
finen.ces. For example, a mn.rket mIght not be deemed fall' and orderly
::fher;;tTlere were indicatwns of manipulation by insiders or ot.heTs.
1n addition to open market purchases, the bIll would authOrIze the
t.rustee, subject t.o SIPC approval, to payor guarantee loans collateraJ-
ized by securities. In appropriate cases SIPC could advance funds fOT"
this purpose. :Margin or ot.her cllstomers would be permitted to pay
the.ir indebtedness and receive the secllritie.s or cash in their accounts.
The current practice of pn.ying cash in lieu of missing securities
would be substantially eliminated.
To speed np distributions of securities to customers, tIle bin gives
t.he trustee the power to transfer some or all of the debtor~s cllstomer
accounts to other broker-dealers. Customers \yolllcl noL of course, h:-n-e
to leave their acconnts with the transferee broker-deaJers. It must be
recognizeel, howeYer, that s11ch transfers are not ahvays fensible, and
in many liqnidations this procednre \yi11 not be ntilized. Bulk trans-
fers would take place only where. \\'illing transferee firms are avail-
able, where the failed firm~s records are reasonably a.ccurate and com-
plete, and ,vhere, SIPC determines that the cost of snch bn1k transfer
of accounts wonld not exceed the eost of ordinary distribnt.ions in fL
liqnic1ation proceeding. .
In order to pare administrative expenses, the .bill would spccificall)T
~uthorize SIPC to designate itself or one of it.s employees as trnstee'
m smnller casps (those ,vhere the failed firm's liabilities appenr to be
less than $750,000 and \\'here there appear to be fewer than f)00 cus-
tomeI's). Local counsel \\onld still be retained. Neither SIPC nor a
SIPC employee ,Yonlcl receive compensation for services rendered as
trustee, though expenses ,rould be reimbursed. The appointment of
a SIPC employee as trustee has been made in a few cases under SIPA,-
25
Section 5-Bylaws and R7.&les
Section 5 of the bill amends section 3 (e) of SIPA by deleting pro-
visions regarding initial byhws and by estab]jshing procedures for
the ac1opbon, amendment, and repea,] by SIPC of byla,vs and rules.
Proposed byhw changes are reviewable by the Comnlission, and may
be subject to the rulemabng procedure wllere the Commission deems
them significant. New procedures :tppropria,re to legislative, rather
than interpretive rules are provided since SIPC:s rules 1\ill have the
force and effect of law. Proposed rule clulJ1ges must be specifically
approved by the Commission, or be the subject of Commission pro-
ceedings to determine whether they should be disapproved. An excep-
tion is provided where the Commission determines by rule that the
proposed change does not require such procedures.
Section 6-SIPC Fund
Section 6 of the bill makes various teclmica,l changes in section 4
of SIPA. ill addition the hill clarifies SIPC's authority to maintain
confirmed lines of credit separat~ £1'0111 the fun~y diminishing
-the possibility tiTIi:L~emigITtn:eedtObo1TOIVfrom the United States
Treasury. The bill imposes a minimum assessment on SIPC members
of $25 per year through 1979. Thereafter SIPC is authorized to set a
minimum assessment not exceeding $150 per year. SIPC is authorized
to levy a penalty for late paymen(of assessments. Finally, this section
continues the existing requirement that gross revenues from the securi-
bes business be computed on a consolidated ba,sis, except that it ex-
cludes foreign subsidiaries from such consolidation. A companion
change in the definition of "customer:' contained in section 15 of the
bill excludes from SIPC protection any person to the extent that his:
claim arises from transactions 1\ith a fore.ign subsidiary of a SIPC
member.
Sections 7, 8, and 9-PToteetion of h7/vestoTS, General Provisions of :a
Liquidation Proceeding and N e7.O Sectio17.s of SIPA
Sections 7, 8, and 9 of the bill contain most of the substantive amend-
ments relating to the protection of investors in the event of a broker-
dealer's financial failure. Discussed below are sections of SIPA as they
would be amended by the Bill.
Section 5(a) (2). Action by a self-regulatory organization to assist
a ~11ember of SIPC in financial difficulty or to take appropriate action
i\lth respect to such a member as may be appropriate to protect custo-
mers may obviate the need for a SIPC liquidation. This seetion would.
clarify the authority of self-regulatory organizations in this regard,
and ",\ould assure that any assistance rendered by a self-regul<ltory
organization would not result in the assumpt.ion by it of any obliga-
tion or liability to customers, other creditors, shareholders or partners
of the debtor.
Sedion 5(a) (3). This subsection eoc1ifies existing Commission rules
(see 17 C.F.R. ~~ 240.15b5-1; 240.15b6-1J uncleI' 1\hich potential sub-
Jects of a SIPC liquidation proceedin~ include only those persons'
who are members of SIPC or who have bee.n memheTs within the past
180 days. The sub2ee.tion also makes clear tl1at SIPC is not. obliged t.o.
~ct 1\here customer interests of the t.ype protected by SIPG are not
mvohed.
28
whether they apply to c8sh or secnribes or bOtJl. The term "secnritv'"
,Yould be c1eiined by section 15 of the bil] (section 16(14) of SIP..:\.
as amended) and t.he some\vhat confnsing reference to "prope~dy
of a. similar chfLrnder:' has been deleted.
Section 6 (c). The bin ,,'ould codify the prc~ent SIPC practice of
providing protection to Cllstomers who, in good faith, enter int.o
trnnsa.ctions ,,,ith t.he debtor after the filing (late but before the ::JP-
pointment of a trustee.
Secbon 6 (e). UncleI' SIPA all costs ancl expenses of the adminis-
tration of the debtor's estate are paid to tIle trustee (including reim-
bursement of any money advnnced by SIPC) in priority to al] other'
claims. The amendments reflect a significant departure from Cllnent
Jnw by providing that these costs and expenses shall be paid from the'
general estate a.fter al] customer net equity chims ha:ve been ::ntisfiec1.
The priorities of distribution from the genera] estate are to be gOl--
erned by the Bankruptcy Act. The bi]] makes clear that certain ad-
vances by SIPC will be deemed costs and expenses of ac1ministration~
SIPC is entit.Jec1 to reimbursement from the general estate for ad-
vances made to broker-dealers for losses suffered in closing ant con-
trncts, and for discretionary advances made to payor guarantee the·
indebtedness of the debtor to any bank, lender or other person. SIPG
is entitled to reimbursement for these latter advances only to the
extent that they are made to recover se.curities which are apportioned-
to the general estate lmder section 8 (d).
Section 7 (a). The bill here specifies the powers vested in a t.rustee.
They are the powers of a trustee under the Bankruptcy Act to,<!cther-
with c.ertain specifically granted powers 'which may be exercised only
with SIPC approval. The use of SIPC employees to aiel the trustees·
in carrying out a liquidation proceeding is specifically authorizec1.
The trustee is further authorized to margin and maintain cnstomer
accounts so as to facilitate any possible tr'ansfer of accounts to other'
broker-dealers.
Section 7 b). The bill charyes the t;rustee :with thecd::~~~~ ~~ustee·.
under t e an rup cy c, p us specml dutles re'latmg to tEe satlsI1rC-;'
. tion of customer claIms for securities by the distribution of secarit-ie:¥
to tne maXImum extent pOSSIble.
.- SectIon 7 (c). The bIll Incorporates the reporting requirements of
bankruptcv rule 218 and adds other special requirements.
Section '7 (d). The bill incorporates the investigatory and reporting-
requirements of section 167 of chapter X, which is broader than the
comparable provision relating to ordinary bankruptcy. Investigation
of the causes or a brokerage firm's failure may be quite helpful in mar-
shaling assets for the estate.
Se.ction 8 (a). The bill would make the trustee's duty to give notice
of his appointment to customers applicable only to those customers
who appear to have had an open account with the debtor within the
year preceding the filing date. Notice to creditors other than customers
will, under the bill, be the same as under the Bankruptcy Act though
given bv the trustee rather than by the court.
The bill would require customers to file some written statement of
claim promptly, reflecting the need for early certainty in regard to the·
allocation of customer property.
it;
29
Claims of customers and other creditors must actua11y be received by
ihe trustee within a si:s:-month period from the dilte of publication of
notice. The trustee \Voul d be authorized to satisfy claims filed more
than the time established by the court, not to exceed 60 days but less
than six months after the date of publication of notice in the most
economical way, thereby protecting SIPC against speculation by cus-
tomers who might withhold their claims for a period of time to see if
a change in the market might give them a more valuable distribution.
Claims filed more than six months after publication would be barred
except for certain claims by a government authority, an infant or an
incompet.ent. In anticipation of the possibility that first meetings of
creditors may be eliminated when the Bankruptcy Act is revised, the
period runs from the date of publication of notice rather than from
the. date set for the first meeting of creditors.
Section 8 (b). This section J·efl.ect.s one of the essential features of
the ~lnenaments, namQY the delIvery of SeClJ)'itiP:S:::tDCl..TSmrrrers--to--t-he-
g"l'eaLest" extent pracbcable in order to make customr.r accounts whole.
'1:'he section pTov1des generally that a trustee shall seek to d1scharge
promptly all ob1igati~ns of the debtor r~1ating to cash or securities to
the extent the obhgabons may be estabhshed from the debtor's books.
In addition to authorizing the trustee to use SIPC funds to satisfy
~c1aims, this section authonzes a trustee to deliver securltles m sabsfac-
. tion 01 claims to the extent they are avaifi.iETe:-:AJrertIie"availn-l51e
, secllritles have been d1stnbuted to sabs such claims, the trustee sha.ll
I'
AGENCY REPORTS
<''l"e,l~l'
in r:v:;h protf'{·tion to ;¥-W.O()(). First. m:1llY r'll~tomrr:-; kl \'l' ]~('n'r
been able to l1ndrr::tflnd thflt thrir protection from SIP(' i~ different jf
their clfllJl1 is for c:l:,-,h :lS opposed to .~ecllritif':':. The di~hnction bl'coHle:::
l'::=pt'cinJJy dr:lJnfltlc \\"llPn a cnstomer \I'ho klS hfld seclll'it ip::: Oll rlc>-
l)o::it with his UrOkl'1' for lllany J1lontlJ~ (or year:')) EclJ~ tho:,:f' ~rcl1ritie::;
~hortJy udore the filing (late. This conYrrt~ his claim :l~fljn:-t the
l.Jl'ob'l' from a e1:1il11 for sl'curities to a claim for c:1:::h. ]\{01'(' importan t.
prrhnps, it COllyrrt;:; the' maximllm ndYflllrc~ he can grt from the SJPC
Fun:l from $100.000 to n much lo\\"er fignrr. 1']1('1'p' is an inE.'qllity in
th:1t situation \vhieh is nnfortnnnte, and it is sC:'vcrely nggrnyntpcl if
the maximllm advance for cash claims is kept at the ,.'xishng $20.000
instead of bClng raised to the recommended $40~OOO.
Second, it should be noted that the experience 'we hn\"e had to elate
\\"onl11 sC'rm to indicate that the costs of this propo:::al can easily be
handled by the SIPC Fund. Of t.he 16;) claims to date \';hich han~
beE'l1 ovC'r the existing limits of SIPC prot('dion~ lOG \\"e1'E.' c1aims fol'
ensh over the $20,000 limits. The totnl dollar llmOll11t of the c.1aims
onT the $20,000 11J1lit ""as $1.2 1l1illlon. If the propo;,=;cd $-10,000 limit
had brC'n in effect for cash, 91 of those c1aimant~ would h;l\-e been
fully protected at an additIonal cost to th~ SIPC Fund of approxi-
mately $900,000. "Ye submit that that. is a sum \\'hic11 the indllstr:v~
which is financing the SIPC Program, is willing and able t.o bear.
Finally, if our program is to achic\'e to the fullest the restoration of
public. confidence in our securities markets~ there seems to be no com-
peJling reason ior failing to keep the limits ofprotect.ion for cash of
securit·ies investors on a monetary par \"lth protection to bank and
sayings depositors.
The. proposed amendme.nts call for changes in the act which \,"ould
enable the trustee, to a much greater extent than is now possible, to
render accounts to customers in the same form as they stood when the
Inember went out of business. Under Section S(d)! of the proposed
amendments, the trustee would be authorized to go into the ma-rket
and purc.hase securities to make up for those 'which aTe missing, so
long as this could be done in a fair and orderly market. The trustee
'Iould also be empowered nnder Section 7 (b) to pay, subject to SIPC
approval~ bank loans collateralized by securities, including margin
sec.nrities, the,reby reclaiming those securities for distribution to 'Con-
sumers. In a.ppropriate cases, SIPC \yould be authorized to adnmce
funds for this purpose. :Margin customers would be pennitted to pay
theil' de.bit balances and receive the securities in their acconnts. If
these recommendations are implemented, the current practice of pay-
ing eash in lieu of missing securities would be eliminated for the most
part. Customers wonld receive, instead, the securities in their acconnts.
Our ex eetation is that. in almost aJI cases, a customer's claim for
. secuntie·s would e S::tlS ec y .1~deltveryols~~1Tritie-s-;-a:na;-wh~re~~_
~cessary, to accom hsh tlllS the trnstee would go lilta tile open marKet
.. 'I nrc ase securItIes. .. e e leve, owevcr, . 1fl. I IS a ,~to ~
•
1 All se-ction rt'ferenee:; are to sections uf the IDiO net a:i nmenllel1 b:r R.R. 8331.
36326 CONGRESSIOI~ AL RECORD - HOUSE ]V () n:. m fN:' r J, I .1) i"i
securitles l)w-.;lnc5.<:;' rnen1.:j the SllJ11 of 1bUI "11:3) PEHSONS ItEl;]STLIl!":l) i\S IlHOI'::ERS OIl
gcnl.leman from NUI'1l1 C" ru!ir", 'H I'
without clupll"a Llon)- IJC/d.I-:nS.-··-The lenn 'pl'r:s.-;ns n'gl:j!.en:() as
BIIOYlIll.J.i will be nc':ognizc<! lIJr :!!j
., (A) conlJnl~slon!:i em"ned In connec.tlon hnlkers ur tlcaJen;' lncl\ldl'~ illlr j:,rrson who
witll l.rn.n~ncllons In securities clTecLcd lor I~ [l J1WllliJer of il naLlollal tiecllrillcti cx- minut.es.
