No.

10-2378

IN THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

IN RE: BERNARD L. MADOFF

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

A. Excerpts from Legislative History

1. 1970 Senate Hearings.... 1

2. 1970 House RepOli 14
3. 1970 House Debate...... 20
4. 1970 Senate Debate.................. 29
5. 1975 Senate Hearings 37
6. 1977 House Report 60
7. 1977 House Debate............................................. 69
8. 1978 Senate Hearings 71
9. 1978 Senate Report............................................. 78
10. 1978 Senate Debate............................................. 84

B. Excerpts from Opinion Below ,. 85

C. Excerpts jiom Oral Argument 93

D. Documents and Order Regarding Discovery 96

E. Excerpts from Brief Below Showing Daily Trading Volumes of

Securities MadoffClaimed To Buy and Sell 103

F. NPR Interview with Irving Picard 106

G. Press Release from Congressman Kanjorski 108

H. Statement from Mary Schapiro 110

 EXCERPTS FROM
LEGISLATIVE HISTORY
 34
Mr. REGAN. Unfortunately that is correct and I for one think t.hose
reguJutions should be strengthened and strengthened immediately.
I see no reason why anyone should be allowed in who has the price of
admission. This is a business, not a theater.
I think business standards should be raised. I am talhng about
the kijowle.c1ge of how to manage a business. It occurs t.o me t.hat. many
of the f:liJure.s, with t.he exception of outright theft and embezzlement
type of failllre have occurred be.cf-l1lse of mismanagement. If we are
gOlJ1g to be called upon throngh self-insurance to underwrite these
risks, then iTe should we]] insist upon a much higher standard and not
be just. wi]]ing to underwrite the poor business judgment, or t.he. sp-ecu-
lahre market judgment of th-e hundreds of individuals who might
want to come into this business because it might be a fast way to make
a buck.
Senator VhLLIAlIfS. So under present sta.ndards marginal firms can
come into the business.
Mr. RE-G-'!.N. Ye.".
Senator ·WILLIAMS. How does your firm protect itself against. the
risk in dealing with these-marginal firms ~ ~. , _.
:Mr.REGAN. You have to be very careful wit.h whom vou trade and
in the light of the ove-r-the-counter market that is the only way you can
prot.ect yourself, sir.
Sen3Jtor WILLIAlIfS. We]], thank you very much, 111'. Regan.
Mr. REGAN. Thank you.
Senator ,VILLIAlIfS. We would like to continue now with 1\11'. John
E. Leslie, chairman of the hoard of Rae-he & Co. and then recess and
return for :i'l1r. Latour, managing partner of Francis T. du Pont & Co.
at approximately 2 :15.
Mr. Leslie, we have your statement. You may proceed any way you
want, presenting the full statement or summarizing if you care to.
STATEMENT OF 'JOlIN"KLESIJE;CHAIRMAN -OF Tlih BOARD,
:BACKE & 00., INC.
Mr. LESLIE.Mv nameisJolmE. Leslie. I lim chairman of the board
ofcBache & Co.,~Inc., New York. Bache is considered to be. the second
largest brokerage ,concern in the. country. We have..over 6,000 em-
ployees and 137 offic8$in-the United States and abroad.· ....
In response to the invitation of Senator ,Villiams I am pleased to
submit some of my thoughts in eonneetion with So' 2348, the proposed
Fed.-er:al Broker-Dealer Insurance Corporation Act. .' . .',.-
I.would like to say at-the outset that the aims. of the bill deserve snp-
poitsince aJ.le}ementof insurance protedion would unClo~lof.emy cone
"tTiliute to remfor~ pu6T:iccorrrutei.1Ce-nTtlm-SB13uritiwirrdu5try;-a11.a-
. wOUlu-a.rsoprovlde. the public WIth a. measure oflilClem:niii-catiun-ili.-
cas~ ofLlmia:tl~1:ITOKeragefirm. ' :. '.. . . .. ....
-:r;-feeI, however, compelleato point-out that these objectives are only
partof a much larger problem which the brokerage indw::;try is facing
today. , .'. . '.
If you permit me, I would like to compare the situation with that:of
a ship. Thj3 first· need is to have a seaworthy ship that cali withstand
a severe storm. The secondneed.isto have lifeboats for the ship that.
can be used if the storm sinks the ship. But obviously the primary
 ,142

STATEMENT BY SENATOR EDMUND S. MUSIUE, ON INTRODUCING THE

AMENDMENT TO S. 2.348

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

THEFTS SEEN AT $20 MILLION

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.

DETEPJORATING SITUATION AT BANKS

A number of stopgap measures have been instituted to b'attle the prcrblem,

including mandatory fingerprinting of matt brokerage firm employes in New
York State: and tighter secaIit:}' !21eaSUres at brokerage bouses 2nd h~Ulks ...~
many brokers, bankers and insul'ers say tbe problem won't bebrongbt under
control fullyunhl all ffjree mdustnes cooperate to estaoiJsb central secuntIes
dep(')§lwfles, coverERC15y; lilsffi iJ ITi:'e, \'. b·ere-nrosf~eilllTIge-s"iTJ_o'Wm'rs1Ji}JL'UU:It!-ue-­
effected sllnply by bookkeepmg entnes. IllIS woulO{'jJ(duwn snarply on-t~
' ~ l e scertiI1c3tes:'tb-ey say.
~''I'e JusfgoE 10geCnd of iilrthaCpaper," exclaims an official at one large
insurance company. "The only question is, wil,l the ini>urance last long enougb
until everybody fin'ally get around to prOViding the answer."
Wbile insurance companies' losses \vith brokErage firms ba v,e been getting
beavier, tbere bave been disturbing signs tbat the situation at banks, who
generally have bad fewer loss problems tbiin brokers, is deteriorating rapidly.
According to the Surety Association of America, a trade group, insurers'
losses with brokerage firms· from securities disappearances 'Rnd other acts of
employe dishonesty were $8.1 million in 1967, compared witb $7.1 million in
premiums received, a ·$1 million net loss; in 1966, the net loss was $400,000:
Figures for 1968 still aren't available, bnt insurance officials say the situation
worsened 'last year. As' for 1969, one executive remarks: "God knows wbat
'figures.will be;.this.J'ear: has been worst of all."
Moreover, tbere ·bas been a r~ent spurt of securities losses at commercial
banks bere, headed by a $13.2 million disappearance of Treasury bills at Morgan
Guaranty Trust eo:'late last month. The Federal Bureau of Investigation early
this month arrested a suspect in Boston in cODl1ection with tbe disappearance,
a preliminary indication that the loss might have been a tbeft.
Indeed, the eas\ly negotiable Treasury bills have been tbe type of s~urities
tbatbave been disappearing most recently. One insurance executive says bis
company canceled two policies with brakers in recent months after eacb firm'
suffered back-to-back losses of TreasurJes'.' . .
"After the' first' loss at· each place, we warned them to take more8afeguiros
in storing the bills," the executive says. "But when tbe same thing bappened
again, we canceled the policies at both firms."

