SIPC’s mission is to promote confidence in securities markets by seeking to return customers’ cash and securities when a broker-dealer fails. SIPC provides advances for these customers up to the SIPA protection limits— $500,000 per customer, except that claims for cash are limited to $250,000 per customer. SIPC is governed by a seven-member board of directors. Its membership is, generally, brokers or dealers registered under section 15(b) of the Securities and Exchange Act of 1934. Membership is mandatory for all registered broker-dealers that do not meet one of the limited statutory exemptions.SIPC had 4,773 members. As of December 31, 2010, While SIPC is not a federal agency, it is subject to federal oversight. Under SIPA, SEC exercises what the U.S. Supreme Court has recognized as “plenary,” or general, supervisory authority over SIPC. Specifically, SIPC bylaws and rules are subject to SEC review. SEC also may require SIPC to adopt, amend, or repeal any bylaw or rule. In addition, SEC can participate as a party in any judicial proceeding under SIPA and can file an application in the U.S. District Court for the District of Columbia for an order compelling SIPC to carry out its statutory obligations. Further, SIPA authorizes SEC to conduct inspections and examinations of SIPC, and requires SIPC to furnish SEC with reports and records that it believes are necessary or appropriate in the public interest or to fulfill the purposes of SIPA. All seven members of SIPC’s board of directors are appointed by federal officials: one is appointed by the Secretary of the Treasury and one by the Federal Reserve Board, from among the officers and employees of those agencies, and five are appointed by the President, subject to Senate confirmation. SIPA established a fund (SIPC fund) to pay for SIPC’s operations and activities. SIPC uses the fund to make advances to satisfy customer claims for missing cash and securities, including notes, stocks, bonds, and certificates of deposit. The SIPC fund also covers the administrative expenses of a liquidation proceeding when the general estate of the failed firm is insufficient; these include costs incurred by a trustee, trustee’s counsel, and other advisors. SIPC finances the fund through annual assessments, set by SIPC, on all member firms, plus interest generated from its investments in Department of the Treasury (Treasury) notes. If the SIPC fund becomes, or appears to be, insufficient to carry out the purposes of SIPA, SIPC can borrow up to $2.5 billion from the Treasury through SEC, whereby SEC would borrow the funds from the Treasury and relend them to SIPC. Figure 1 shows the SIPC fund’s balance over the past decade, with the balance falling after the 2008 financial crisis and beginning to recover in 2010. According to SIPC senior management, recent demands on the fund, including from the Madoff case, coupled with a change in SIPC bylaws increasing the target size of the fund from $1 billion to $2.5 billion, led SIPC to impose new industry assessments that total about $400 million annually. The assessments, equal to one-quarter of 1 percent of net operating revenue, will continue until the $2.5 billion target is reached, according to SIPC senior management. The new assessments replaced a Under the new levies, the flat $150 annual assessment per member firm.average assessment for 2010 was $91,755 per firm, with a median of $2,095, according to SIPC. See appendix II for a history of assessments and assessment rates for the SIPC fund. SIPA authorizes SIPC to begin a liquidation action by applying for a protective order from an appropriate federal district court if it determines that one of its member broker-dealers has failed or is in danger of failing to meet its obligations to customers and one or more additional statutory conditions are met. The broker-dealer has an opportunity to contest the protective order application. If the court issues the order, the court appoints a “disinterested” trustee selected by SIPC, or, in certain cases, Under SIPA, SIPC has sole discretion SIPC itself, to liquidate the firm.to select a trustee and trustee’s counsel for the liquidation of a member broker-dealer firm. SEC has no statutory role in the selection of the trustee or trustee’s counsel. SIPC attempts to match the size of the engagement with the capabilities of service providers. If SIPC were not to act immediately, SEC could opt to seek court appointment of an SEC receiver, pending SIPC action, according to SIPC senior management. After SIPC makes its selection and the trustee is appointed, the bankruptcy court holds a disinterestedness hearing, at which interested parties can object to the selected individual and firm named as counsel. The district court also orders removal of the liquidation proceeding to the federal bankruptcy court for that district. To the extent