CUSl0J11CrS 11.';; llgent I net of COIl1Jnlsslons pal(! .:ll11l1ge. Thc Chair n~C:llgnizc.~ the gcnl.lcln:ln
to other brokers ancI dcn.lcr.":i In connection "\14) PIlDTECTIVE UECfiEE.····Tl1c Lenn 'pro- from Texas 1MI'. EClHJIIJ< IlT' .
with o;llch trnnsllc\.lonS) nnd markups with lrct.! \'c decrl'enleaJ1!'; ;1. decree. Issllerl IJy a Mr. ECKH/lHI.'T. Mr. Speaker. I yield
respect; to purchnses 01' sales of sccurltles :,s ;:uun \lPCJl1 applieatlon uf SlPC unfler see- JTI-:\,' ~('i'f""ii11"C1TTi'l11l"":TSI m:1 .v C (J ns 11111 L' .
principal: Lion fJ la) 13). tllal thL' el1SLomers of a mem- Mr. Speaker. t.!le Securities In\,e:;-
"(B) ehllrges for cxecuting 01' rlearlng lJer of SIPC arc III need of tile protection tor Protection Act, :IS mnny of
transnetions In "ecuri tics for other brolcL'rs pl'l)\'lcleej I1!Hler thl.-; Act
"115) SEcumTY.-··The term 'secl1rily' means my colleagues will recall. was cnacted
llnd dealers:
"IC) the net renllzed gnln, if nny, from any note, stOCk, treasury stock. bOlld. de!JC'II- in December I !l70 in reSpollSf to a l:risis
principal trllnsnctions In 5ecurilles in lJ'nel- Ll1re. evidence of lndeIJtednC's:;. 1\111' <:ollateral within the brokerage communiLy. After
ing accounts: trl1st ('(',·tlficate,preOrl,(flUlzation c~'rtltlcatl' or ~he b~ar market ane! back olFicc paper
"(D) the net profit, if an)'. from the man- subscription .tmnsfenlble share, voUug trust erisis of 1%:3-70, the ma rket drop)Jed off
ageJilent of or partleipntlon in t.he under- c:ertificate.certi'ficate of depo~!t, certlficnte of sharply. During Lhis time. a number of
writing or dlstriblltion of· securities: cleposit. for.a security, Imy Investment con- brokerage firms went out of business, and
.. IE) interest earned on customers' secu- tract orcertlficllteot in tel' est or particlpatiou public confidence in the securities mar-
rities accounts: in any profit-sharing agreC'ment or Ju any 011.
..... IF) fees fOl·inv~stmen.tadyisory scrvic',s gas. ormill eralroyaityor lease (if such in- kets was badly shaken. In an effort to
(except wilen renderedtopne or more regise vestment,c011tractor interest. is the subject rc'<t.ore investor confidenee, Congress
tered investment companies'of insurance of a regIstration· statement with the Com- ad;nted the 1970 act, crea ting the Secu-
conlpllny sepnrate accounts) or account mission .pursualitto the provl,;;ons of the rities Investor Protection Corporation
superYision with respecttosecllrllJes; Sec uri ties Act (11933) ,any certlfic:lt~ of In- I.SIPC) to provide financial protection
'. "(G) fees for the solicitatl0l1 Orproxics terest orparti.clpl1t:ion.ln. temporary or in- for customers of insolvent broker-deal-
wIth respect to, or tenders or exchanges of, terim ceriificrtefcir,Teceipt for, gU:1ran tee of, ers and to administer the new law. SIPC
securities: or warrantor'i"ight to subscribe co or pur-
became t.he FDIC of the securities indus-
. .. (H) incomefromsen'i~~cha'rgi,~or other cha~e.crsep al)yoftlle foregoiJJg. and any
. surcharges wi th respecttosecufltles: NileI' .instrull1eh t commonly known as a se- try.
"(I) except A.S otherwiseprovldedbyrule curity. The term 'security' does not inciude In the 7 years since its creation, SIPC
of ·.the Commission, divide'nds' and interest any currency, or any ·C.0111J11f'ditv or relnted has appointee! 123 trustees. Through
'rece'tiled on securities in Investment nccounts CO;l tractol'fu turescon tract, or [my warrant their experience, cert.ain glaring defi-
. ·.oftheSrokerordealer: . .•.•. '.' ..••.•..•.. >. or right to .sUl?SCribeto or purchase or sell ciencies in the existing liquidation pro-
.......... ,." (J)'. f~esjnCol1J1ei:tioll\vitl1.pilt.qll ;and any of theJoregoing:". cedure have become evident. Accord-
.···other·.option trailsactioils.in·s~cllriti~s: AMENDMENT TO THE "SECURI7IES EXCHANGE ACT ingly. SIPC appointed a special task
•..... (K) comrnisslonsearlledfrom~ransac Of' 1934 force to review the 1970 act and consider
; Uons in it) certificatesoLdep',?SIt:and (ii) SEC. 15.Section3(a) of the Securities Ex- the ileed for amendments. H.R. 8331 es-
,.TreaslJrybills, .bapkers\\cceptance~;cll:.·.com- chall ge . Actdf 19,34 (15 U.S.C. 78cia») is
mercialpaper which .hayea;l?lat,::,r.it~,atthe sentially reflects the recommendat.ions
amended ·by addIl'lg at the end thereof the ~ h e task force. Tl1e amenoments
·.~ime .::··o.f '·i.5Stli1.llCe, .oL,:~,n.ot,-::.~x:C:~~~~l_i_~:_~niile follo(vingnew pa'ragr\\ph:
n10ntlls,. exclusive· .. ofdays of grac.e.br ,an>; "(40) :The t'erm ,·'financinl responsibility \VTIl streamline the otherwise liquidation
renewal thereof., theJnaturi~Y.Cif\vhich is rnles: .menns the rtl.lesand regulations of the procedures, and reduce the expense and
!H~ewlselimited,.except 'thfl,.h.§IF'C ..shall· by Commission.or the r:ules and regulations pre- administrative complexity of the process.
.' b}'} a" .igclu.de . illtlleaggr.egateof,·greiss· rev- scribed 'by any' self-regulatory organization In light of the fluctu?, ;ng state of the
..... ~Jl~lfis qnlyan approPriatePel.'ceii tage of SllCh relating to financial responsiblIlty and re- stock markAt, and th<: potentially disas-
c.6mniIssions based. on SI'PC'S!OSSeXperiellCe lated .practices which are designated by the
.\vithrespe,ct to such instr~mlel* over at trous consequences for smaller broker-
Comrni~sion, by rille or regUlation, to be fi- dealers of a precipitate downtown, we
, .' 'leasC.theprecediligfiveyear~:ariel nancial responsibility rules ....
;' , ; " (L) 'f 7es .and otlH~r.jn~pnlef,rqm.such need more ~han ever before to insure
iOtI1e,., c~t~gori~s of.Ule secliri ties bUsiness as TAULE OF CONTENTS SIPC's ability to liquidate insolvent
.,.,.ElIPCShallp!OviqP b~'byla\~. SEC. 17. The tnble of con ten ts of the Se- broker-dealers quickly and efficient.ly.
:Spch . term ." does .not'incIUdel'eYenu~s"ree curities Investor Protection Act of 1970 (15 These amendments are very important,
C.. ~eivecl.li) abrDl<er ·.or;AealeYUn~Ol'ln~ction U.S.C. 78ann et seq.) is amended to read as
follows:
and very much in need by SIPC.
': .•·.· ... with ;the ·.• dIstributiOll.()fsl1al'~!;qfaregis The bill would achieve a number of
'.' ')ered operi endjnVestnlentfP'l1PUl,Yor unit "TABLE OF CONTENTS
important changes. Among other things,
. in\'est,men t. trustor'. reven uesderiyedby a "Sec. J. Short title. it would increase the extent of SIPC pro-
< '.• broker. or dea.lerfromthesalie.ofvarlable "Sec 2. Application of Securities Exchange tection for customers' cash and securities
;§. ~.§j;~")~?\i~,s.t~ili~~}?hefon~rctDftili,' busi-
Act of 1934.
"Sec, 3. Securities InYestor Protection Cor- in an account with a broker-dealer. The
:.:t{: .:~:~:./:":~_~::;:(_:~ l_t~·_~ ~:,Q p~,[)~.rlp.~, .,..~Rp~~~_~IN.~.~,.~'~~ _-_~ ernl poration. act currently protects customer accoun~
'F ·:liqui.dati6npk9ceedlng;nleal1~anyprOCeed "Sec. 4. SIPC Fund. up to a total of $50.000, with a ceiling of
:.~ ;y~:g,~PI".··t}1:e)i,9\~_i~rI~,iph:_~~-_~_:·d#bt:~r :llll'der this "Sec. 5. Protection of ~ustomers, $20,000 for cash. H.R. 8331 would double
,. A9tAn.\vhi~l1,,,,'trtl.steehas'been .apIlOinted "Sec. 5. General provisions of a liquidation the amount of protection, raising to
!,} :und~rsectiqil.5 LlJ)C3)< proceeding. $100,000 the total amount of protection .
. <}./f1,2>t{E'fE,8UFy:,__The term 'net equity' "Sec. 7. Powers anel duties of trustee, and to $40,000 the level of protection for
'llle~m<ti1e.doI1~Y;ll;m()).iritofthe account or "Sec. 8. Special pruvisions of n liquidation
proceeding. customers' cash. There was unanimous
". :·ac;c::oulj),.~.oLa "'I;:llstomer, to be determined sentiment that such an increase in the
;,·bv'·· ... , . . . ••.. . . "Sec. 9. STPC ad\·ances.
':'HAJ Cal~lJ1atIng the stlln which would "Sec. 10. Direct paymen t procedure. amount of protection \Va:, an important
,; >hay~;;Qeen.o"ed:by the debtor to such cus- "Sec. 11. SEC funct.ions. mE:ans of improving inve5tor cOi,Sdence
·toi::1';ri{the·t1~8torhacillqilidated. by sale
"Sec. 12. Examining authorIty functions. in the securities markets,
';'. ()J'- pIirCl1ase 'oD:ihe filing da teo all securi ties "Sec. 13. Functions of self-regulatory C'rgani- In addition the bjJJ would seek to
positionscif.sucl1·customer (othel' than cus- zatiolls. sat.isfy more adequately customer expec-
"t~nler:nnme . securities reclaimecl by such
"Sec. 14. Prohibited acts.
tations; and also reduce the time and
',ccustOlner I ; mill us. . "Sec. 15. MIscellaneous prO';isions.
"Se~. 16. Definitions,".
'-expense of liqUidations by revising the
·;:";.'iB) any ,indebtedness of such customer procedure under certain circumstances.
k.'t:otlicCi~.~tor·on'thefiling date: plus The SPEA K~rl pro tempo!'e, Is a sec- Under the bill. the trustee -,""ould be
' . . ','( C)'anypaynfent by such customer of ond d.ema.':,i.1ed? 'reqnired. to the extent he can do so 111
i~t such -iildebtedness to the debtor which iz Mr. BROYHILL. Mr. Speaker. I c1e- a fair and orderly market. to pm chase
;riuLde.yith· thE' approval of the trustee and
:;\yl,tl'li.nsuch period as the trustee !"llay de- ITl.J.nd a second. • ;;ecunlles on the open marKet 111 saus-
<.t.ermine (but in no event more than slxt"v The SPEAKER pro tempore. \Vithout· 1acLIOn 01 a customer claIm for sec til: 'ies:-
days after the publicatIon of notice 'elnde;' objection. a second will be considered as ,-erne of the greatest shortcomings of the
section 8 (a) ). ordered, C proceCiUre Ulidert-he-tiT'TO act. to be ,r:me-
"'.: I'n determining net equity ',mder th!s para- There was no objection. 'died bv this bill. IS Llle [aHUle to meet-
!,':. graph, lLCcoUlItS held by a customer In sep- The SPEAKER pro temnore. The gen- "'legitimate customer expect-at IOns of
arate capaCities shall be deemed to IJ2 ac- tleman from Texas eMr. ECKHARDT) I~'ill recelvmg I\'hat was 111 their account at
counts of separate customers. be recognized for 20 minutes, and t.he the time of their broker's insolvency.
'-' ~.
69
November 1,1977 CONGRESSIONAL RECORD- I-lOUSE
The bill \':"uld also lluthor;"e SIPC to Mr. BROYHILL. Mr. Speaker. I yield r~'(;1.iiring :•. ,nounCenl(~11t of SJPC 11 H.' In .
transfer acco, I1ts from the insolvent myself such tunc as I may l:on:;ume. 'oer~;ili]J on television ads, for e;'::11l1pll:,
broker-dealer to another broker to mil1i- Mr. Speaker, a~; lJle chairman oJ could be ,iusUfJed.
mize disruption and permit customers to the subccmt11illee ]las inclicltted, this Mr. Speakl:r. in eondusion, I believe
continue to exercise investment discre- bill 1V0ulr! make :1 number 01' needed that the amendments made by lhi.s leg-
tion. and technical chnnges in the Sel;u- islation are desirable. TI1f:y go " 10111.: "'::;y
In small liquidations, SIPC would have rities Investor ProLectif'l1 Al:l. Con- toward dearing up problem:, W]-liLh ex-
the authority to make payments directly gress enacted the act creating the Se- perience has shown exist under Lhe orig-
to customers, Instead of l1nving to rely curities InvesLor Protedion Corporation inal aeL and, therefore, I urge thaL J.hl~
upon a court-appointed trustee. This (SIPCJ in 1970, ami since that tin](', it legislation be enacted.
procedure would allow SIPC to avoid has.become apparent that although the Mr. ECKHAHJJT. Mr. Spf,aker, 1 have
the disproportionately large administra- act Jor the most part is working well, no further requests for time, lind I yield
live expenses inClined in small liquida- certaIn proceduresspedfled in the act back the balance of my ~ime.
tions. havp. turned out to be unduly inflexible TIle SPEAKER. The question is on the
The amendments would allow SIPC, and InefficIent. Therefore, the purpose motion oJTerl:d by the gentleman fro.' '1
or one of its employees, to be appointed oLthisbillis to make. theactmorere- Texas IMr. ECKHAIlDT) that the How.>l
trusteeo! an)nsolvent broker,dealer in sponsive to investors urid pl'avide them suspend the rules and pass the bill H.R.
certain small liquidations .where the with additional protection Inthecase of 8331, as amended.
claims .do Il·o.tt:;:';eed.$750,000 and where tlHqailure of a broker-ckaier, The question was taken; and (two-
there are Je\ver than 500 customerS,Ingenentl temls, the act directs t,he thirds having voted in favor thereof)
The.bilL\vouldcontinue the exemption CorjXlralion to establish aTundm.a.deup the rules were suspended and the bill,
fromSIPCmembership and from SIpc of assessments .impoSed onoroker~deal a.5 amended. was passed.
a<.sessment Jor exclusive dealers in ers, Who are members ofSIPC. which is A motion to reconsider was laid on the
mutual fund.shares andv!lrialJleam1Ui~" availlable to pay elaimsofcu~tomers·of tabk
ties.HowEver.the.bill would subject to bn:ikerage houses which' haye, failed,
limited" . . . assessnlen t ..transactloris .in Sin'ce it. wases ta blishedlni970.··. SiFC
money 'marketin1itrumeri ts, whichwere..J.1a~xeturi1ed.approximat¢ly, $277 iniIlon GENERAL LEAVE
exenlptfronla.ssessment underthe 1970 'ill:property to over 100;000 customers Mr. ECKHARDT. Mr. Speaker, I ask
act. Althoughlransactio'nsin th05esecu,anilhas advanced morethari'$53 mil- unanimous consent that all Members
ritiesppseali111itedrisktocustomer lio:nfr(jm· the SIPC fundto':satisf~lCUS- may have 5 legiSfative davsin which
fundsand.seci.lr:ili~s. SIPC has experI, '. to'mer clainis.. .. .......•... '..' .. , . to revise andi'extendtheir' remarks on
encedalniost'··$2 nlilli on in Claims' f oi' ...:E:Io>vever,experien ce: "vftl:l;M(J~~niCIUi the bilIjustpas.'iEid.H.R. 8331.
losses ~ilff~r,ed,oncertIfisates .ofdeposit' 'datiorishas .highlight0diiieak\vl1ei'e . TIle SPEAKEYt'ipro tempore. Is there
and Trl:asury. bills, Therefore; we have . 'changeswould be appropiiii'te;For'ex- . objection to 'the request of the gentle-
woposed(Jri.l~':a·lilllitedassessmen tfor-ample, the legisla tion'makesanumher I11an from TeXIis?