"WE WERE PUT ON NOTICE"

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

II problems conducted iby the Commerce Committee's subcommittee on investiga-

tions, bis letter {jisclosed,butCbairman Staggers turned 'bim dowD.

[From tbe Wasbington Post, Mar. 23. ] 970J

1
"J,'
WALL STREET Is HEADED FOR TIGHTER
(By Philip Greer)
REGUL.!.TIG'Ii"

NEW YORK, Marcb 22.-Tbere is little doubt-,-.a-,t-::-le-a-s-t in tbis observer's mind,

tbat tbe securities industry is beaded into-a period of increased regulation wbicb
will ultimately put it under government oversigbt to about tbe same extent as
banks.
It 'won't bappen soon and it won't be without a bitter 'figbt from WaH Street,
", but two factors point cle.arly in tba t direction:
• Tbe sE'curities industry and the Securities & Excbange Commission bave
: "" sbown no ability to ba ul the industry out. of its vitally important administrative
lV, prublems sucb as exist in tbe areas of commission rates, back officers, anti-
':1' ·k trust .snd pnblic ownersbip. '
,~:', • The pnblicsnd tbe -Congress are becoming increasingly aware of tbe jtmgle-
! W~J,i~e turmoil i.n Wall Street. On Capitol Hill, wbere' 'sE'curities r.eguluti?n us~allY
t', kf,:,fngbtens leglslators, more and more congressmen are expresSlng thelr concern
",'":;tover the fumbling pace of adjustment and reform in tbe Street.
- As an indication of tbe wa of -Con ressmen are tbtnltin , Sen. Edmund l\1uskie
(D-M,lline an ep. 0 n Moss (D-Calif.) bave-proposed a ederal" iokei-
Dea er - epo· r ~COI'P.~~d arrer~I~~e·§eg:.e.!aCneposfClrisiJia-:we-eorp-.--,­
a:Iiif1.1ie're~eeri a sug~af part of tbe p~"t-IansactiQ[iChafu--:==_
wbich would be added to reiuI~.l.SQ!DmlsslOn rates, 1:1e u~ea ~fo:.-6UiId=aJ1illd!o _
roted mvestors from brokerage firmIamr:t~SImr'1TTrlilicatlOns,true, iJut real
-evertbe ess. -n y a year or woago;- 6 Origressman would have botbered
ith sucb ideas.
Tbere is a very real nE'E'd for something like a FBDIC. Last week, McDonnell
Co., a stockbroker for 65 years,admiltE'd it had TUn out of money had bad
close ,down. Ex-e1Jange officials .and officers of tbE' firm insist the liquidation
ill be orderly and that customE'rs will not be bur.t. ThE' final verilict, of 'course,
ill bavE' to wait until the auditors get finished.
Hopefully, McDonnell will fade -out quietly. MaybE' it won't. Or maybe the
ext failure won't be so neat, or ,the OnE' after tbat, wbenE'ver it may Ibe. '
Tbe fact is that people who send their cash into 'brokerage firms and ,those
ho leave their stoCk: certi'ficates with their brokE'rs, have no real assurance----
yond thE' excbanges 'Word-that tbey will ever 'see eitbE'r -again.
:,The Big Board has a slusb fund wbich was 'originally $10 million in cash .and
5 million in standiby credits. ThE' fund is used in liiluidation cases, to loosen
. the clerical jam. 'SometimE's it is usE'd to payback investors whose sbares
ve disappeared in tbe attempt to keep tbe firm alivE'.
.T be excbange -doesn',t talk about it, but word in thE' Street is that t;be casb
rtion has sbrunk to $6 million dollars. (In addition, eacb, firm carrying pub-
-accounts must ,bave a $25 million fidelity bond. Tbat protects customers-up
;,;,. if'.a total $2'5.million-from failurE', ibut it does not cover fra ud.)
";,.8.;U of tbis monE'Y would do little good if one of thE' big firms WE'nt down tbe
rr;.-lftalD. Tbere b'ave been cases~successful,so far-wben thE' excbangE' has worked
ttte,yerishlY to keep a firm afloat because tbe failure could send damaging shocks
li~rough tbe whole industry. .
~T
~.
 FEDERAL BROKER-DEALER INSURANCE
CORPORATION

FRIDAY, APRIL 17, 1970

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

I- 1 This E:;;cbange bas joinel] witb otber Dlnjor self-reglllntory orgilni2ntions

