Opinion ID: 769835
Heading Depth: 2
Heading Rank: 1

Heading: The Securities Investor Protection Act

Text: 2 The SIPC is a private, nonprofit membership corporation formed pursuant to the Securities Investor Protection Act of 1970 (SIPA), 84 Stat. 1636, as amended, 15 U.S.C. §§ 78aaa-78lll. Congress passed the SIPA in response to a rash of failures among securities broker-dealers in the late 1960s, resulting in significant losses to customers whose assets either were unrecoverable or became tied up in the broker-dealers' bankruptcy proceedings. See Securities Investor Protection Corp. v. Barbour, 421 U.S. 412, 413 (1975). To prevent further losses, restore confidence in the securities industry, and provide protection for future customers, Congress created the SIPC, which monitors the activities of broker-dealers and insures customers in the case of a broker-dealer's liquidation. See15 U.S.C. § 78ccc. To cover these costs, the SIPC maintains a fund (the SIPC Fund), which is supported by assessments on members' revenues. Seeid. § 78ddd(c). Virtually all registered broker-dealers doing business in the United States must belong to the SIPC. Seeid. § 78ccc(a)(2). 3 The SIPA regulatory scheme imposes two primary duties on the SIPC: monitoring active broker-dealers and overseeing the liquidation of failed firms. In order to monitor broker-dealers and ensure their continuing financial viability, the SIPC relies primarily on the SIPA reporting system, which requires broker-dealers to file annual audit reports with the SEC and with one of several self-regulating bodies within the broker-dealer industry. See 17 C.F.R. § 240.17a (Rule 17a). These reports must include, inter alia, an analysis of the broker-dealer's compliance with the net capital rule, which prohibits a broker-dealer from maintaining an aggregate debt greater than 1500% of its net capital, seeid. § 240.15c3-1, and other information regarding the broker-dealer's financial condition. Rule 17a requires broker-dealers to employ an independent public accountant to file these reports. Seeid. § 240.17a-5. If the information provided to the SEC and the industry self-regulating body indicates that a broker-dealer is approaching financial difficulty, those entities must notify the SIPC, which, if it deems the broker-dealer to be in danger of failure, may choose to commence liquidation proceedings. See Barbour, 421 U.S. at 416-17. This elaborate reporting scheme is designed to serve as an early warning system that will enable [regulatory authorities] to take appropriate action to protect investors before a broker-dealer collapses. Touche Ross & Co. v. Redington, 442 U.S. 560, 570 (1979). 4 To initiate liquidation, the SIPC may apply for a protective decree in federal district court invoking the protections of the SIPA. See 15 U.S.C. § 78eee(a)(3). If the court finds grounds for granting the application, it must appoint a trustee, chosen by the SIPC, to oversee the liquidation of the business. Seeid.§ 78eee(b)(3). The trustee exercises the same powers that a bankruptcy trustee exercises with respect to a debtor, including the power to distribute customer property, satisfy customer claims, and liquidate the broker-dealer's business. Seeid. §§ 78fff(a), 78fff-1(a). To ensure prompt settlement of customer claims during liquidation, the SIPC may advance funds to the trustee from the SIPC Fund for use in satisfying claims up to $500,000 per customer 1 and for administrative costs of the liquidation. See id.§ 78fff-3(a)(1). Under the terms of the SIPA, the SIPC becomes subrogated to customer claims to the extent it has advanced funds to cover those claims. Seeid.§§ 78fff-3(a), 78fff-4(c).