that it is consistent with SIPA, the proceeding is conducted pursuant to provisions of the Bankruptcy Code. While SIPC designates the trustee, that person, once judicially appointed, becomes an officer of the court. As such, the trustee exercises independent judgment and does not serve as an agent of SIPC. Indeed, SIPC- designated trustees and SIPC have occasionally taken opposing legal positions in liquidation proceedings. Under SIPA, the trustee must investigate facts and circumstances relating to the liquidation; report to the court facts indicating fraud, misconduct, mismanagement, or irregularities; and submit a final report to SIPC and others designated by the court. Also, the trustee is to periodically report to the court and SIPC on his or her progress in distributing cash and securities to customers. The bankruptcy court is to grant the trustee and trustee’s counsel “reasonable compensation” for services rendered and reimbursement for proper costs and expenses incurred in connection with the liquidation proceeding. Promptly after being appointed, the trustee must publish a notice of the proceeding in one or more major newspapers, in a form and manner determined by the court. The trustee also must see that a copy of the notice is mailed to existing and recent customers listed on the broker- dealer’s books and records, and provide notice to creditors in the manner the Bankruptcy Code prescribes. Customers must file written statements of claims. The notice typically informs customers how to file claims and explains deadlines. Two deadlines apply. One is set by the bankruptcy court supervising the proceeding, and the other by SIPA. The bankruptcy court deadline for filing customer claims applies to customer claims for net equity and may not exceed 60 days after the date that notice of the proceeding is published. Failure to meet the deadline can affect whether a customer claim is satisfied with securities or cash in lieu of securities. The SIPA deadline occurs 6 months after the publication date. SIPA mandates that the trustee cannot allow any customer or general creditor claim received after the 6-month deadline, except claims filed by the United States, any state or local government, or certain infants and incompetent persons (although a request for an extension must be filed before the 6-month period has lapsed). Once filed, claims undergo various review, according to the Trustee. First, the Trustee’s claims agent reviews claims for completeness; if information is found to be missing, the claims agent sends a request for additional information. Next, the Trustee’s forensic accountants review each claim form, information gathered from the Madoff firm’s records regarding the account at issue, and information submitted directly by the claimant. The Trustee uses the results of this review in assessing his determination of the claim. Finally, claims move to SIPC, where a claims review specialist provides a recommendation to the Trustee on how each claim should be determined. Once that recommendation has been made, the Trustee and trustee’s counsel review it, as well as legal or other issues raised previously. When the Trustee has decided on resolution of a claim, he issues a determination letter to the claimant. The letter also informs claimants of their right to object to the determination and how to do so. The bankruptcy court judge overseeing the liquidation rules on a customer’s objections after holding a hearing on the matter. Decisions of the bankruptcy court may be appealed to the appropriate federal district court, and then upward through the federal appellate process. As of January 27, 2012, the Trustee had received 16,519 customer claims in the Madoff proceeding, and reached determinations on all but two of them. Figure 2 shows a timeline of key events in the Madoff liquidation. A SIPC liquidation of a member broker-dealer begins when either SEC or a securities self-regulatory organization, such as the Financial Industry Regulatory Authority, recommends that a firm’s failure may require SIPC assistance, usually because of theft or other misuse of customer assets and insolvency. If SIPC’s president, general counsel, and vice president for operations agree that a case should be opened, the SIPC president requests authority from the SIPC board chair to begin the action. Upon receiving this authority, the SIPC president selects a trustee and trustee’s counsel after consultation within SIPC. According to SIPC senior management, the SIPC board does not vote on the selections. Instead, the selection relies on the judgment of SIPC senior management in what they describe as a relatively narrow field of specialty. SIPC senior management told us they attempt to match the size of the liquidation proceeding with the capabilities of the individuals and firms that will perform the liquidation.