.money market. instruments.ata .... rate o(.crianges .deSigliedLOgt!ilI)hlti'!eUla:t There was ']Y.O objection.
case'cr6npie'j-isk .irivolyedto:eus tomers .cus~orners.· aecuull Ls '.' ri:l.eiir.~~IIied.ag
[ind SIPC's lpssexper:iehce 1n these,secu, tlli:y e"!'is ted ..PllOI4'rJ:j;he;i1.1cj u,Idaf;jol1 .IL
ritiessinse,19?q;l3lIchallapprOacli\\iould""':.vouldelo thtSbypIlo\yl.ngS,lgCLpgo SAFE I1fUNKING WATER ACT
produc~,aVi=rynlode.stassessm'2nt. . • ,llltqthe. In"r k . . . o· . . ' - AMENDMENTS
Inadditiqi}.JI;R.8331wou:ld l'equiie.1}tles:i .. ,possiblerathei:·itha~i;tetJii·ning
the stdcLenforcement 6fsubordiriaLecicashtothe customer.'I'he,;bill;alsocDli- Mr. ROGERS. Mr. Speaker. I move
lending,agreehl,entSit!ierebydenying the "tainsanumberoLprovisio.i.is~~\'J:1ich .•,are to suspend the rules and agree to the
status.of~'cust(}n~er:' forpur]Josesofacle,sign~,dt() . e)(p~ditepl~i·li,9ili(:I~t~on resblu non tHo Res. 885) providing that
SIPGnci~idatio~Jopei.'s6nswho,,':ilave\jJ:f<?ces,sby elin;inatin!l':.e.uri)b,e.l:,sp,I'l1~:pi·o, upon. the adoplionof thisresoiulion, the
sUbbrpIn3:t e.dth,eii" capital>bylel~dillg'S-::?Urcestha.thiOli.'t:jJT?y:e!f;f9fl:j,~;;H):1Il~:ces- bill IS. 1528) ·entitled "An act to ameml
secuntiestoabroker.ThisPI·oviSion\\;iIJ' ,:sary, Further, t.:nde.rtllept~.s~Ilt.;'terpls s.ection 2 of the ;.Safe ,Drin:~ingWater
not preventcustcimersfr'0mseelcirig .re~·... of.the.a.ct•. eachcustcimgr.is·lirriit~d'toa Act IPublic Law 9'3"'::5231 ·to .extend and
.scissionor.,th.eiragreements,whei,ethe}.•.·..:totaJ::PTotection ·for.. s~c.l1ttf,i.~.sAnd;~aslU increase authori~ationsprovided for
su.spe.ctJt~ud:'iii;J,Yhave.6ccurTed.but· ·0,f~5P,:OPOOf.\Yl1ichnp'n}9te ;t-!}a.;r;rHO;p(l() Public Wa tel' Systems" with the. Sena te
·~voul(Ls!m]Jl)'pr'eyei1t"themfroITI])ar,:C:3,ll;~ea ClaII11fol~Ca'5I}:'m}\=~,l:i,IIJ;\y0li1d'. ·amendments to the House amendment
". ticipatipI:L.i~Yi.th'bther'~usti:miers>intllf)ncr~.aseJhe}imitsof.·SH;G;wotectionlo . theretobe.andthe same is hereby. taken
il~l~lt'~~r~w1~}I.,~~~i;;~h;~;~~~1!ll~~ji~1~~li~~Jii~!~~!o~~~: E~~5f~~:~f:~{'~~;:J~,i~Jfi
selves',tprtI:;1i:'i:lUbl1cLhi'oughsonle;'111Iil; .Undel·tliepresenttei~f:l1sbI·theact, am. ndment numbered 1.1) teo and the
iJii~li~#~0r&~i~~l~~s~1~~A~~iili1YbfPcti{}i~~#fb~~~i~}B~i:~;X~~B~~~~t~:cif:gj~r:S~Yl~~~l~~~d~e~~~rebY. agreed to. \\'ith an
tinued{,el'~p1p'ti\)n>;fl:OJn:,'sIpe;menibEl'~ excli!siyeJyseIlmutual fUlldsor variable The Clerk read as follows;
shIp <p!ex.clllslve:mu{i1al'fulJd:a11C!·va'i-l:' . 3,bi'iuities. After a great deal of discus- H. RES, 885
abl~3;:nn\.iItS'r-li:~lers;;i:'heillv~stil~gp~b~ sio.n.• we<l1ave decided to retain these ex- Resoll:cd. That upon the adoption of this
lir.shouli:l:l,1ayethe,bPiJcii't[mit~;·tollia}:e emptions. since it do.es not appear from resolution. the bill (S, 1528) entitled "An Act
:.
aridnIO'rhle'(j"dL;Cision,:as.to\vhether or the testimony presented .atthe hearings to amend Section 2 of the Safe Drinking
not.t,d.#oj~~~h1ess:"Yltha;partri;ular that mutual funds or variable annuities Water Act (Public La\\' 93-523) to extend
bro~er.':l\Iepi1Jel;ship·inSIPC'can · bean present the kind of risk created by gen- and increase authorizations provided for
1nfiiJe:iitia1:'factoiin.. 'that .declsion: 'The eral brokerage activities which are cov- Public Water Systems" wiih the Senate
. ·•·.•.~.·..i,i.·.t..:,c.O.·.i1cer
. ,.:11.i. . 11.g S.. iF
I
ai.iie
. . .ni:lm ... C
. advertis- ered by SIPC. amc::dments
thereto lJe. andto the thesameHouse amendment
is Ilereb\', taken
il1(';~!?,~.8r.iI1.giI!.g:aboutadditional public Finally. the bill \\'ould give SIPC the from the Speaker's table 10 the end i l l
-,
awaJJ~l]es,s·.bf'SIPC. is also designed to aULhority /.0 require broker-d·ealers to that the Senate amendment numbered t2)
il1ci·~ase'·.investor confidence in the Na- make known their SIPC m::mbership to be. and tile same is llereby. agreed to: i21
tioil·'s·sec1.ftitiesmarkels. their customers. It should be empha5ized t.hat the Senate amendment numbered t 1)
The bill was reported unanimously OUf. that SIPC may require only the mini- be. and the same is hereb\·. acreed to \-;ith
of the Consumer Protecti:m and Finance mum amount of ad\'ertising necessary all amendment as follows:' -
Subcommittee on September 7. The full in order to guarantee that customers are Snike Ollt the mauer propo.:;ed to be 11:-
Commerce Committee likewise approved aware of the firm's membership. For ex- serted by Senate amendment l1tlmbe:'ed (11
the measure unanimously. In addition ample, POStillE: ...
notices of SIPC member- ani insert in lieu thereof the follo,,';ing:
"\ B l ( i 1 In prE':;cri bing regulations nnde!"
to unanilnous bipartisan support. the ship in the brokerage firm probably 1.his ~~C'lion lhe Administrator shalL to the
bill enjoys the support of SiFC, the SEC, would be appropriate under this provi'- extelH feasible. a\'oid promulgation of re-
and the securities industry. sion. I am doubtful, however. whether quirement.s which \"-ould unnecessarily dis-
CXXIII--2286-Part 28
70
""'~
~,
U.S. SENATE,
COMMITTEE ON BANKIKG, HOUSING, AND URBAN AnAms,
SUBCOMMITTEE ON SECURITIES,
Washington, D.O.
The subcommittee met at 2 p.m. pursuant to notice, in room 5302,
Dirksen Senate Office Building, Senator Harrison A. Williams, Jr.
(chairman of the subcommittee) presiding.
Senator WrrLIAMs. We can now begin our subcommittee hearing.
The Subcommittee on Securities will receive testimony on H.R.
8331, the Securities Investment Protection Act Amendments of
1977.
[The bill is printed at p. 61.]
OPENING STATEMENT ,OF SENATOR WILLIAMS
------
72
7
STATEMENT
BYHUG~AN,
sEcuRrrTIs INVESTOR PRO! Ec"l101'1 'C'1JRPOAATION
"- BUORe THE
SUBCOMMITTEE ON SECURlTIES
COMMITTEE O~1tiNG, MOtlSfNGJIlil'b-umiJ'iN AFFAIRS
,,--.- UNITED STATES SCNATE
, Aprl! 25, 1978
for me to appear before you this morning and present the views of the :.
SecurIties Investor ProtectIon Act Amendments of 1977. This blU was passed
Protection Act of 1970 ("SIPA"), and SIPC supports the leglslatlon In Its
present Corm.
briefly the activItIes of SIPC sInce Its creatlon In December 1970. As many
of you wlll recall, SIPA had Its origIns In the dIfficult years of 1968-1970
acqulred or slmply went out of buslness. Some were unable to meet thelr
.----
V In. 73
8
obllgatlons to their custOmers and went bankrupt, Public confldence
markets. Congress passed SIPA. That statute. whlch was signed Into Jaw
'"
on December 3D, 1970. created SIPC and established a program whereby
m·onles from the SIPC Fund would be available {or the purpose o{ protectlng
but no more than S20.000 of that amount may be advanced to pay clalms
Stnce the enactment o{ the SIPC leglslatlon. 129 o{ the over B, 700
broker/dealers whlch have been SIPC members Over the past 7 years have
been liquidated under SIPA, As o{ March 31, 1978, SIPC had made net
Section 9
cDrpDratlDn Df chapter X of the Bankruptcy Act (see §5(b) (2) of the Act abDve
and accompanying discussion), the pDwers with which the trustee 15 vested
by this sectlDn are described simply as thDse Df a trustee under the Bankruptcy
Act, tDgether with those powers specl£lcally granted tn subsections (I), (2)
Is antlclpated that this will Increase both the speed and efficiency of l!qulda-
tlon proceedings.
the Bankruptcy Act has been deleted In favDr of a general reference whIch
Incumbent on a bankruptcy trustee, the SIPA trustee ls charged with the follDw-
75
42
estele, but merely held by the debtor es bol1~e. This, Df COutse, I' not
proceeding ID deal with customer name securllies end ony disputes concerning
them. Excluded from this definition are securities In negotiable form, (or
example. aecurlllBs regLslered tn customer name but [or whlch the customer
concept which takes the place of the" single and separate fund" of SIPA
cash and securities (other than SIPC advances and customer name securities,
all Cd sh and securities held from or for the accounts of customers. Includ-
Also 1ncjuded Is property generated from the use of debit Hems In customers'
accounts and property of the debtor whLch. upon compl1ance with applicable
laws. rules and regulations would have been Set aside or held for the
benefit of customers.
make It conform to amended subsection SIal (3) and new sectlon 10 of the ACl.
S. REP. 95-763, S. Rep. No. 763, 95TH Cong., 2ND Sess. J 978, J 978 U.S.C.C.A.N. 764, 1978 WL 8748
(Leg.H is!.)
COMMJTTEE DELlBERATlONS
H.R. 8331 WAS PASSED BY THE HOUSE OF REPRESENTATIVES ON NOVEMBER I, 1977 AND RE-
FERRED ON NOVEMBER 3, 1977 TO THE COMMJTTEE ON BANKING, HOUSING AND URBAN AF-
FAIRS. THE SUBCOMMlTTEE ON SECURlTIES HELD HEARINGS ON H.R. 8331 ON APRJL 25, 1978 AND
ORDERED H.R. 8331, AS AMENDED, TO BE REPORTED TO THE SENATE.
MILLION, OF WHICH ABOUT $54.5 MILLION WAS ADVANCED BY SIPC TO TRUSTEES; THE RE-
MAINDER CONSISTS OF FUNDS AND SECURITIES ACQUIRED AND RECOVERED BY TRUSTEES DUR-
ING*765 THE LlQUIDATION PROCEEDINGS. ALL OF THIS HAS BEEN ACCOMPLISHED WJTHOUT THE
EXPENDITURE OF ANY FEDERAL FUNDS.
THERE HAVE BEEN 129 LlQUIDATION PROCEEDINGS UNDER SIPA SINCE 1970, THE GREAT MA-
JORITY OF THOSE LlQUJDATIONS COMMENCED IN 1973 AND EARLIER YEARS. BECAUSE OF BET-
TER SURVEILLANCE AND OTHER FACTORS, THE NUMBER OF LlQUJDATIONS HAS BEEN DECLlN-
ING SINCE THAT TIME.