S i 'llH] certain industry groups to formulilte a program for tbe jJur]}OSp of ex-
Is 1 Jl'lUlliug the protection affordetJ to tbe fllnds 2nd seclllitje~ wbicb bro!,er denIers
"',,. I boTJd for tbe inves'ting public,
~
e ,
is be goals of tbis prognlDl will jnclllde the follon'iDg: fir,st, pronding protec-
It tioJ, for tbe funds and secllritip, of customers of a]] bro],er-l]eaJers witbin the
i- J e,lilblisbed frameTI'orl; aDd traditiou of self-regulation; second, (]eve]oping an
II ~ equitable formula of financing sucb il program and assuring tbat it reflects tbe
Ie lj' ubeedtJs and circ11msU!nbcesS~~ ePoch ~eghmeCnt of the ind~nstJ]'y a~d its tCllst?Jll('rs;
1J t lr , presentllJg to t e .'.!ii'G 3nd to t e ongress a UJll ec anu cons rUC[]Ve ap-
",:. J,]'uneb ollbehalf of tbe entire securities industry.
il The qlle~tion of insurance protection for customers of member nrms is in-
a e~:rlea'blr bound up witb tbe broader questions of member finn capital require-
~'" wents, membersbip st,andards, nnancial responsibility, and operational prO-
a- l c"dures, Tbese factors, in turn, are tied to tbe way in ,vbleb self-regula tion
id t witb appropriate SEC oversjgbt, governs tbe brokerage cOillmllnity,
,r T Congr€ss recognized tbe lllliqlle cbaracter and desirability of self-regulation'
~r ;1 "ben it framed t.be Securities Exdj~nge Aet 36 years ago, by writing into tbe
~,Iaw a positive responsibility for tbe industry to regulate itself, subject.J.Q. SEC,
~:"lI'erSighL III tbe 36 years since tben. tbis original COllgresSlUDal lntenl bas been
• ;reaffirmed frequently, and in tbose years an elaborate and effective syst€m' of
k- ,a';psAminatiOnS, survej]]ance and compliance procedures h,as b€ell developed to
ed j\Jlrotect tbe pubUc, tbe broker-dealers witb wbom tbey deal, and tbe market
,ll i 'places they use.
IS, ~ ~, One measure of tbe effectiveness of tbe system tbat bas developed is tbe fact
'? \l1Jat in tbe tbree-and-a-b,alf decades ;:ince the passage oJ tbe Securities Ex-
'icbAnge Act,no public customer of an American Stock Excbange meill'ber or-
;'gauization ever suffered financial losses because of tbe insoll'ency of a firm with
~b, "-",.",,,bicb be dealt.
CONCLUSION

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~.- - -

STATEMENT OF ROBERT M. GARDINER, CHAIRMAU, LEGISLATION,

COMIVIITTEE, ASSOCIATION OF STOCK EXCHANGE FIRMS; ACCOM- ··t
P ANIEDi BY DR. LEON T. KENDALL, PRESIDENT, ASSOCIATION OF..
1
i
STOCK EXCHANGE FIRMS, AND RICHARD O. SCRIBNER, GENERAIi'1
COUNSEL ',F,)
.. _..... . . . .. . ... . ....~j
Mr. GARDUmR. My nan1e is Robert M. Gardiner. 1"fi,ni "chairm.anof,i.
the. legislation comn1ittee of the Association of Stock Exchange Firms"'!
and mannaging partner of Reynolds & Co., a member firm of t.he Ne~1~;-j
York Stock ~xchange. Accompal!ying me today are Dr.. LeonJ{ixl
Kendall, preSIdent. of the AssoclatlOn of Stock Exchange FIrms;p..n:~'"
RiC-hard O. Seribner, its general counsel. We appear here to pre.S~~~
the views of the association on Senate bill 2348. ."
The association's membership c01l1lJrises 500 securities firms at'
whom are members of t.he New York Stoek Exchange. In additi
many of these firms are also members of the American or reg\Q
stoek exchanges. Of course, the vast majority belong to the Natt
Associations of Securities Dealers, Inc. .:.
It has been estimated that upwards of 85 percent of all seeu,i'
business, both listed and over the cOlmter, is transacted by or thi¢,:
members of our association. Our members have offices in every'
in the Union and many foreign countries. These firms are head'
tered in New York City and metropolitan areas throughout the
tion; some are very large and others relatively small; most e#.'
primarily in the retail securities business while others emphasi
stitutional sales, underwriting, asset management and otherr'.
activities, or are specialists or floor brokers on the New York'
Exchange.

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

.iF!l~~d supervlsory controls to lInnt the pOSSJbllItles of bank or savmgs

~~J:ldloan failures. The crucial factor of public confidence was further
flJ.!:Ittressed by safeg1.1arding ·the savings of individual depositors
'~1irough deposit insurance.
~~The -language employed in S. 2348, encompassing terms like "insured
1ll?loker," "insurancec1 dealer," "actuarial considerat.ions," "insurance
.~

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,"

We find it is actually more to the. customer's best interests as well as '

our own if we have the securities with us a.nd if he wants to sell them.
he can sell them immediately. 1£ he wants them, we put thein in transc> .~'
fer and send them-for us it is easier and for our ease we encourage j,:
retention by the firm. ' .

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

.--lLecretal:-:v. KENNEDy. Thank you, 11,'11'. Chairman and members of

the committee. " .
I appreciate thisoppol'tunity to present the views of the adminis-
·tratiOLl on the proposed legislation to provide protection and illSur-
ance against certam nonmarket losses to customers of brokers a.nd
dealers ill securities.
The need for such protection is clear. That need was recognized'
mOre than a yenr ago when. Senator Mriskie introduced a bill to estab-
lish a program of insllrance for the protection of securities industry
'customers.. ..' .
And I am sll~~ you l1i:e. a~an,? that President 'Nixon, in his address
to the Nadon all, ECOllbmic Pohcy ·anclProductivity last mOllth, specir:---
.~ ~ically e:rtclQrSmi Lire _~ulicept ~~ il1.~su~an~e- pl"otec11o~for invesEO.rs iil
seqmtles: He sald: ." . . .,:. ~-:--,:~,-~.- ..-.---.-:-:-~---. ~'--'~
,~o.furthel""protect·th~ 's'mallinvestor, 'I':supportthe- estabHshmeq.t''-of· ,Hi inc
, surauce cor-p-ol'ahou wIth a Federal !lac~stop to guarllntee i:tr'e: ip:vestoc 'llga;lns'c'
'L~hatcoUlC( lie caus~d by' nnaucLaL llitIkutties: Of brokerage no-uses, Wblle---
-.mls would' not affect' the' eqliLLy rtslrtlTIit-i.13-aL-wa:ys''"1!resenETIL-stocli::<....marKe-t
: llivestment;' it ·ivUt-irsSULt5, the· investor th~TIrbtlttrlJ-e-tlr~Ues:-in--
":(iUStry Ltself does llottiecome: cause toe .coucern: "'_ ' . ..' " , "
For obvious l'ea.sons, the SEC and' its able' staff have ea["~ied tlli:\
bUl'denfor' the administr::ation·iin:refining.;the ideas that have b~en
presentetl-over the past year 0[" so- in,this area. ' . .-
During the past month, the SEG'and the a:dministcatiqn ha'lre been
working· intensively with represent[\;tives of the industry to develop
a COlllmon position, The results of these efforts are incorporated)n
the version of the bill which"Chairinan Budge will present to you this
lllornirig..' '. '. ." ... ,. ',-' , ' . '.
This committee is well "aware. of .the complexities in ul1Cling equit-
able and meaningful answers tOo the difficult problems raised by cus-
tome"!.i insurrtilCe far the securiti~.s· inclustry. I thip.k, hO\';CVT.f, that
the version of the, bill which will b~ presented by Chairm:1ll Budge
.toclay deals effectively with these com p lexities.
e.'Iy function this ll10rnillg is first of all to confirm to this committee
the importance the administration a.ttaches to the quick passage of this
legislation. In the Treasury, we are particularly conse,ious of the diffi-
eulties thait call be created for financial markets-and for the economy
that depends on the functioning of those markets for its financial
needs-by any loss of eont1dence on the part of investors in the institu-
tinn,ll arranQ:emeLlts in those ma,rkets. 'VVe belie,ve tha't the 11resenc bill
i\'illltelp subsbllltially to preserve th8.t confidence.
S~condl'y. I shoulcllike to assure this subcolllmittee that the major
['olley decisions incoq;o~'ated in tilis late;:;t \re.rslon of the bill have been
re\"ie"ed by the administra.tion and h<l.~re- its endorsement.
In i'iew 'of the. i1l1110rtance of this legish1.tion and the t.ime element,
the Commission Ilfl.c! been \\-od;:ing- closely \\-ith other interesteel ag;ell-
cies of.the GO\Temment ill dei'eloping its views.
,:\s r hn.'.'e "Ireacly indicated, that dose cooperaton has c.cmtillucd
ill rC'c.ent "-Beko;, «Lld the pre:~e~,t. d,',1 ft bill is twly a jOillt. [H·i:>dl.l.-:t, I-'(Jtll