ALTHOUGH THE FOREGOING DISCUSSION ILLUSTRATES THE OVERALL SUCCESS OF SIPA. LIMI-
TATIONS EXIST UPON SIPCS ABILITY TO PROVIDE THE TYPE AND DEGREE OF PROTECTION FOR
SECURJTIES CUSTOMERS FOR WHICH SIPA WAS ENACTED. SPECIFICALLY, THESE LJMITATIONS
IN SOME CASES IMPAIR THE SATJSFACTION OF CUSTOMERS' CLAIMS AS FULLY, PROMPTLY AND
EFFICIENTLY AS THE COMMITTEE BELJEVES IS DESIRABLE. H.R. 8331 ADDRESSES THESE LlMI-
TATJONS IN ORDER TO PROMOTE THE ENHANCEMENT OF INVESTOR CONFJDENCE IN THE SECU-
RJTIES MARKETS. THE BILL ALSO RESPONDS TO A NUMBER OF SPECIFIC PROBLEMS THA T HA VE
ARJSEN IN SIPA LlQUJDATION PROCEEDINGS.
*2 1. COVERAGE.-- THE BILL INCREASES THE AMOUNTS AVAILABLE TO BE DJSTRJBUTED IN
LlQUJDATJONS TO EACH CUSTOMER FROM $50,000 TO $100,000; NO MORE THAN $40,000 (JNSTEAD
OF THE PRESENT $20,000) IS AVAILABLE TO SATISFY CLAIMS FOR CASH.
IN ADDJTION, H.R. 8331 MODIFIES EXISTING LAW BY DJRECTING THAT THE TRUSTEE PURCHASE
SECURJTIES WHEN NECESSARY IN ORDER TO DELJVER SUCH SECURJTIES TO CUSTOMERS IN OR-
DER TO SATISFY CLAIMS. THE TRUSTEE'S DUTY IN THIS RESPECT IS QUALJFIED TO THE EXTENT
THAT SUCH ACTION IS TO BE TAKEN 'TO THE EXTENT THAT SECURJTIES CAN BE PURCHASED IN
A FAIR AND ORDERLY MARKET.'
UNDER PRESENT I Aw,....BECAUSLSECURJTIES BELONGThLG~IQ,CU£J'..o.MERS..MA.YHAVE BEEN
LOST, IMPROPERLY HYPOTHECATED, MISAPPROPRJATED, NEVER PURCHASED OR EVEN STOLEN,
'----rr IS NOT ALWAYS POSSJBLE TO PROVJDE TO CUSTOMERS THAT WHJCH THEY EXPEcnoR:E:-
~._
CEIVE, THAT IS, SECURJTIES WHICH THEY MAJNTAJNED IN THEIR BROKERAGE ACCOONT:1.N::-
_ . . . ._ _._ _ _~~_. __ __~~_.~". ,,_.~ ' '=M,~_-,.,,~~~ ..
,,~, ==-=~._._~ ~
STEAD, WHEN THE CUSTOMER CLAIMS FOR A SECURJTY EXCEED THE SUPPLY AVAILABLE TO
THE TRUSTEE IN THE DEBTOR;S ESTATE, THEN CUSTOMERS GENERALLY RECEIVE PRO RATA
PORTIONS OF THE SECURJTIES CLAIMS, AND AS TO ANY REMAJNDER, THEY RECEIVE CASH
BASED ON THE MARKET VALUE AS OF THE FILJNG DATE (NORMALLY THE DAY THE LJQUJDA-
TJON PROCEEDJNG IS JNlTIATED). IN ADDITION, CUSTOMERS OWJNG CASH OR SECURlTIES TO
THE STOCKBROKER (FOR EXAMPLE, MARGJN CUSTOMERS) ARE NOT NOW PERMITTED ElTHER TO
DELJVER THE SECURJTIES IN OR TO PAY THEIR DEBlT BALANCES; JNSTEAD THEIR ACCOUNTS
ARE NETTED OUT.
h A PRJNCIPAL UNDERLYING PURPOSE OF THE BILL IS TO PERMlT A CUSTOMER TO RECEIVE SE-
CURJTIES TO THE MAXIMUM EXTENT POSSIBLE JNSTEADOF CASH, IN SATISFACTION OF A CLAIM
roR:SEa:JRlTIES. BY SEEKING TO MAKE CUSTOMER ACCOUNTS WHOLE AND RE~
TO CUSTOMERS IN THE FORM THEY EXISTED ON THE FILJNG DATE, THE AMENDMENTS NOT
<
_ ONLY WOULD SATISFY THE COSIOMERS' LEGITIMATE EXPECTATIONS, BUT ALSO WOULD RE-
~s I OMER TO HIS POSlTION PRJOR TO THE BROKER-DEALER'S FINANCIAL DIFFICUL-
.:·TIES. Tills wILCrn"lltBLE4"Jm-etJ-3'f('JMER I 0 PURSUE HIS JNVESTMENT OBJECTIVES WlTHOUT
BEING DISTURBED BY THE FORCED SALE OF SECURllIES, A RESllLT WHICH ALSO HAS RESULTED
~J.N UNFAVORABLE TAX CONSEQUENCES FOR SOME INVESTOR5..0.
2. DELAYS IN LJQUIDATIONS.-- THE LJQUIDATION PROCEEDING UNDER SIPA HAVE OFTEN BEEN
LENGTHY AND HAVE CONSEQUENTLY RESULTED IN SUBSTANTIAL UNNECESSARY DELAYS TO
THE DETRlMENT OF CUSTOMERS. UNTIL CLAIMS ARE SETTLED, CUSTOMERS WHO HAVE CLAIMS
FOR SECURlTIES ARE UNABLE TO IMPLEMENT INVESTMENT DECISIONS INSOFAR AS THEIR CASH
OR SECURlTIES ARE TIED *766 UP IN THE LJQUIDATION PROCEEDING. WHILE SOME DELAYS ARE
lNEVlTABLE, SOME REQUIREMENTS OF SIPA HAVE PROVED UNNECESSARY, PARTICULARLY IN
SMALLER LIQUIDATIONS.
SECURlT1ES Ol~ BOTH. THE TERM 'SECURlTY' WOULD BE DEFINED BY SECT10N 15 OF THE BILL
(SECTJON J6(J4) OF SJPA AS AMENDED) AND THE SOMEWHAT CONFUS1NG REFERENCE TO 'PROP-
ERTY OF A SlMILAR CHARACTER' HAS BEEN DELETED.
SECTJON 6(C). THE BILL WOULD COD1FY THE PRESENT SIPC PRACTICE OF PROVlDING PROTEC-
TION TO CUSTOMERS WHO, IN GOOD FAJTH, ENTER JNTO *775 TRANSACTIONS WlTH THE DEBTOR
AFTER THE FJLJNG DATE BUT BEFORE THE APPOINTMENT OF A TRUSTEE.
SECTJON 6(E). JT IS MADE CLEAR IN THIS SUBSECTION THAT CERTAIN ADVANCES BY SIPC WILL
BE DEEMED TO BE COSTS AND EXPENSES OF ADMINISTRAT10N, AND WILL BE RECOUPED AS
SUCH. OTHER CLAIMS AGAINST THE GENERAL ESTATE HAVE THE SAME PRJORJTY THEY WOULD
HA VE UNDER THE BANKRUPTCY ACT.
SECTION 7(A). THE BILL HERE SPEClFJES THE POWERS VESTED IN A TRUSTEE. THEY ARE THE
POWERS OF A TRUSTEE UNDER THE BANKRUPTCY ACT TOGETHER WlTH CERTAIN SPECJFICALLY
GRANTED POWERS WHlCH MAY BE EXERCISED ONLY WJTH SIPC APPROVAL. THE USE OF SIPC
EMPLOYEES TO AJD THE TRUSTEES IN CARRYING OUT A LlQUlDATION PROCEEDING IS SPECIFl-
CALLY AUTHORIZED. THE TRUSTEE IS FURTHER AUTHORIZED TO MARGIN AND MAINTAIN CUS-
TOMER ACCOUNTS SO AS TO FACILlTATE ANY POSSlBLE TRANSFER OF ACCOUNTS TO OTHER
BROKER-DEALERS.
*]2 SECTION 7(B). THE BILL CHARGES THE TRUSTEE WJTH THE DUTIES OF A TRUSTEE UNDER
THE BANKRUPTCY ACT, PLUS SPECIAL DUTIES RELATING TO THE SATISFACTION OF CUSTOMER
CLAIMS FOR SECURITIES BY THE DISTRIBUTION OF SECURITIES TO THE MAXIMUM EXTENT POS-
SlBLE.
SECTION 7(C). THE BILL INCORPORATES THE REPORTING REQUIREMENTS OF BANKRUPTCY
RULE 218 AND ADDS OTHER SPECIAL REQUlREMENTS.
SECTION 7(D). THE BlLL IN CORPORA TES THE INVESTIGATORY AND REPORTING REQUIREMENTS
OF SECTION J67 OF CHAPTER X. WHICH IS BROADER THAN THE COMPARABLE PROVISIONS RE-
LATING TO ORDINARY BANKRUPTCY. INVESTIGATION OF THE CAUSES OF A BROKERAGE FIRM'S
FAILURE MA Y BE QUITE HELPFUL IN MARSHALING ASSETS FOR THE ESTATE.
SECTION 8(A). THE BlLL WOULD MAKE THE TRUSTEE'S DUTY TO GIVE NOTICE OF HIS AP-
POINTMENT TO CUSTOMERS APPLICABLE ONLY TO THOSE CUSTOMERS WHO APPEAR TO HAVE
HAD AN OPEN ACCOUNT WITH THE DEBTOR WITHIN THE YEAR PRECEDING THE FILING DATE.
NOTICE TO CREDITORS OTHER THAN CUSTOMERS WILL, UNDER THE BILL, BE THE SAME AS UN-
DER THE BANKRUPTCY ACT THOUGH GIVEN BY THE TRUSTEE RATHER THAN BY THE COURT.
THE BlLL WOULD REQUIRE CUSTOMERS TO FILE SOME WRITTEN STATEMENT OF CLAIM
PROMPTLY, REFLECTING THE NEED FOR EARLY CERTAINTY IN REGARD TO THE ALLOCATION OF
CUSTOMER PROPERTY.
CLAIMS OF CUSTOMERS AND OTHER CREDITORS MUST ACTUALLY BE RECEIVED BY THE
TRUSTEE WITHIN A SIX-MONTH PERIOD FROM THE DATE OF PUBLICATION OF NOTICE. THE
TRUSTEE WOULD BE AUTHORIZED TO SATISFY CLAIMS FILED MORE THAN THE TIME ESTAB-
LISHED BY THE COURT, NOT TO EXCEED 60 DAYS BUT LESS THAN SIX MONTHS AFTER THE DATE
OF PUBLICATION OF NOTICE IN THE MOST ECONOMICAL WAY, THEREBY PROTECTING SIPC
AGAINST SPECULATION BY CUSTOMERS WHO MIGHT WITHHOLD THEIR CLAIMS FOR A PERIOD
OF TIME TO SEE IF A CHANGE IN THE MARKET MIGHT GIVE THEM A MORE VALUABLE DISTRIBU-
TION. CLAIMS FILED MORE THAN SIX MONTHS AFTER PUBLICATION WOULD BE BARRED EXCEPT
FOR CERTAIN CLAIMS BY A GOVERNMENT AUTHORITY, AN INFANT OR AN INCOMPETENT. IN
ANTICIPATION OF THE POSSlBILITY THAT FIRST MEETINGS OF CREDITORS MAY BE ELIMINATED
WHEN THE BANKRUPTCY ACT IS REVISED, THE PERIOD RUNS FROM THE DATE OF PUBLICATION
OF NOTICE RATHER THAN FROM THE DATE SET FOR THE FIRST MEETING OF CREDITORS.
_SECTION 8(B). THIS SECTION REFLECTS ONE OF THE ESSENTIAL FEA TURES OF THE AMEND-
MENTS, NAMELY THE DELIVERY of SECURITIES TO COST01VlERS 'J'(J'IHE GREATEST EXT~J\fT
J5RACTICABLE IN ORDER TO MAKE CUSTOMER ACCOUNTS WHOLE. THFSECl'I0M-PRG\1~IDES--GEN
'~RALLY THAT A TRUSTEE SHALL SEEK TO DISCHARGE *776 PROMPTLY ALL OBLIGATIONS OF
THE DEBTOR RELATING TO CASH OR SECURITIES TO THE EXTENT THE OBLIGATIONS MAYBE ES-
TABLISHED FROM THE DEBTOR'S BOOKS. IN ADDITION TO AUTHOR1Z1NG THE TRUSTEE TO USE
SlPC FUNDS TO SAT1SFY CLA1MS. THIS SECTION AUTHORIZES A TRUSTEE TO DELIVER SECURJ-
T1ES lN SATISFACTION OF CLA1MS TO THE EXTENT THEY ARE AVA1LABLE. AFTER THE AVA1L-
ABLE SECURIT1ES HAVE BEEN DlSTRIBUTED TO SATISFY SUCH CLA1MS. THE fRUSTEE SHAL~
,£DRCHASE THE BALANCE OF THE SHARES IN OPEN MARKET PU'RCHASE IN ACCORDANCE WITH
SECT10N *(D) SECURITIES DIS I RIBUTED TO CUSTOMERS ARE rOBE VALUED AS THE FlUNG
DATE.
*13 SECT10N 8(C). THIS SECT10N ESTABLISHES THE PR10RITY lN WHICH CUSTOMER PROPERTY
SHALL BE ALLOCATED.
FJRST, SlPC lS ENTlTLED TO RE1MBURSEMENT FOR D1SCRET10NARY ADVANCES MADE TO RE-
COVER SECURJTIES THROUGH PAYMENT OR GUARANTEE OF ANY INDEBTEDNESS OF THE
DEBTOR TO A BANK, LENDER, OR OTHER PERSON, TO THE EXTENT THAT THE SECURlTlES ARE
APPORTlONED TO CUSTOMER PROPERTY UNDER SECT10N 6(D). THE RECOVERY OF SECURJTlES
GlVEN BY THE DEBTOR TO OTHERS AS COLLATERAL FOR LOANS IS AN IMPORTANT MEANS OF
FAClLJTA TING THE DELJVERY OF SECURJTIES TO CUSTOMERS.
SECOND, REMAINJNG CUSTOMER PROPERTY WOULD BE ALLOCATED RATABLY AMONG CUS-
TOMERS IN SATISFACTION OF THElR RESPECTIVE NET EQUITY CLAIMS. TO THE EXTENT THAT A
CUSTOMER'S NET EQUlTY CLAIM IS UNSATISFlED BY CUSTOMER PROPERTY, THE CUSTOMER IS
ENTlTLED TO AN ADVANCE OF FUNDS FROM SIPC UP TO THE AMOUNT PERMlTTED BY THE BILL.