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
------ . -~"'~-~"~"""""~=~"""""-"".''''''-.,-.---.

At tbe hearings before the Subcommittee on Securities of the Senate COlli-

mittee on Banking and Currency on JUly 16, 1970 with respect proposed legis-
lation to protect investors against loss due to a broker-dealer's financial difficul-
ties, Senator vVilliams requested a memorandum with respect to possible
amendments to the bankruptcy law contained in the proposed Securities Investor
Protection Act of 1970 a draft of which was submitted for the record during tliose
hearings, This memorandum is submitted in response to that request. Hereafter
in thi,s memorandum reference will be made to tbat draft bill ~"bich is dated
July 16, 1970.'
The bill does not in fact amend tbe Bankruptcy Act in any way. Rather, the
bill contemplates tbe liquidation of broker-dealer firms in financial difficuities,

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.

INVESTMENT COMPANY INSTITUTE,

Jnly 17, 1970.
Hon. HARRISON ..A.. WlLLllM:S, Jr.,
Ghainnan, SubcDmmittee Dn Securities, Senate Banking and Clt7TenCY Gom-
mittee, HDuse Df Repl'esentatives, Washington, D.G.
DE.A.R 11m CHAIRMAN: This letter is written on behalf of the Investment
Company In&titute""which is me na'tlOhal "a$SDctnt~H"ttl'td-i-udustry:­
Its membe'f'fMl:re 322 mutual funds and their investment advisers and principal
underwriters. Our mutual fund members have over 10 milliDn sharehDlder
accounts, with assets Df about $40 billion, cDmprising over 90 percent Df the
assets of all U.S. mutual funds.
We wish tD express, for YDur Committee's consideration, our views Dn the
bills to establish "a system of insurance for customers of broker-d~
Unable tD meet theIr obligations tocllstomers. .~-~_._~------
I At tile outset It should be "made elear that'the Institute strongly endDrses the
principle embDdied in these prDposals. We believe that reasonable insurance pro-
tectiDn should be provided tD protect investDrs against the insDlvency Df brDker-
rleafers. "Frii·therrii6i:e,"srnceultimate reliance-f6i'the "ftiudillg of such an insm"
ance program is on tbe U.S. Treasury, we believe that there should be reasonahle
controls Dver access to public monies and affirmative governmental pDwer and
respDnsibility to fashion rules designed to millimize the risks fDr which insurance
is prOVided. In accDrdance with this belief, we have no reservation concerning
the partticipatiDn of all registered hroker-dealers to the extent that the "activities
of such brDl;:er-dealers create the I;:illd of financial risks against which the bills
are directed.
We also believe in the principle that the CDSt Df the insurance should he borne
by those whD create the risk For this reason we urge that the insurance proposal
uHimately adDpted should contain a statutory exemptiDn frDm mandatDry par-
ticipation fDr those brDl;:er-dealers who do nDt hold and utilize ill their own
husiness operatiDns customers' free credit "balances aud customers' securities.
The justification for this exemptiDn would be that the exempted hroker-dealer's
business is nDlt tbe type that presents the risl;:s that the insurance prDposal is
designed to guard against.
Broker-dealers whose type Df busilless, by clear objective standards, does not
involve the risks intended to he insured against should not, in fairness, be 1'13-
quh-ed to finance an insurance prog-ram for others whose business does not involve
such risks. The standards for exemption from mandatory participation can ancI
shDuld be written illto the statute, rather than a requirement of universal par-
ticipation by all brDker-dealers with exemptive powers given tD the SEC perhaps
on a case by cases basis.
In this connectiDn, it is important to summarize the pDsitiDD of a mutual fund
underwriter. .
The typical mutual fund organization is cDmposed of three compDnents; the
investment company, Le. the mutual fund itself, the principal underwriter 1 and
the investment adviser. The investment adviser CDntracts with the fund tD pro-
vide advisory and aclmiDistrati~e services for which it is 'paid a fee, commonly
known as the advisory or management fee. The fund underwriter coutracts with
the fund to arrange fDr the distribution of the shares of tbe film! to the public.
The I1nderwriter receives its compensation by retaining a portion Df the sales
charge that an investDr pays when he purchases sucb shares. Often the uuder-
writer a"nd the adviser are a single entity. Where they are separate companies,
they are "usually, but not always, under common CDntroi. Because the underwriter

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.)