THIRD, SIPC SHALL THEN BE REIMBURSED AS SUBROGEE FOR THE CLAIMS OF CUSTOMERS
WHICH IT HAS SATISFIED WlTH lTS OWN FUNDS.
FINALLY, SIPC SHALL BE REIMBURSED FOR ANY ADVANCES IT HAS MADE TO GUARANTEE OR
SECURE ANY INDEMNJTY PURSUANT TO SECTION 9(C)(2).
ANY CUSTOMER PROPERTY REMAJNING AFTER THE SATISFACTION OF CLAIMS BY CUSTOMERS
AND SIPC BECOMES PART OF THE GENERAL ESTATE. A CUSTOMER MAY FILE A CLAIM AGAJNST
THE GENERAL ESTATE TO THE EXTENT THAT HIS NET EQUlTY EXCEEDS HJS SHARE O_LCUS-=-
TOMER PROPERTY PLUS SIPC PROTECTJON.
'---vND"ER SUBSECTION 8(C)(2) THE TRUSTEE IS DJRECTED TO DELJVER CUSTOMER NAME SECURJ-
TIES TO CUSTOMERS IF THEY ARE NOT JNDEBTED TO THE DEBTOR. IF A CUSTOMER HAS ANY
OUTSTANDJNG JNDEBTEDNESS, HE MAY PAY THE TRUSTEE, AND WJTH THE TRUSTEE'S AP-
PROVAL RECLAIM CUSTOMER NAME SECURJTIES. IF A CUSTOMER DOES NOT LJQUIDATE ANY
EXISTJNG JNDEBTEDNESS, THE TRUSTEE SHALL NET THE CUSTOMER'S ACCOUNT AND PAY TO
THE CUSTOMER HIS NET EQUlTY ON THE FILJNG DATE.
THE BILL WOULD PRESERVE THE SUBSTANCE OF SIPA SUBSECTION 6(C)(2)(D) WHJCH DE-
SCRJBES TRANSACTJONS DEEMED TO BE VOIDABLE UNDER SIPA. SUCH TRANSACTIONS JNCLUDE
THOSE VOID OR VOIDABLE UNDER THE BANKRUPTCY ACT AND THOSE WHICH HAVE THE EFFECT
OF GRANTJNG PREFERENTIAL TREATMENT TO INDIVIDUAL CUSTOMERS.
.g:CTION 8(D). ONE OF THE CENTRAL FEATURES OF THE BILL IS THIS SUBSECTION'S GRANT OF
AUTHORITY TO THE TRUSTEE TO PURCHASE SECURITIES IN THE OPEN MARKET OR OTHERWISE'
OBlAIN lHEM FOR IflEl}'tfR:P ~tlN~ft1'11::f!'<t(j-I1K.f'l:
·PoSIIIONS. A KEY OBJECIlv.c-eF-'f~JSFAeTItJN OF A CUSTOMER'S CLAIM FOR
'SECURlJIES B~ELlVERYOF SECtfR]lIES TO THE GREATEST Bff-ENT POSS1131:E. SIPC FONDS
:tViA'TBEMADE A VAILJtBtC'fO-'f-H£--'FR'l::tS-T-ttlO'PtiREHA:SE-SjxtJRlTIES TO REPLACE THAT PART
OF A CUSTOMER'S DEFICIENCY IN SECURITIES WHOSE VALUE ON THE FILING DATE DID NOT EX-
CEED THE LIMJTS OF SIPC PROTECTJON PROVIDED IN SUBSECTJON 9(A) OF SIPA AS AMENDED.
*777 SECTION 8(E). THIS SECTJON DESCRIBES THE PROCEDURE TO BE FOLLOWED FOR THE
CLOSJNG OUT OR THE COMPLETION OF CONTRACTS WlTH OTHER BROKER-DEALERS LEFT OPEN
BY THE INSOLVENCY OF THE DEBTOR. ALTHOUGH THE COMMISSION MAY ISSUE RULES CON-
CERNING THE COMPLETJON OR THE CLOSJNG OUT OF CONTRACTS, CURRENTLY SIPC LACKS
SUCH AUTHORITY. THIS BILL WOULD AMEND SIPA BY PROVIDING THAT CONTRACTS SHALL BE
COMPLETED OR CLOSED OUT BY THE TRUSTEE PURSUANT TO SIPC RULE. UNTIL SUCH RULES
WlTH RESPECT TO TRUSTEE COMPETJTJON OR CLOSE OUT ARE ADOPTED, THE OTHER BROKER-
DEALER SHALL CLOSE OUT THE CONTRACT IN THE BEST AVAILABLE MARKET PURSUANT TO
SIPC RULES. UNTIL SIPC ADOPTS RULES RELATING TO CLOSEOUTS BY THE OTHER BROKER-
DEALER. THOSE BROKER-DEALERS SHALL CLOSE THEM OUT IN ACCORDANCE WlTH COMMIS-
SION RULE S6(D)-1. THAT RULE AND THE COMMISSION'S POWER TO AMEND IT FROM TIME TO
TlME SHALL BE PRESERVED BY THIS STATUTE UNTIL SUCH TIME AS SIPC ADOPTS lTS OWN
RULES.
*]4 THE BROKER OR DEALER WILL BE ENTlTLED TO SIPC PROTECTION UP TO $40,000 FOR
LOSSES SUSTAINED FOR EACH OF HIS CUSTOMERS IF HE WAS IN FACT ACTING FOR A CUSTOMER
AS DEFINED IN SUBSECTION 8(E)(4) OF SIPA AS AMENDED. ANY LOSS SUFFERED BY THE BROKER
OR DEALER WHO WAS NOT ACTING FOR A CUSTOMER WILL CONSTlTUTE A CLAIM AGAINST THE
GENERA LEST ATE AND NOT BE PAYABLE FROM SIPC ADVANCES. PERSONS WlTH CONTRA CTS
NOT WHOLLY EXECUTORY SHALL HAVE A CLAIM AGAINST THE GENERAL ESTATE FOR ANY
LOSSES.
THE PROVISlONS ALLOWING THE PA YMENT OF CLOSE-OUT LOSSES W]LL APPL Y NElTHER TO A
REG]STERED CLEARING AGENCY THAT HAS lTS OWN RULES ON CLOSEOUTS FOR lTS MEMBERS,
NOT TO PART]C]PANTS IN SUCH AN AGENCY, TO THE EXTENT THEIR CLAIMS MA Y BE PROCESSED
WlTHIN THE CLEARING AGENCY, UNLESS SIPC PROVlOES OTHERWISE BY RULE. CLEARING
AGENCIES WHICH SUFFER LOSSES HAVE CLAIMS AGA]NST THE GENERAL EST ATE ONLY, AND
MA Y NOT BE PAlO FROM S]PC FUNDS. SIPC'S RULEMAK]NG AUTHORITY ]N THIS REGARD ]S SUB-
JECT TO CERTAIN LlMlTS SET FORTH IN SUBSECTION (E)(3). IT]S RECOGN]ZED THAT THE CREA-
TlON OF A NAT]ONAL CLEARANCE AND SETTLEMENT SYSTEM ]S CERTAIN TO CAUSE CHANGES
]N THE OPERA TlON OF REG]STERED CLEARING AGENC]ES. THEREFORE, IN EXERCJS]NG lTS
RULEMAK]NG AUTHORITY UNDER TH]S SECTlON, S]PC SHALL CONSULT AND COOPERATE WlTH
THE COMMISSION IN CARRYING OUT THE CONGRESS]ONAL D]RECTJVE IN SECTION J7A OF THE
1934 ACT TO CREATE A NATlONAL CLEARANCE AND SETTLEMENT SYSTEM.
SECTION 8(F). AS DESCRIBED EARL]ER IN THIS REPORT, TH]S SECTION ENABLES THE TRUSTEE,
SUBJECT TO PRIOR APPROVAL BY S]PC, TO TRANSFER A CUSTOMER'S ACCOUNT TO ANOTHER
BROKER-DEALER. THE BENEFlTS TO CUSTOMERS AND THE POTENT]AL SAVINGS TO S]PC WHICH
MAY RESULT FROM SUCH TRANSFERS MAKE IT APPROPRIATE THAT SJPC FUNDS BE AVA]LABLE
TO FACILITATE SUCH TRANSFERS.
SECTION 9(A). IN ADDITJON TO INCREASING THE AMOUNTS AVA]LABLE TO SATISFY EACH
CUSTOMER'S CLA]M, SECTJON 9(A) OF THE BILL WOULD CONTINUE TO APPLY THESE LIMITS TO
THE SHORTAGE REMAINING AFTER THE ALLOCAT]ON OF CUSTOMER PROPERTY RATHER THAN
TO THE NET VALUE OF A CUSTOMER'S ACCOUNT. TH]S MAKES THE BENEFIT OF S]PC ADVANCES
ADDJT]ONAL TO WHATEVER BANKRUPTCY-TYPE REMEDY THE CUSTOMER MAY HAVE HAD. FI-
NALLY, THEB]\-L MAKES CJ EAR THAT TEE DOLLAR LlMlTS APPLY TO THE FJLING DATE VALUE
\lUHE SECURITIES IN RESPECT OF WHJCH THE SIPC ADVANCE ]S MADE, RATHER THAN TO THE
CASH ADVANCE ITSELF. . ..
SECTION 9(8). ADVANCES FOR CUSTOMER-RELATED LOSSES ON CLOSED OUT CONTRACTS AND
EXPENSES OF ADMINISTRATION WHERE THE DEBTOR'S ESTATE IS NOT SUFF]CIENT TO PAY THEM
ARE MADE MANDATORY.
*778 SECTION 9(C). THIS NEW SUBSECTlON JS ADDED TO PERMIT SIPC TO MAKE DISCRETlON-
ARY ADVANCES TO AID IN RECLA]MING PLEDGED SECURITIES UNDER SECTION 7(B)(2), IN
TRANSFERRING ACCOUNTS UNDER SECTION 8(F) AND IN PURCHASING SECURITIES UNDER SEC-
TION 8(D).
SECTION 10. THE DIRECT PAYMENT PROCEDURE DESCRIBED EARLIER IN THIS REPORT IS THE
SUBJECT OF SECTION 10, WHICH AUTHORIZES ITS USE AND SETS FORTH THE PROCEDURES AP-
PLICABLE TO THE DIRECT PAYMENT PROCEDURE. THE SECTION PROVIDES FOR THE DISCON-
TINUANCE OF THE PROCEDURE JF SPIC DETERMINES THAT JT IS NO LONGER APPROPRIATE. THE
RlGHT OF A CLAIMANT TO AN ADJUDICATION OF A DISPUTED CLAIM IS EXPLICITLY RECOG-
NIZED.
82
© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.
S REP. 95-763 Page 15
THE BILL DEF1NES THE TERM 'CUSTOMER NAME SECURlTIES' AS THOSE SECURITIES WHICH
ARE REGISTERED IN THE NAMES OF CUSTOMERS OR ARE IN THE PROCESS OF BEING SO REGlS-
TERED ON THE FlLlNG DATE. IT TREATS THOSE SECURlTIES NOT AS PART OF THE DEBTOR'S ES-
TATE BUT AS PROPERTY OF THE INDIVIDUAL CUSTOMERS, WHICH IS BEING HELD BY THE
DEBTOR. SUCH SECURlTIES WILL BE RETURNED TO THOSE INDIVlDUAL CUSTOMERS. EXCEPT TO
THIS LlMlTED EXTENT, THE CONCEPT OF 'SPECIFICALLY lDENTlFlABLE PROPERTY' IS ELIMI-
NATED. SIPA'S DEFINlTION OF 'CASH CUSTOMER, ' CLOSELY RELATED TO THE DJSCARDED CON-
CEPT OF 'SPECIFICALLY lDENTlFIABLE PROPERTY,' IS DELETED AS BEING NO LONGER USEFUL.
*]6 Till BILL PROVlDES FOR 'CUSTOMER PROPERTY' TO REPLACE WHAT IS NOW TERMED THE
'SINGLE AND SEPARATE FUND.' lHE BlLL PROVlDES THAT ALL CASH AND SECURITIES, EXCLU-
SlVE OF SIPC ADVANCES AND CUSTOMER NAME SECURlTIES, WHICH ARE AVAILABLE TO THE
TRUSTEE FOR THE SATISFACTION OF CUSTOMER CLAIMS S.!::lALL BE DEEMED TO BE CUSTOMER
'PROPERTY. INCLUDED IN THIS CATEGORY IS PROPERTY MADE AVAILABLE THROUGH THE USE---·-
cOF REALlZA TION OF DEBlT CASH BALANCES IN CUSTOMERS' ACCOUNTS AND, AS DETERMINED
BY THE COMMISSION, OTHER CUSTOMER-RELATED DEBlT lTEMS. ALSO INCLUDED IS PROPERTY
WHICH WOULD HAVE BEEN SET ASlDE OR HELD FOR THE BENEFIT OF CUSTOMERS HAD THE
DEBTOR COMPLlED WlTH APPLlCABLE PROVISIONS OF LAW.
THE BlLL MAKES CONFORMING CHANGES IN THE DEFINlTlONS OF 'DEBTOR', 'EXAMINING AU-
THORITY', AND 'FILlNG DATE'.
THE BlLL ALSO DEFINES THE TERM 'FOREIGN SUBSlDIARY' AS MEANING (I) ANY SUBSlDIARY
OF A MEMBER OF SIPC WHICH HAS lTS PRJNCIPAL PLACE OF BUSINESS IN A FOREIGN COUNTRY,
OR (2) ANY SUBSlDIARY OF A MEMBER WHICH IS ORGANIZED UNDER THE LAWS OF A FOREIGN
COUNTRY.
THE BILL MODlFJES THE DEFINJTION OF 'GROSS REVENUES' BY INCLUDING IN GROSS REVE-
NUES A CERTAIN PERCENTAGE OF COMMISSIONS FROM TRANSACTIONS IN MONEY MARKET IN-
STRUMENTS.