*1 *5254 P.L. 9]-598, SECURITIES lNVESTOR PROTECTION ACT OF 1970

HOUSE REPORT (INTERSTATE AND FOREIGN COMMERCE COMMlTTEE) NO. 9]-]613,
OCT. 21, ]970 (TO ACCOMPANY H.R. ]9333)
SENATE REPORT (BANKlNG AND CURRENCY COMMlTTEE) NO. 9]-]218,
SEPT. 2], ]970 (TO ACCOMPANY S. 2348)
CONFERENCE REPORT NO. 9]-]788,
DEC. ]8,1970 (TOACCOMPANYH.R. ]9333)
CONGo RECORD VOL. 116 (1970)
DATES OF CONSlDERATION AND PASSAGE
HOUSE DECEMBER 1,2], ]970
SENATE DECEMBER] 0,22, ]970
THE HOUSE BILL WAS PASSED IN LIEU OF THE SENATE BILL. THE HOUSE REPORT AND THE CON-
FERENCE REPORT ARE SET OUT.

(CONSULT NOTE FOLLOWING TEXT FOR INFORMA-

TION ABOUT OMlTTED MATERIAL. EACH COMMlTTEE REPORT IS A SEPARATE DOCUMENT ON
WESTLAW.)

HOUSE REPORT 1'10.9]-]613

OCT. 21,1970
THE COMMlTTEE ON INTERSTATE AND FOREIGN COMMERCE, TO WHOM WAS REFER..lZED THE
BILL H.R. 19333) TO PROVlDE GREATER PROTECTION FOR CUSTOMERS OF REGISTERED BROKERS
AND DEALERS AND MEMBERS OF NATIONAL SECURITIES EXCHANGES, HAVING CONSIDERED
THE SAME, REPORT FAVORABLY THEREON WITH AN AMENDMENT AND RECOMMEND THAT THE
BILL AS AMENDED DO PASS.
THE AMENDI\.1ENT IS AS FOLLOWS:
STRIKE OUT ALL AFTER THE ENACTING CLAUSE AND INSERT A NEW TEXT WHICH APPEARS IN
THE RECORDED BILL IN lTALIC TYPE.

*5255 PURPOSE OF LEGISLATION

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

IS JUST A MATTER OF TIME UNTIL THE LIQUIDATION IS COMPLETED, BUT, UNFORTUNATELY, IN

SOME SITUATIONS THE CUSTOMER NEVER FULLY RECOVERS THAT TO WHICH HE IS ENTITLED.
THE PROPOSED LEGISLATION WOULD PROVlDE FOR THE ESTABLISHMENT OF A FU1'm TO BE
USED TO MAKE IT POSSIBLE FOR THE PUBLIC CUSTOMERS IN THE EVENT OF THE FINANCIAL IN-
SOLVENCY OF THEIR BROKER, TO RECOVER THAT TO WHICH THEY ARE ENTITLED, WITH A LIMI-
TATION OF $50,000 FOR EACH CUSTOMER ON THE AMOUNTS TO BE PROVlDED BY THE PROPOSED
FUND.
IN ADDITION, THE LEGISLATION MANDATED A GENERAL UPGRADING OF FINANCIAL RESPON-

14
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 H.R. REP. 91-J613 Page 2

SlB1LlTY REQUIREMENTS OF BROKERS AND DEALERS TO ELlM1NATE, TO THE MAXIMUM EXTENT

POSSlBLE, THE RJSKS WH1CH LEAD TO CUSTOMER LOSS.

BACKGROUND AND NEED FOR TH1S LEGISLATION

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.

*5274 SECTION S(B)-COURT ACTION

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)-COMMISSION PARTICIPATION

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.

SECTlON 6(A)-GENERAL FUNCTIONS OF TRUSTEE IN LIQUIDATION PROCEEDmGS

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.

SECTION 6(B)-RULES APPLICABLE TO LIQUIDATION PROCEEDmGS

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.

H.R. REP. 9]-1613 Page 20

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.

SECTlON 6(C)-APPLICATION OF BANKRUPTCY ACT IN PROCEEDINGS AND TO TRUSTEE

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.

SECTION 6(D)-NOTICE OF PROCEEDINGS

*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.