BECAUSE SIPA LACKS A CLEAR DEFINlTION OF THE TERM 'SECURITIES: SIPC HAS RESOLVED
THE AMBIGUJTY IN A WAY WHICH HAS RESULTED IN THE USE OF DIFFERENT DEFINITlONS FOR
THE PURPOSES OF PROTECTlON AND ASSESSMENT. AS A RESULT, SIPC HAS EXTENDED PROTEC-
TlON TO PERSONS WHO HAVE CLAIMS RELATING TO MONEY MARKET INSTRUMENTS WJTHOUT
ASSESSING COMMISSIONS EARNED FROM THOSE TRANSACTIONS. IN LlGHT OF PAST INVESTOR
LOSSES IN THESE SECURITIES, THE COMMJTTEE HAS DETERMINED THAT SIPC SHOULD BE ABLE
TO ASSESS REVENUES EARNED FROM MONEY MARKET INSTRUMENTS. HOWEVER, THE COMMlT-
TEE RECOGNIZES THAT MANY OF THESE TRANSACTIONS ARE GENERALLY CONDUCTED FOR THE
BENEFJT OF LARGE INSTITUTIONS RATHER THAN INDlVlDUALS, AND THA T THE COD NATURE OF
THESE TRANSACTIONS TYPICALLY POSES LlTTLE OR NO RISK TO CUSTOMERS.
THE COMMJTTEE HAS ADOPTED A COMPREHENSIVE DEFINITION OF THE TERM SECURITIES
WHICH WILL, AMONG OTHER THINGS, RESOLVE THE DUAL TREATMENT OF MONEY MARKET IN-
STRUMENTS. IN ADDJTION, THE COMMITTEE HAS DEClDED TO PERMJT SIPC TO ASSESS ONLY
THAT PERCENTAGE OF REVENUES WHICH WOULD REFLECT SIPCS LOSS EXPERIENCE IN THESE
SECURITIES FOR THE PRECEDING 5 YEARS.
*780 THE BILL MODIFIES THE DEFINJTION OF 'NET EQUITY' IN ORDER TO MAKE CLEAR THAT
MARGIN AND CASH CUSTOMERS ARE TO BE TREATED EQUALLY AND THAT CERTAIN PROTEC-
TIONS ARE AVAILABLE TO PERSONS ENTERING INTO TRANSACTIONS IN GOOD FAITH AFTER THE
FILING DATE. CERTAIN CONFORMING CHANGES ARE ALSO MADE.
THE PRESENT SIPA DEFINES 'SECURITY' BY REFERENCE TO SECTION 60E OF THE BANKRUPTCY
ACT. THAT SECTION, HOWEVER, DOES NOT JTSELF DEFINE THE TERM. THE BILL ADDS A NEW
DEFINITION OF 'SECURITY' PATTERNED AFTER THE DEFINJTION CONTAINED IN THE SECURITIES
EXCHANGE ACT OF 1934. THAT DEFINITION IS NOT FOLLOWED EXACTLY, HOWEVER, SINCE THE
PURPOSES OF THE 1934 ACT AND SIPA ARE DIFFERENT.
*17 COMMODITY CONTRACTS AND OPTIONS RELATING THERETO ARE EXCLUDED, AS ARE IN-
VESTMENT CONTRACTS, PROFIT SHARING PLANS, AND AN INTEREST OR PARTICIPATION IN OIL
83
© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.
April 26, 1978 CONGRESSIONAL RECORD - SENATE J i j)! j
There being no objection, the Senate ties. These payments supplement clistri- Commerce on AllI.;IL';L 1. 3. and 3. i:;';'7.
proceeded:to consider the bill (H.R. 8331) butions of available securities and ca~;!1 The bill was appruved by tilf.: JlUIl:;" "I
which had been reported from the Com- from the debtor's estate. HepresenLa!.ives on NIH';:llliJer I. i ern
mittee on Banking, Housing, and Urban Since the enactment of the SIPC legis- The oll!JcummiLLI:t: on S('cllril.it::,: hcld
Affairs with amendments as follows: lation, 129 of the over 8,700 broker/dcal- hearings un Lhe bill Oil J\prlJ ~;i, 1:)'iH.
On page I, Ilne 5. strike "19'/7" and Insert ers which have been SIPC members over anti thi: bill was approved by a \11l;dl\-
"1978"; the past 8 years have been liquidated mO\l~ vote oI til" Illll Sen:",c Uankin,:
On page 3. lIne 4. after "Insurance" Insert under the act. As of March 31, 1978. SIPC Committee.
"company": had made net advances to trustees total- \Vhill: there 11ave been .~lJlne 11.';('1\11 and
On page 46. Ilne 25. slrIke "determination ing $54,518,825. In additi"Cln, significant construt:tive revisions marll: in thl' ori;:-
has" and Insert "determInation) has"; ina! SIPC recornmellClatiolls by tlw nOll!;!:
On page 51, llne 6. strike "(3)" and Inseyt amounts of securities and cash in the
"( 5)"; debtor's possession have been distributed oI Represcntatives. the lJa'i!c wisdom and
On page 52. after the comma. Insert "as to customers by the trustees. SIPC esti- advice Irom SIPC lJa \"(! been pn,scnTd
redesignated by thls Act."; mates that to date securities and cash almost completely intact. As it i!; now
On page 54. Ilne 19. f1fter the comma. insert having a value of over $279 mi1lion have before us. the bill is a positive step III
"as redesignated by this Act,"; been distributed to approximately 105.- the d:rectioll of more cJJicient !;oJutiol1s
On page 6£, llne 2. strike "subscription 000 customers in the course of liquida- to the brond rani,:E' of problems which
~raJlsferable" and insert' SUbscription, trans-
ferable"; tion proceedings. These figures demon- confront SIPC. In my judgmenl. thiS
On page 67, beginniL6' with Ilne 8, insert strate vividly the effect which the SIPA bill goes a substantial way toward im-
the follOWing: program has had on investors throughout proving the protections afforded secu-
SMALL ISSUE ExEMPTION this country and point up the wisdom rities customers l\l1cl enabling SIPC to
SEC. 18. section 31b) of the Securities Act of Congress in establishing SIPC and perform its rolr more expeditiously :mcl
of 193 (15 U.S,C. 77C(b) Is amended by the SIPA program in 1970. efficien t1y.
striking out "$500,000" and inserttng in lieu In short, SIPC has protected inves- A~ pas~ed lJy the HOllse, the Securities
thereof "$2,500.000". tors against loss in the manner envi- Invest!)r Protection Act would achien:: a
AMENDMENT TO THE; SECURITIES EXCHANGE ACT sioned by its creators and at no cost to number of important changes in the orig-
OF 1934"' the taxpayer. As of March 31. 1978, inal 1970 act.
SEC. 19. Section ll(a) (3) of the ser.uritles S:'PC had assessment revenues from its First, the bill would increase the ex-
Exchange Act of 1934 (15 U.S.C. 78k(a) (3» members which totaled over $198 mi11ion. tent of SIPC protection for customers'
is amended by striking out "May 1,1975" and In addition. SIPC had earned approxi- cash and securities in an account with a
inserting in !leu thereof "February I, 1978" mately .$31 million in interest income on broker-dealer. The act currently proL€cts
and by striking out "MflY I, 1978" each place its investments. giving SIPC total rev- customer accounts up to a total of S50.-
It appears and Inserting in !leu thereof enues of $229 million. SIPC's expenses ODD, with a ceiling of S20.000 for cash.
"November I, 1978". from inception to this date totaled ap- H.R. 8331 'would couble the amount oI
Mr.WIJ.,LIAMS.. Mr. . President, as proximately $64.5 million. As noted above protection. raising to SlOO.OOO the total
C1nrIfiilan of the SenateSubcoITuriittee $54.5 million of that total represents amount of protection. and to $40,oon the
on Securities; I am pleased to lay before advances made to trustees in SIPA level of protection for customers' cash.
the Senate for itsirnmediateiconsidera.- liquidations and the baHmee represents This corresponds to the changes in 1974
tionH.R.8331, theSectirities,Irivestor overhead expenses for SIPC's opera- in the FDIC, FSLIC. and FCUIC legisla-
Protection Act Ameridments of liriiLThe tions to date. It may be noted that tion which doubled the coverage for
billw9U!dall1endinsignlflcantrespects E'TPC's expenses for its internal opera- depositors.
the SecuritiepInvestor,grotection ACt of tians have been slightly less than one Second, the bill \,'ould modify the act
i970';bystreamlining liquidationproce- third of the interest income SIPC has to provide protectIOn which better com-
dures:avllilableund.erthe act,reducing earned on its investments. CUlTently, thf' por,ts--w+t-h-tfH!-~ec..b'1.tion01 both clish
theexj)Cnse:indcomplexityoftheprQce- S:h-'C fund totals approximately S16J.5 and"lJJargin customers. This would be
dures' ti I1der tpe act, and prc:rviding public million. aC(:.QmRlished by moving 1U'La.Y.....lwn a
custCiirle:,s, of,.failing brokerage firms with As my colleagues may recall, SIPC was str~~ce con~ept and toward a
'increasedandimpravedinsurance cover- considered and passed on an emergency sC~'e!;HrH~~lts
age~,Iurgethe immediatep'assageof the basis. The need for prompt action re- i "ct as the existe whp.n the broker-
amendments. quired that certain technical problems dealer became jnsolyent The JJene s'o
SiIlc~Corigresshas not revisited or re- rela.tingtothe procedures for liquidating cthe customers of firms in liquidaBon:wJll
examined theSecurities~:investorProtec- securities firms would be left for later \J!0rnmeasurable sidce Liley wi11110 longer
tionCorp()ration,.createcttoad.rrtipister solutions 'in light of act.ual experience b,\;...deprIved for lengthy pe:.cods of thee
the,act,sinceitserell£ion i1i1970,abtief under the new act. At his first confirma- use of. or access to. tf'ieir cash or secllri-
review or .th'ecircumstancessurrounding tion hearing in November 1973, then and ,lIes.
its creatioD.ariditsexpeijericeduring the stillSIPC Chairman Hugh F. Owens, ad- Third, liquidation procp.dlJ.!"'=s would be
paSt8yearS~houldbeusetulto my cbl- vised the committee that SIPC would un- streamlined and tile cost c.f liquidations
lell.l5ti'eS;)nt~OSingda~of1.97o-, G olJ.=-dertake a thorough study of possible reducea by aut.10!"izing ;;:i1PC to make
gress',estiiJ:>1t,etheSecuritiesInvesior amendments to the SIPC Act. Pursuant payments directly t.) custome:.: without
P1'(j,LecLlonCotpor lltlOmmresponse to the to this commitment, Chairman Owens the necessity for a judicial proceeding.
Wallstreet:back oIfice.crIsls and the bear appointed '". broadly based task force And SIPC would itself be the trustee fn r
mar,ketoftheJate 19,60's. Durmg thiS to explore better. quicker and more ef- liquidation of small brokers and dealers
tui"bllJentpenoQ, hundreds of brokerage ficient methods of achieving the investor where the claims dG not exceEd $750,000
fifms.wentoutofbusmess. TheIr publiC protection and concomitant investor con- and wh<>re there are fewer than 500 cus-
customers were exposed to serIOUS fi"" fidence envisaged by Cungress when it tomers.
I?anclallos,ses and publIc cohhaence ill passed the 1970 act. Fourth, the bill wonld contiT,ue r.he eX"
t!.¥secuntle;Jga;%ets =rraken. badly._ The task force issued its repor~ in emption from SIPC memiJer"hip and
TOrese<ir__u IC c.lill..-ence m the July 1974. and the SIPC Board of Dlree- from SIPC assessmen: for exclusive
securities markets and protect public in-. tors approved Virtually all of its recom- dealers in mutual fund shares and vari-
, ve§tors against the taIlure and msolvency_ mendatiuns. These were subsequently in- able annuities. I believe it is er;tirely ap-
of btgkers an~ealers, the Sec.utities 1n-, corporated into legislative proposals and propriate to retain G:.~~.; exemptions
veii~'ffln Act o.r-----t!},{'O was transmitted to the Congress. In 19'14, I since exciusive dealers in these instru-
ad~ Under the original sta-t-ttte-anCl introduced the SIPC legislation as S. ments do not present the kind of risk
as it now stands, the Securities Investor 4255; in the 94th Congress. in 1975, it was intended to be covered under SIPC. How-
Protection Corpc.:ration may advance a S.1231. ever, the bill would subject to limited
maximum of $50,000 to protect the claim In the S5th Congress H.R. 8331 was assessment transactions in money mar-
of anyone customer of a failed broker- introduced in the House of Representa- ket instruments, which were exempt
dealer, but no more than $20,000 of that tives in July 19.7, and hearings were held from assessment under the 1970 act.
amount may be advanced to pay claims by the appropriate subcommittee on the Mr. President, it is not often that leg-
for cash as opposed to claims for securi- Committee on Interstate and Foreign isln~~)n enacted in haste works as
84
EXCERPTS FROM
OPINION BELOW
APPENDIX 1 - APPEARANCES
Attorneys for Optimal Strategic US. Equity Limited and Optimal Arbitrage
Limited
Pro Se
1. Hugh de Blacam
3. Anthony Fusco
6. Lillian Gilden
7. Phyllis Glick
8. Yo]anda Greer
9. Joseph M. Hughart
] 1. Marshall W. Krause
6
I S. Herbert A. Medetsky
] 6. Josef Mittleman
2 J. Alan J. Winters
7
The IA Business, on the other hand, perpetuated Madoffs fraudulent activity. Physically
h
isolated on the 1i floor from the MM and PT Businesses, the IA Business was accessible only
to select employees and insiders. 14 Unlike the SEC registration of the MM and PT Businesses,
registration of the IA Business was fabricated; only 23 of its thousands of customers were
reported. In contrast to the MM and PT Businesses' live computer trading system interfacing
with outside feeds, the IA Business had no contact with opposite brokers or counterparties and
used only one unsophisticated and archaic computer that was not programmed to execute trading
of any kind. The legitimate MM and PT Businesses limited scrutiny of the IA Business. In tum,
the proceeds generated by the IA Business enabled the MM and PT Businesses to remain viable,
n.MffiC~CSOFTHEPONUSCHEME
Rather than engage in legitimate trading activity, Madoffused customer funds to support
operations and fulfill other investors' requests for distributions of profits to perpetuate his Ponzi
scheme. Thus, any payment of "profit" to a BLMIS customer came from another BLMIS
customer's initial investment. Even if a BLMIS customer could afford the initial fake purchase
of securities reported on his customer statement, 15 without additional customer deposits, any later
"purchases" could be afforded only by virtue of recorded fictional profits. Given that in
Madoffs fictional world no trades were actually executed, customer funds were never exposed
to the uncertainties of price fluctuation, and account statements bore no relation to the United
States securities market at any time. As such, the only verifiable transactions were the
14 The IA Business was staffed by more than 25 employees, including Madoff and DiPascali, who directed its day-
to-day affairs.