SECTION 6(E)-SIPC ADVANCES TO TRUSTEE

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

OFFICE OF THE GENERAL COUNSEL,

WASHINGTON, D.C, OCTOBER 2],1970.
HON. HARLEY O. STAGGERS,
CHA]RMAN, COMMlTTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTAT]VES, WASH]NGTON, D.C.
DEAR MR. CHA]RMAN: THE DEPARTMENT WOULD UKE TO TAKE TJ-IlS OPPORTUNlTY TO COM-
MENT ON H.R. ]9333, TO PROVlDE GREATER PROTECT]ON FOR CUSTOMERS OF REGISTERED BRO-
KERS AND DEALERS AND MEMBERS OF NATIONAL SECURlT]ES EXCHANGES.
A REPRESENTATIVE OF THIS DEPARTMENT TESTIFIED BEFORE THE SUBCOMMlTTEE ON COM-
MERCE AND FINANCE OF YOUR COMMlTTEE IN SUPPORT OF A JOINT ADM1N1STRA TION-SEC-
INDUSTRY BlLL ON JULY 9,1970. TI-llS BILL WAS SUBSEQUENTLY INTRODUCED BY THE CHAIR-
MAN OF THAT SUBCOMMlTTEE AS H.R. ]8458. H.R. ]8458 WAS THE PRODUCT OF EFFORTS TO RE-
SOLVE DlFFERENCES AMONG VARJOUS BILLS AND APPROACHES SUGGESTED AND PRESENTED
TO YOUR COMMlTTEE OVER THE PAST YEAR.
ON JUNE] 7, 1970, PRESlDENT NIXON, IN HIS ADDRESS TO THE NATION ON ECONOMIC POLICY
AND PRODI)CT1VlTY, SPECIFICALLY ENDORSED THE CONCEPT OF ]NSURANCE PROTECTION FOR
TNVESTORS IN SECURJT1ES. H.R. 18458 WOULD HAVE ESTABLISHED A PRIVATE, NONPROFlT IN-
SURANCE CORPORATION, WlTH A FEDERAL BACKSTOP OF LOANS UP TO $1 BlLLlON TO GUARAN-
TEE THE lNDlVlDUAL INVESTOR AGAINST LOSSES UP TO $50,000 THAT COULD BE CAUSED BY FI-
NANCIAL DlFF1CULT1ES OF BROKERAGE HOUSES.
H.R. 19333 RETAINS THE BASIC PRJNCIPLES AND PURPOSES OF THE JOINT ADMINISTRATION-
SEC-INDUSTRY BILL.
THE DEPARTMENT RECOMMENDED A CHANGE IN ASSESSMENTS WHICH WAS ADOPTED BY
BOTH THE SUBCOMMlTTEE AND THE FULL COMMlTTEE. AS NOW WRJTTEN, A ONE-HALF OF I
PERCENT ASSESSMENT ON GROSS REVENUES OF MEMBERS IS IMPOSED UNTIL THE FUND
REACHES $150 MILLION, NO MORE THAN $50 MILLION OF WHICH CAN BE CONFIRMED LINES OF
CREDlT AFTER DECEMBER 31, 1973, AND AT ANY TIME THE CORPORATlON HAS BORROWING
OUTSTANDING. THIS RATE OF ASSESSMENT WOULD BE REIMPOSED AT ANY TlME THE FUND
FALLS BELOW $100 MILLION, EXCLUSIVE OF CONFIRMED LINES OF CREDlT. A ONE-FOURTH OF I
PERCENT ASSESSMENT WOULD BE IMPOSED WHEN THE FUND AGGREGATES BETWEEN $100 MIL-
LION AND $150 MILLION, EXCLUSIVE OF CONFIRMED LINES OF CREDlT, WHlCH WILL ALLOW A
GRADUAL PHASE OUT OF CONFIRMED LINES OF CREDlT.
TWO OTHER MAJOR CHANGES WERE MADE IN H.R. ]9333. THE FIRST CHANGED THE COMPOS1-
TlON OF THE BOARD FROM FlVE MEMBERS APPOINTED BY THE PRESlDENT FROM THE GENERAL
PUBLIC AND]O BY THE INDUSTRY, TO TWO MEMBERS APPOINTED BY THE PRESlDENT FROM THE
GENERAL PUBLIC AND FIVE FROM THE INDUSTRY. FURTHER, AT THE TIME OF ANY APPLICATION
BY THE CORPORATlON TO BORROW FEDERAL FUNDS, THE PRESlDENT WOULD APPOINT FOUR
ADDITlONAL MEMBERS FROM THE GENERAL PUBLIC TO SERVE FOR SUCH TlME AS THE FEDERAL
LOAN IS OUTSTANDING. THUS, THE PUBLIC MEMBERS WOULD HAVE A SIX TO FlVE MAJORlTY ON
THE BOARD DURING THIS PERJOD.
*26 SECONDLY, H.R. 19333 WOULD EXEMPT CERTAIN TYPES OF BROKER/DEALERS FROM MEM-
BERSHIP IN THE CORPORATlON, WHICH WE UNDERSTAND IS BASED ON THE MINIMAL OCCUR-
RENCE OF RJSK TO CUSTOMERS OF THOSE BUSINESSES. THE JOINT BILL CONTAINED NO EXEMP-
TlONS AND THE DEPARTMENT CONTINUES TO FEEL ANY EXEMPTlONS OF ANY CLASS OF OR IN-
DIVlDUAL BROKERJDEALERS, IN WHOLE *5281 OR IN PART, SHOULD BE DETERMINED ADMIN1S-
TRATlVELY BY THE SEC THROUGH RULES AND REGULATlONS.
ON BALANCE, HOWEVER, THE DEPARTMENT FEELS THAT H.R. 19333, FAIRLY INCORPORATES
THE OBJECTIVES OF H.R. 18458 TO INSURE CUSTOMERS AGAINST LOSS FROM BUSINESS FAILURES
OF MEMBER BROKER/DEALERS IN THE SECURlTlES INDUSTRY.
IN VIEW OF THE FOREGOING, THE DEPARTMENT RECOMMENDS ENACTMENT OF THE PROPOSED
LEGISLATlON.
THE DEPARTMENT HAS BEEN ADVISED BY THE OFFICE OF MANAGEMENT AND BUDGET THAT

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.

 [!CCC mlJer 1, 197'0 CONGRESSIONAL RECORD -HOUSE 3934J"
h tatement of tlle managers on the such as [: "00!13 tidE security holder. N The Clerk caned thE 1:011, 2J1d ti,e fol.
j!l1~e ~ ula be lIlserted after liDE 17 on and requiling "clear and convincing" lov.-ing Members fallen to anSWEr t.o their
\eP ee st~e House. The following Se!:>' Ev:!dence. The cGnference accepted the names:
l'"rt 0 of the eonference report: simpler SenatE 12.ngue.ge. Ti1is of course fRail No. 372]
0
;:.tJlfc 3 nie.-ence a"Teemellt tc1)OTVE thE- is .one of the t.ig differences between the Abbitt F2110ll Nedzf
-rJ" CU!. 0 House and Senate bills. If we are 1villing Adr.ir ?arbstein C'P-UlFE
-"nEf. "fEb on. to re]y on the general fairness and tbe AAJCXfi.1JdEl' Fasce1l O'KonskJ
"'.,. on page 30 in lines 19 and 28, s.bl ey Ford, OttingEr
r.,.~o. 32ta) sbouJd be changed to read, ability of OUT courts, this should be ASJJi::ali. WilHs.mD. PeUy
""cuon adequate protection to fund managers Elanton Ben"y Porem.s.u Pike

.~ •...
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
The recent extended decline in the se-
curities mar],et has focused 8 LLention on
problems wl1ich occur when a b]"oker-
deale]" encounters financial difficulties
"'llich result. in the closing and Jiqllida-
tion of the firm. In t.his circumst.ance,
t.he investor sometimes has:; l1ard Ume
getting his money back. Sometimes he
does not get. it.. Sometimes he does not
get it all.
In view of the condition of our market
today, as chairman of the Committee
on Interstate and Foreign Commerce,
I would like to state at the open-
ing that I propose to have the commit-
tee make a complete study of the secur-
ities market and exchanges in the com-
ing session of the Congress.
Mr. Chairman, I would like to em-
'15hasize at the outset oj tllis dlscussJOn
, ~E]Jropnsect-reg,'Sl1It1mr15Ll~d
.-l;(rpl'Citt:eLcustomers;-the-more-than-26
willi on Affierrc-a:l1SVJlTIJ-111l,re-tIfV-ested
part oj theIr savmgs 111 shares 01 AmerI-
can corporations. The bill is not designed
to protect or to save Wall Street or any
broker or dealer or any stock exchange,
because they go in to business with their
eyes open. But this is intended to pro-
tect the consulm!TSilnd-IJw&e--wJ:1G-i.l'l=
'vest. It woWd protect them 0:9 ll"qUlr-
iIlg the new SecullLIes InvestOl PJote-c-
diall CoIPOl atiOlI to est-a-bmh-a-fun-ct-into
~Cll a!',sessments Imposed upon m~.~
bers oj the SeCUritIes busmess woWa be
PB.-ld. I~e lUn~ woo:terbe uSed to protl'!ct
tlie pu IC cus omers in the event of fi-
nanClaI insolvencIes of broker-dealers:
WIt1lli11mi ta tion of $'5iT,OOlTforeJI'C'hlll-"
vestor on ·the market. The initial fund
would be $75 million raised by a one-
time assessment of one-eighth of 1 per-
cent of the gross revenues on all mem-
bers of.the corporation, and by confirmed
lines of credit which have been nego-
tiated by representatives of the industry
with private lending institutions. The
bill would require assessments of one-
half of 1 percent of gross revenues to be
levied until the fund has been built up
to $150 million.
I should say at the start that $3 mil-
lion would be paid into the fund by the
broker-dealers themselves out of the
trust fund they have. and the $7 million
raised by the assessment of one-eighth
of 1 percent. The other $65 million would
be raised by lines of credit from banks.
Then the assessments would go to one-
half of 1 percent until the fund is built
up to $150 million.
The lines of' credit would then. be
phased out until there is a cash fund of
$150 million, and then the Corporation
can raise or lower the' assessment. as
needs be to keep the fund at this level.
The bill then' further provides that,. in
cases of e)llergency, they may borrow $1
billion indirectly from the ·U.S. Treas-
ury. But-Imight say this,that the Direc-.
tors of the Corporation' are·made up of
five men 'Jromthe exchanges and two
fromthepiiblic.~·:rftheyhaveto borrow
from the Federal Goverllli:lI~rit, then the
President has to appoint four more pub-
licmembers' iODJake a majority of public
menibers
roWing Can
onbe 'ihe~:i3dar!'i before· any' bor-
made; . . '..
The corporatiOIiIiiust siltisfY the Fed-
eral Government that they have a plan
CONGRESSIONAL JRJECOlRD - HOUSE
under wl1ich repayment will be made and
tl1at plan will have to satisfy the SEC,
the Treasury, and the Federal Govern-
ment before any lending is done.
Mr. GROSS. Mr. Cl1airman, will the
gentleman yield?
Mr. STAGGERS. 1 am happy to yield
to the gentleman from Iowa.
Mr. GROSS. Jf this bill is designed to
protect Mr. and Mrs. John Q. Public in
their investments and dealings in the
stock mar](et, wl1Y are there only two
public members on this Board o.f seven
to administer SIPC, the Securities In-
vestment Protectio;) Corporation?
Mr. STAGGERS. I might answer the
gen tleman in this way: It is only to use
the money that has been raised by the
industry Ll1emselves. They are only using
their own money that tl1ey have all paid
in.
Mr. GROSS. Let me ask the gentleman
this question, if he will yield further.
Where in the world do you suppose the
stockbrokers are going to get the money
that you call "their money"? They are
going to increase th eir cost of doing
business and take it cut of the pockets
of Mr. and Mrs. John Q. Public. This
business about using their own money
just does not add up. .'
Mr. STAGGERS. The gentleman does
not understand, because be.fore they can
increase any payments from John Q.
Public, as you call him, they have to get
approval from the SEC. This is regulated.
Mr. GROSS. If the gentleman will
yield further, the Members of the House
are ca]]ed upon here today to pass upon
thk bill and not something that may be
worked out in the dim and distant future,
and, for the life of me, I do not under-
stand why, and I hope someone will ex-
plain, why there· are only two pUblic
members on this Corporation Board of
seven members that is designed to pro-
tect the investing public.
Mr. STAGGERS. I would say this to
the gentleman from Iowa, that this is a
regulated and self-regulated industry.
We are not trying to take 'over that in-
dustry. We are trying, with two public
members appointed by the President, to
keep an eye on what is going on and to
see what is going on regularly and to
have them report back to the SEC, which
is the public agency. The SEC is the rep-
resentative of the public;' appointed by
the President to serve in this agency' and
. to oversee all the broker-dealers of the
land. This is just an added oversight
which we are. providing for in this bill.
Mr. GROSS. If this is a self-regulating
industry what in the world are we doing
with this legislation here today and why
have a Securities and Exchange Commis-
sion insofar as the SEC's interest in the
broker-dealer phase 'of the stock market?
Mr. SPRlliGER. Mr. Chairman, will
the gentleman yield? . The stock exchange is under,.ex.
Mr. STAGGERS. I yieJd to the gentle-
man from TIlipois.
Mr. SPRlliGER. Mr. Chairman, I think
if 'all these assumptions of .the gentle-
man from Iowa :were tr~e, I would, be
inclined to agree with. him. As long
.. ,as i:n:iblic funds are .notused-;-;fu.other
words,the assessments aI:e individually
upon the members wh(dake' part-then
they are in the majority. It is possible
December 1 , 1,
. n-i I)
under this bill that they can bar ., ..
tJ1e Treasury. At that point t~O\·'. _'lu,r,
dent t.hen appoints fOllr. ~"11' el "':':"j.
1113 J.:"ES 1. h e. pU tl
" In t.he . nlnjOl'i\"..
i lC
Ic 1 " )',:Y:
when publIC funds are used. t.h~;l· ,:"";'
Government itself, representing I.h; I,"',';
IIC, sre lJ1 the maJorrty and h.;.·.···,·