15 The Trustee notes that, in most instances, the customer likely did not invest enough capital to buy even those
securities listed on his first BLMIS customer statement, given that prices selected for the purchase of securities for
customer accounts were backdated and orchestrated.
10
88
Madoff never executed his split-strike investment and hedging strategies, and could not
possibly have done so. First, the customer funds were never actually invested "in the market" or
"out of the market," despite customer statements to the contrary. In reality, funds were
maintained in the 703 Account at Chase Bank. Second, according to the Trustee's investigation,
an unrealistic number of option trades would have been necessary to implement the Split Strike
Conversion Strategy because there were insufficient put and/or call option contracts available at
the Chicago Board Options Exchange to properly hedge the volume of securities positions
reflected on the customers' statements. In addition, one of the money market funds in which
statements, was Fidelity Brokerage Services LLC's "Fidelity Spartan U.S. Treasury Money
Market Fund." Fidelity Brokerage Services LLC, however, has acknowledged that it did not
even offer investment opportunities in any such money market fund from 2005 forward.
Yet Madoff successfully created the illusion that his trading activity was legitimate and
his Split Strike Conversion Strategy was effective. In order to do so, Madoff and a select group
of employees assembled historical price and volume data for each stock within the basket. Using
this data, they strategically selected stocks after the fact at favorable prices to ensure promised,
consistent annual returns of between 10-17%. They monitored the baskets to make certain that
the selected stocks yielded returns that were neither above nor below the desired range. This
practice of backdating allowed Madoff to engineer trades on the perfect dates at the best
available prices to guarantee such results. Consequently, all documentation related to this
strategy, including order tickets, trades, and customer statements, were necessarily concocted by
Madoff. In fact, the Trustee's investigation revealed many occurrences where purported trades
14
were outside the exchange's price range for the trade date?O At bottom, the BLMIS customer
statements were bogus and reflected Madoff s fantasy world of trading activity, replete with
fraud and devoid of any connection to market prices, volumes, or other realities.
While the majority of customers were supposedly invested in the Split Strike Conversion
Strategy, as of the Filing Date there were fewer than 245 active non-split strike conversion
BLMIS customer accounts (the "Non-Split Strike Accounts"), or roughly 5% of total active
BLMIS accounts. The Non-Split Strike Accounts were held by devoted customers such as
Stanley Chais, Jeffry Picower, and Madoff family members and employees, and reported
unusually high rates of return in excess of the consistent 10-17% generated for Split Strike
Conversion Strategy accounts. For example, the Trustee alleges that Chais's family and
corporate accounts generated annual returns as high as 300%, and Picower's generated annual
returns as high as 950%. See Trustee's CompI. at ~ 3 (May 1,2009) (Adv. Proc. No. 09-01172
(BRL)); Trustee's CompI. at ~ 3 (May 12, 2009) (Adv. Proc. No. 09-01197 (BRL)). These
accounts were handled on an account-by-account basis, in contrast to the more common basket
approach. This time-consuming and labor-intensive process required the manual input of
backdated transactions to represent the purported trades executed on behalf of each account.
Fundamentally, however, both the split-strike and non-split-strike accounts were subjected to the
stocks and related prices. With the exception of a few isolated trades and physical custody of a
20 For example, in one instance, a monthly account statement for December 2006 reported a sale of Merck ("MRK")
with a settlement date of December 28,2006. BLM1S records reflect a trade date of December 22,2006 at a price of
$44.61 for this transaction. However, the daily price range for MRK stock on December 22,2006 was a low of
$42.78 and a high of$43.42. See Looby Dec!. at ~ 106.
15
90
than $500,000. These customers are not entitled to a further distribution from the fund of
customer property because their Net Equity claims will be fully satisfied by the SIPC advance.
In general, Net Winners will be concentrated among early investors, while a critical mass of Net
DISCUSSION
A. Generally
As a backdrop for the Court's review of the Net Equity issue in this SIPA proceeding, a
brief overview of the history and purpose of the statute will provide helpful context. Congress
enacted SIPA in 1970 for the primary purpose of protecting customers from losses caused by the
insolvency or financial instability of broker-dealers. See SEC v. s.J. Salmon & Co., Inc., 375 F.
Supp. 867, 871 (S.D.N.Y. 1974). In doing so, Congress sought to "reinforce the confidence that
investors have in the U.S. securities markets" and "strengthen[] ... the financial responsibilities
of broker-dealers." H.R. Rep. No. 91-1613, at 2-4 (1970), reprinted in 1970 U.S.C.C.A.N. 5254,
5257.
To accomplish these aIms, SIPA establishes procedures for liquidating failed broker-
dealers and provides "customers," as defined by SIPA section 78111(2),25 with special protections.
24 For reasons that are self-evident, a majority of those objecting to the Trustee's Net Investment Method are Net
Winners.
25 A "customer" is defined as-
any person ... who has a claim on account of securities received, acquired, or held by the debtor
in the ordinary course of its business as a broker or dealer from or for the securities accounts of
such person for safekeeping, with ... collateral security, or for purposes of effecting transfer. The
term 'customer' includes any person who has a claim against the debtor arising out of sales or
conversions of such securities, and any person who has deposited cash with the debtor for the
purpose of purchasing securities ....
SIPA section 78111(2).
18 91
also Conn. Nat. Bank v. Germain, 503 U.S. 249, 253-54 (l992) ("[C]ourts must presume that a
legislature says in a statute what it means and means in a statute what it says there."). SJPA
The term "net equity" means the dollar amount of the account or accounts of a customer,
to be determined by -
(A) calculating the sum which would have been owed by the debtor to such customer if
the debtor had liquidated, by sale or purchase on the filing date, all securities
positions of such customer ... ; minus
(B) any indebtedness of such customer to the debtor on the filing date ....
The main source of contention between the Trustee and the Objecting Claimants lies in
how each would determine a customer's "securities positions," as that term is used in the
definition of Net Equity. The Objecting Claimants state that the best evidence of a customer's
securities positions is the customer's account statement as of the Filing Date, or in this case, his
November 30th Statement. They assert that SJPA's legislative history, indicating the intent to
protect investors' "legitimate customer expectations" and "make customer accounts whole,"
supports this position. H.R. Rep. No. 95-746, 95th Cong., 1st Sess. at 21 (1977). Written upon
A customer generally expects to receive what he believes is in his account at the time the
stockbroker ceases business. But because securities may have been ... never purchased
or even stolen, this is not always possible .... [C]ustomers generally receive pro rata
portions of the securities claims, and as to any remainder, they will receive cash based on
the market value as of the filing date.
Id. (emphasis added). Here, as argued by the Objecting Claimants, the customers had legitimate
expectations that they held the securities positions reflected on their November 30 th Statements.
Therefore, the Objecting Claimants espouse the Last Statement Method and believe that Net
Equity claims must be recognized in the amount of the customers' account balances as of
21
EXCERPTS FROM
ORAL ARGUMENT
1
Debtors.
---------------------------------x
February 2, 2010
B E FOR E:
HON. BURTON R. LIFLAND,
U.S. Bankruptcy Judge
16 stays right and steady. We stay with the fact that we are
5 statute.
14 bank, when the two are totally different. Cash going into
Lawrence Velvel
This will confilID that I orally agreed on today's phone call that, rather than produce, object, or
file a protective order on or prior to November 3rd with regard to my request for production of
documents, you can have until November lOth to do so. I understand that your filing will in fact be of a
protective order taking the position that, for whatever reasons you choose to assert, the I rustee can
never be required to produce the re uested documents. 1 also understand that you are required to and
'WI set up a co erence call with Judge Lifland to discuss with him, and obtain his approval for, the
procedure you request.
Please either confirm that what I have said in this email is correct, or tell me what I have said
that may be mistaken.
Thank you.
Sincerely,
Lawrence R. Velvel
11/9/2009
Page 1 of 1
Lawrence Velvel
Thank you for your email confirmation of our telephone call today concerning your Request for
Production of Documents. You have accurately stated our agreement. By way of clarification. I would add
that it is understood that we 'will not be producing documents pursuant to your request until ordered by the
'court to do so. I Will reacli out to you 011 MOllday with regard to arrangements for contacbng tlie court. •
Thank youand have a good weekend.
David Sheehan.
This will confirm that I orally agreed on today's phone call that, rather than produce,
object, or file a protective order on or prior to November 3rd with regard to my request for
production of documents, you can have until November 10th to do so. I understand that your
filing will in fact be of a protective order taking the position that, for whatever reasons you
choose to assert, the Trustee can never be required to produce the requested documents. I also
understand that you are required to and will set up a conference call with Judge Lifland to
discuss with him, and obtain his approval for, the procedure you request.
Please either confirm that what I have said in this email is correct, or tell me what I have
said that may be mistaken.
Thank you.
Sincerely,
Lawrence R. Velvel
This email is intended oniy for the use of the party to which it is
addressed and may contain information that is privileged,
confidential, or protected by law. If you are not the intended
recipient yOll are hereby notified that any dissemination, copying
or distribution of this email or its contents is strictly prohibited.
If you have received this message in error, please notify us immediately
by replying to the message and deleting it from your computer.
Lawrence Velvel
Having had an opportunity to think more about your proposal, I have some thoughts that should
be set before you.
It seems to me that a schedule should be 8lTanged so that, if Judge Lifland rules that there should
be discovery, the discovery can be had and briefed in time to be part of the February 2 nd argument? (Do
I conectly remember you affirming this, or is my recollection incorrect?) This does not seem to me to
be possible, however, under your proposed schedule. For it would seem that, under your proposed
schedule, you will be filing objections to my discovery requests only after the Judge rules there should
be discovery (if he were in fact to rule that way). I would then have to file a second motion to compel,
there might have to be an argument and decision, that decision would probably not come until January
sometime, only after that would documents be produced, and stmlater would there be depositions. The
bottom line is that information learned in discovery could not be used -- assuming, of course, that it is
usable -- lmtil well after the February 2nd argument.
Let me, then, suggest an alternative schedule in an effort to ensure that discovery, if it is allowed
by Judge Lifland, is had in time to be presented, if desired, at the February 2nd healing. The proposed
schedule is this:
1. The Trustee and SIPC would file their protective order and their objections by
November 10th .
3. The Trustee and SIPC will file their replies by December I st.
5. If the Comi allows discovery, documents will be turned over no later than one week
after its decision, with depositions, if any, to be scheduled and taken as soon as possible
thereafter.
I know that ou do not wish to file objections before Jud e Lifland rules on your request for a
rotective order because you feel, Mr. Sheehan has said on the phone, t at 0 ectlOns presume a rIg t to
._discovery, but you deny any such light can eXIst ere. onet eless, filing your protective order and
objections simultaneously seems to be the only way to complete the process in time, unless you waive
the right to file objections should Judge Lifland rule that there should be discovery. Also, if you were to
file a protective order and objections simultaneously, I would not argue that the filing of objections is an
implicit admission that the position taken in your protective order -- that there can be no discovery here -
- is incorrect. I would make such argument for other reasons only.
OR
vU
11/9/2009
Dear Mr Case: 10-974 Document: 52-7 Page: 27 05/06/2010 34735
Please let me know if you are willing to agree to the schedule I have proposed.
Sincerely,
Larry Velvel
1119/2009
Case: 10-974 Document: 52-7 Page: 29 34735 3 fage 1 of 1
Lawrence Velvel
I have enclosed a second document request. It seeks documents relating to the reasons for or
against satisfying investors' claims by acquiring and providing investors with the secmities shown in
their statements of November 30,2008.
As you surely are aware, SIPA -- a name which, like SIPC, many of us had never even heard less
than eleven months ago -- is an incredibly complex statute. Thus, it was not until reading the briefs
recently filed on the ne(equity question by SIPC and the Trustee, and learning it from their own briefs,
that I learned that SIPe and the Trustee are required to acquire securities to satisfy the claims of
investors if this can be done in a fair and orderly market, and that SIPC and the Trustee cannot simply
rest content with paying victims cash of up to $500,000 when securities can be appropriately obtained
for the victims. Despite the obvious irony, I appreciate the fact that the recent briefs made this clear to
those of us who are novices with regard to SIPC.
Having now become aware from their recent briefs that SIPC and the Trustee must provide
securities if they can be purchased in a fair and orderly market, and believing that such purchases could
have been made by use of techniques that are standard for persons acquiring large blocs of shares, I am
seeking discovery on why it was not done here. No doubt your forthcoming motions for a protective
~wilI implicitly cover this matter, since your pOSItIOn, as I understand it, is that no discovery can be
had on any questIOn. It would be pelfuetly undcrstmrdable, however, and perfectly alright with me, if
you were to choose to explicitly say that your position also covers discovery about acquiring securities
to satisfy customers' claims.
Sincerely,
Larry Velvel
11/9/2009
Case: 10-974 Document: 52-9 Page: 2 05106/2010 34735 3
Defendant.
In re:
BERNARD L. MADOFF,
Debtor.
This matter came before the Court on the motions (the "Motions,,)1 of Irving H. Picard,
Esq. (the "Trustee"), as trustee for the liquidation of the business of Bernard 1. Madoff
Investment Securities LLC ("BLMIS" or "Debtor") under the Securities Investor Protection Act,
15 U .S.C. §§ 78aaa, et seq., and as trustee for the estate of Bernard 1. Madoff ("Madoff') and of
the Securities Investor Protection Corporation, for entry of a protective order denying discovery
sought by Lawrence R. Velvel, as more fully set forth in the Motions; and the Court having
jurisdiction to consider the Motions and the relief requested therein in accordance with section
78eee(b)(4) of the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. ("SIPA"), and
the Protective Decree, entered on December] 5, 2008 by the United States District Court for the
Southern District of New York in Case No. 08 CV 1079], and 28 U.S.C. §§ 157 and 1334; and it
I Capitalized terms not otherwise defined herein shall have the meanings given to them in the Motions.
101
Case: 10-974 Document: 52-9 Page: 3 05106/2010 34735 3
appearing that the relief requested by the Motions is necessary and in the best interests of the
estate, its customers, its creditors, and all parties in interest; and upon consideration of the
responses and objections filed in this Court in response to the Motions; and due notice of the
Motions having been given, and it appearing that no other or further notice need be given; and
upon a hearing and the proceedings before the Court and after due deliberation, it is hereby:
ORDERED, that good cause exists under Rule 7026(c) of the Federal Rules of
Bankruptcy Procedure for the issuance of a protective order denying the discovery sought by
Lawrence R. Velvel, including the request for a privilege log, because the discovery requests,
having much of the indicia of a fishing expedition, are overbroad, unduly burdensome,
ORDERED, that this Court shall retain jurisdiction with respect to all matters relating to
102
EXCERPTS FROM
BRIEF BELOW SHOWING
DAILY TRADING VOLUME
OF MADOFF SHARES
will obtain and provide a customer with the securities shown on his statement even if the
broker had never actually acquired them and even if their value had tripled, and Ms.
Wang, SIPC's General Counsel" was quoted by an obscure publication early-on in the
Madoff matter as saying SIPC would acquire and provide securities for victims if their
But, as said, that SIPC was required to provide securities to victims was not
generally made known to victims, who were almost all entirely in ignorance of any
knowledge of SIPA or SIPC. Instead, the victims were told at an early stage that their
recovery, if any, would be entirely in cash that reflected their net equity.
In fact, however, as said, SIPC and the Trustee were "direct[ed]" to acquire and
obtain securities if the stocks could be obtained in a fair and orderly market -- as they
could have been and still can be. There is no sign that the market has been or now is
determining a fair and orderly market. Nor need the purchase of the necessary securities
even move the market very much if at all. After reading the briefs of SIPC and the
Trustee which, as said, made clear that acquiring securities is mandatory, not optional, if
the stocks can be obtained in a fair and orderly market, Objector had research done on the
size of the market for securities comprising the S&P 100, which are the securities shown
on investors' statements. It turns out that the securities in the S&P 100 trade, in toto, in
the billions of shares per month -- approximately three to five billion. S&P 100 Index
turns out that a sampling of individual shares in the S&P 100 showed that they trade in
the range of many millions of shares per day, and that the particular shares shown on the
103
17
November 30th statements generally trade in a range of from five or six million shares per
day to scores of millions and even hundreds of millions of shares each day. S&P 100
forth below is a list of the daily trading volumes, over three months, for the securities
9 This list was compiled from Yahoo! Finance on October 26,2009, http://finance.yahoo.com/.
18
United Teclmologies Corp. 5,170,060
US Bancorp 16,154,000
US Treasury Money Market
Verizon Communications 17,251,100
Wal-Mart Stores Inc. 16,985,100
Wells Fargo & Co. 50,059,800
With a market of this size,lo it is self evident that the shares shown as belonging
market that is not being subjected to artificial influences such as manipulation, but could
be acquired without disturbing the market. Such acquisition would be even the easier
because there is no requirement that the shares be acquired in one fell swoop. Rather, as
is commonly done by traders who buy or sell huge blocks of securities and do not wish to
disturb the market or cause large price movements, the required securities can be
acquired in segments over time, over two or three or six months, let us say. I I
But as far as is publicly known, SIPC and the Trustee did not give thought to
acquiring and providing securities (except for Wang's statement in an obscure internet
publication) even though such acquisition and provision is required, and did not insure
that victims -- who mainly were in complete ignorance of SIPA -- were plainly informed
that SIPC was required to provide securities if this can be done through acquisition in a
10 It is likely that a reason that the volumes of trades in S&P 100 securities is so (surprisingly?) huge is that
stocks in the S & P 100 comprise "about 59 percent of the market capitalization of the S&P 500 and almost
45 percent ofthe market capitalization ofthe Us. equity markets". Standard & Poor's, S&P 100 Fact
Sheet (Dec. 31, 2008) available at
http://www2.standardandpoors.com/spflpdflindex/SP 100 Factsheet.pdf. (Emphasis added.)
II Madoffs statements showed approximately 65 billion dollars in securities owned by investors. The total
collective price of S&P 100 securities traded each month is approximately 1.65 trillion dollars (estimate
based on data compiled from Yahoo! Finance using the closing price for each stock in the S&P 100 on
Nov. 4, 2009, and the three month daily trading average for each stock on Nov. 5, 2009,
http://finance.yahoo.com), in three months is thus about 4.95 trillion dollars, and in six months is nearly ten
trillion dollars. The total dollar value of shares of Madoff investors is thus a bit less than 4% of one
month's trading of the S&P 100, only about 1.3 percent of three months' trading of the S&P 100, and less
than seven-tenths of one percent of six months' trading of the S&P 100.
105
19
NPR INTERVIEW WITH
IRVING PICARD
Untangling Madoffs 'Wimlers' And Losers: NPR Page 1 ot 5
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SIEGEL: And in your most recent report to the bankruptcy court, you wrote that you recovered about
one-and-a-half billion dollars. Before Madoff's investment business collapsed, it claimed accounts
totaling about $65 billion, perhaps an inflated number. Have you been able to determine just how much
money investors had with Madoff?
Manufacturing Slows. Construction Makes Tiny Jump
Mr. PICARD: We've been using as a working number somewhere between 18 and $20 biliion that had Lesson From LeBron: Be Good. But Nol Too Good, At
been deposited when the doors closed on December 11th. 2008, Your Job
Counterfeiters Crank It Down a Notch
SIEGEL: And how much of that money do you reasonably hope to recover?
more
Mr. PICARD: I learned a long time ago that I don't speculate on those things. My aim is to collect as
much as possible. I'm hopefUl that we can return upwards of 50 cents or even more on the dollar to
Business Headlines
people.
From the Associated Press
SIEGEL: I'd like to try to get a sense of which investors are considered winners here which investors
Treasury: 5.6M Hires Qualify For New Tax Break
you should go after. We all understand that, say, very close associates or relatives of Mr. Madoff's who
made a lot of money may possibiy have been in on the swindle or should've known. Some big investors Stocks Start Off August With Big Gains; Dow Up 200
who ran feeder funds perhaps should've known. Obama: US To Leave Iraq 'As Promised, On SChedule'
But why should someone who invested with Madoff in good faith, made some money, paid taxes on it Last updated: 12:03 am ET view more
and is now, say, living in retirement on those earnings, why should that person's assets be clawed
back?
Mr. PICARD: The net winners are people who received fictitious profits. So they got more than they had
deposited. And the only way that they could've gotten that money is that that money was taken
people who have lost money, who haven't been paid back in fUll what they deposited.
And the bankruptcy code provides a mechanism for a bankruptcy trustee. It's called avoidance actions,
to get back some of those funds to redistribute them to the people who lost money. We're talking here
about fictitious profits and somebody being paid with other people's money.
Cool reads for hot days>
SIEGEL: So if I had put $50,000 in with Madoff 15 years ago and I looked at my eye-popping sums
every time when I got a statement from him, what I would be compensated, the amount I would be
compensated to today would be the $50,000.
Mr. PICARD: If you hadn't taken out any other money, that is correct
http://www.npr.org/templates/transcript/transcript.php?storyId=128802589 8/2/2010
Untangling Madoffs 'Wilmers' And Losers: NPR Page 2 of5
SIEGEL: How cooperative are you finding the winners whom you've been trying to reclaim money
from?
Mr. PICARD: Well, we've sent out hundreds of letters and we've gotten very few, if any, responses.
SIEGEL: The longer you do this and the more you learn about Madoff's investment business, are you
more impressed with how easy it was for one to believe in his successes as an investor or are you
more incredulous that one could've not seen through the returns that...
SIEGEL: More incredulous. People should've known, seeing what they were...
Mr. PICARD: Well, I think there were lots of what us lawyers call red flags that people should've picked
up on and that's why we think that many of these people, especially ones that we've already sued, are
in a category of should have known.
SIEGEL: We report on your doings often here and it's good to talk to you at last. But I just wonder,
when we speak of Irving Picard trustee, is there entire a department of Baker and Hostetler do you
have a huge staff that's working on this? How many people are actually working on it?
Mr. PICARD: Well, we, you know, it depends on what the issue is and, qUite frankly, the day of the
week. We have lots of issues. We have lots of people working on this case. I have forensic consultants,
investigators. This is a far-reaching case. This is a case that involves issues not just in the United
States, but issues, we're involved in 12 to 15 foreign countries.
I have lawyers in some of the foreign countries. We brought litigation in some of the foreign countries.
We've been able to free something like $200 million in Gibraltar and British Virgin Islands, the Caymans
and a couple of other places. This isn't just a little case or a case that's solely situated in the southern
district of New York.
SIEGEL: Irvin Picard, the trustee in the Madoff bankruptcy. Thank you very much for talking with us.
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http://www.npr.org/templates/transcript/transcript.php?storyld=128802589 8/2/2010
PRESS RELEASE FROM
CONGRESSMAN KANJORSKI
Page 1 of2
laWi'Sl'1Ce Velvel
"The many complaints of investors after the failure of Lehman Brothers and the Madoif-
Ponzi scheme, along with a number of court mhngs, make it clear that Congress needs to explore
.- a comprehensive overhaUf of SIPA;'SaiCl.-Cliai.fii1an KanJorski. "As part of these efforts, we
- musralso ensure that the SeCUrItIes Investor Protection Corporation, the enflty charged wIth
1i1ijJlementing SIPA, follows the SpIrit Ohne-extstillgtaw and-wcmcs to protect the best interests
of Investors. Omortunately, SIPe has dellIed the claims of customersoasecl on statement . -
'C-balances provided to them by their brokers, yet SIPC expects customers to use those very same
~ statements to report unauthorized trading In theIr accounts. ThIS paradox resul:tsilHl customer's
'~15eingmeanIngless whenever it could harm SIPC, but not when it harms the customer.
We need to exploretfils mconsistency further."
"Now that Con ress has completed its overhaul of the nation's financial industry, it's
time to address the shortcomin s of SIPA, ' SaI Ice hamnan Ackerman. "The Securities
nvestor rotection Corporation has a responsibility and a mandate to provide insurance a ainst
broker-dealer failures, out their response to tlIe l\7IaclOff1:TIiUC[ an other Ponzi schemes has been_
-J?taIly Inadequate. Thousands of imlocent vIctimsremain destitute fl:2!!l.financial frauds because
SIPe IS determined to payout as few claims as possible. SIPC's obdurate refusal to provide
cOVerage fo indirect inveslOlsi5ecomes even more mfUriating given that, for more than a decade,
m=:i:lilli'::io=:n::s:-:an=dl':m
~ip')iC=;-,--jfuf=nd::re:::d:rbCy::t:b::ro::1k::::e=r--;:di:e:::ar:le=rs;::-,:in=-:;::tul:::::n:-:a:"1f"i':fo::r::1d-:::-ed::r:: 3 ill:li'=0=n:::-s-::o-:Cf'::Jd:::-oIITl::::ar::::;s-:I:::-n--:Cm=:s;;:;-l=Ir=an::::Cc~e::--~
coverage to them for less than most Americans pay for an auto insurance policy."
Recent market scandals have exposed faults in SIPA. As a result, the landmark Dodd-Frank
Wall Street Reform and Consumer Protection Act contains several provisions to raise the
minimum assessments paid by brokerages to fund SIPC, increase customer cash advance limits,
and provide coverage for futures held in investors' portfolio margin accounts. Nevertheless,
7/30/2010
Page 2 of2
Cliairnlim'Kanjorski is committed to exploring the need for further statutory reforms. Previously, the
Capital Markets Subcommittee held a hearing in December 2009 to explore these matters, and in March
2010 Chairman Kanjorski sent a letter urging the SIPC's reform task force to look comprehensively at
how best to protect investors.
"Reforming SIPC and expanding the agency's protections are essential to restoring equity and
dignityto the vICtIms of Ponzi schemes, as wetl as ensuring that fLiture victims o:f15f5ker:GeaIerliiI'LITes
""llTICt1fau s ar bett· ec e e assura 1 es :PC was intendea to proVIde," added Vice Chairman
Ackennan. "I 100kJ:orward to this important hearing, and hope It WI ea to mcreased protections an
iiiiproVed insurarice coverag~ for the i.gp.ocent victims of POllZi schemes t1TaLSIPC has left 15e1'll:i1:cl~
Chairman Kanjorski concluded, "In short, this hearing will build upon reforms that recently
became law by exploring the work of the SIPC task force and examining proposals to further modify
SIPA. As markets change, so must our laws. I therefore believe that it is very important for Congress to
consider whether SIPA's current framework adequately protects investors who now trade in a market
that differs dranlatically from the structure that existed when SIPA became law in 1970. Individual
investors will gain greater confidence in our capital markets when they know that SIPC is fully
committed to placing investors' interests first."
###
109
7/30/2010
STATEMENT FROM
MARY SCHAPIRO
Too Many MadoffVictims, Not Enough Money to Go Around, U.S. Official Says Page 1 of 4
e NEWS
By ANGELA M. HILL
Thousands of victims of Bernard Madoffs $65 billion Ponzi scheme may not receive all the monies
owed to them by the insurance agency created to protect investors against the failure of major brokerage
films, according to a senior govermnent official.
''It shouldn't be such a difficult issue but it is," testified Mary SchaQiro, the newly appointed chairman of
the Securities and Exchange Commission, at a rece'i11' Congressional Hearing. "The tragic truth is there is
not enough money available to payoff all the customer claims. " i"
The customer claims are the responsibility of the Securities Investor Protection Corporation (SIPC), the
organization created by Congress in 1970 to be the first line of defense for eligible investors trying to
recoup up to $500,000 oflost investments. The SEC has regulatory oversight of the insurance agency
and, through the Securities and Investor Protection Act (SIPA), is obligated to ensure that SIPC bOlTOWS
funds to payoff its obligations.
Click here to go behind the scenes of Brian Ross' investigation into Madoff with the Kern!, a new way to
experience news.
The congressional hearing, held by the U.S. House Financial Services Committee earlier this month, met
to understand the work of the SEC and to re-examine the gaps in existing regulatory structure that led to
the Madoff and other financial schemes. Congressmen expressed their frustration over how the SEC
could allow the Madoff scandal to happen.
"To have somebody examined eight times by the SEC and other institutions in 16 years and have this
not found when people were calling attention to it shows a structural flaw," said Representative Edward
Royce (R-CA).
Chairman Schapiro said the Madofffraud was "one that the agency tragically did not detect, and not a
day goes by that we do not regret that. "
Seven months after the biggest financial fraud in U.S. history was exposed when Madoffs sons turned
him into the FBI, only about 540 of the more than 15,000 Madoff investor claims have received a
pOliion of their SIPC insurance.
"I think it's telTible," said Carol Baer, a Madoffvictim still fighting to be reimbursed. "People are
110
http://abcnews.go.com/print?id=8223686 8/3/2010