majorlty on the C0l11nljs~jon and ca~·j\.:'il
ulate. as tJ1e gentleman Hom Iowa I •."
nlind. 1,,:-, :!1
Jt is not assumed they will bone.-
money from tlle Federal Government r;';'
the minute they do, then the makeu' ,(,t
the Commission changes. )I ~I ,.;,
Mr. GRO~.'3. Mr. Chairman, will tt,. '.:o-~,
gentleman YIeld so I may ask a quest; .:;
I wiJl be brief. .0.,. ."
Mr. STAGGERS. I yield to the gent";~.:.)!'"·
n,an from Iowa. '~'. 'i.t·
Mr. GROSS. But all the financing \,.:li t P
eventually come out of the public POCk(-l.
There vnll be added costs, and the ;'e'i~;/'
tJeman well knows it. ~//; ..
Mr. SPRINGER.. L~t me say this.W;;
are bopmg that thIS Industry can reglii"
late Itself. We have noted in many 1..'1/
stances that tIle attempts at self-regi.J~';
lation have be~n very good. We coull!
pomt to many mstances where the Na~
tional Association of SecuritiesDea"
bas done a good job. In fact, somer
they wanted to go beyond what theCa
gress or this committee or the SECp!
posed, so I do not say they are not·S
sponsible. I just say there are cert
firms which are not strong. For thes'
pIe reason that we do have a martaT
rate when we have what I would·£~{
a recession in the stock market, so'
thing had to be done about it. So··t
would like to regulate themselves by"
sessing themselves. But if they do co,
to the Federal Goven1ment for that' "
pose, then there must be four new'i:Q
bers appointed, which does guard':'(f
funds. I will explain this further when
get a chance. '
Mr. CELLER. Mr. Chairman, will,:'
gentleman yield? . ,':'::
Mr. STAGGERS. ! yield to the ge .
man from New York. .,
Mr. CELLER. Mr. Chairman, 1, to<k:
concerned, as is the gentleman";(
Iowa, that there is an insufficient re
sentation on the part of the publi
the first stages of this matter, ther
five members, all professionals, who.
familiar with the' stock exchange::'
we have only .two members of the pu
There is a vast public, interest over,.'
beyond the second stage, where ·Gov.
ment may be called upon to lend ',n
a billion dollars. There are some -30..
liOn investors in secUl·ities in this.c
try. ., "",
Most of those tradings with refer
to t,hose securities go through tpes
changes. If that is not the public'
est, I do 'not know what is the .p
interest. . . '.
criticism now because of its condu
has been condlicting itself like a·,p
club 'and not in the public int'erest,
high tiin"e that direction was ,foe
upon the stock exchange to see tlJ)!..
it is no longer conducted as membe
~pri'irateclub but that. thep)l~lie::_
est' aJso must be' considered. . 'i:
Wheit"we"ha've'this grcnip of',
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
of t!le SEven appointed by the people who
put up l.he money. The other two mem-
bers are appointed by the President.
The distinguisJled gentleman from
]o','a IM1'. GROSSj raised a question, as
did (.jie distinguished cJlairman of the
Judiciary Committee. here a few mo·
ments ago. Tl1e committee Jlad t.he feel-
ing that as long as they had their funds
involved in this in t.he form of an assess-
ment they ought to be able to regulat.e
and should regulate themselves.
Now let me say this: They do not form
t1l.is corporation and operate independ·
ently. The rules and limitations on the
operation of. this are laid down by the
Securities and Exchange Commission.
I do not want somebody to tillnk that
here is a corporation which is operating
out in the open air without any kind of
supervision at all. And. it will have to
operate within those rules as they are
laid down by the SEC. So. ypu do have
a Government body and authority cre-
ated by this Congress. and an arm of the
Committee on Interstate and Foreign
Coinmerce, which we created in the SEC.
Our committee had jurisdiction of tills
problem entirely on its own and we gave
part of that jurisdiction to the SEC.
Now. we did realize that when this
corporation found it necessary to go to
the Treasury to borrow money, if it was
necessary to go and borrow money. at
that point the public interest was So
great and there was of necessity Govern-
ment funds involved and the· President
then appoints four more members, giv-
ing the public a majority on tills board.
.Mr. GELLER. M1'. Chairman, will the
gentleman yield?
Mr. SPRINGER. I shall yield to the
dtSting:mshed gentleman from New York
in just Ii moment after I have completed
my preliminary thoughts.
Now, what happens if'you invest your
money through a brokerage firm,
what happens if it fails? That is what
you want to know. You do not come
running. to the exchange to see about
getting your money back, or' you do not
go and ask the company with willch you
invested for it. You come directly to
tills corporation Just liKe you would do
vIitilreference to a barik under the.FDIC.
.'You-make your ap:plicatlQR-d.4:ec.thJ.o
the corporation wfiIC111s formed. The
fUD'tlls made up of assessm-e-nts-ltg-ainst
thevaIioas hIVestur houses, and you get
up··"tlJ$'59,999. It is my l'eeol:1eclJtm tlTItt
under the opelations of the' :FDIC YDU
are9llsurea, I believe, up t6 $20,tlOO. It
may be more than that but I thifik tilat
is WEant has been fill SUIhe tIme. You
ar.tt·insm:ed up to a denmte amount mrt
not beyondtn:J.t. ,Under thIS bill you are
insureq UP to $50,000.
":-Mi', CELJ:£:R,. Now, 1\11':' Chairman, will
the gentleman yield? . .
. Mr.SPgING1!R. Yes, I yield to the
!iiBtiJ:Jg:uisbed'.chairman of.the. Commit-
t.ee ontJ1,e;!I.,u!llci,uy. :..... '. . '.
Mr; CEI.LER.· Ida not. think it: Is 'fair
t.o .make. the .. eomparison between t.he
, setup. as-contained1n this bill and the
operation t;>f.tI:!e FDIC!. r .'
case.
In the ofj,he FDIC ab i.i::Ii.tio every-
one is not' adn'Jittep into the scheme. Un-
der tills bill everyone, ,the good, and ·the
,bad,'aIld the. indiil'erent are embraced
CONGRESSIONAL RECORD - HOUSE
under its protection. No questions are
aslted. Under the FDIC there are regu-
lations which det.ermine whether a banlt
or a savings institution is qu&lified t.o be-
come a member of the FD]C. There are
examiners who periodically examine
their books. There is nothing Ji~e this
contaiJled in this bill. Therefore, the
analogy which the gentleman from Ii-
linois has drawn is not perfect. When
YOU have a situation where everyone
~omes in, whether they are bankrupt or
insolvent or whether they are vicious, or
sain ts, or sin!1ers. I think the public cer-
tainly ought to have the strongest kind
of representation. In the Senate bill they
do provide for a situation where the pub-
lic members far outweigh the profe~­
sional members because of what I have
indicated just now. I do not see why that
should not be done here. I am going to
vote for the bill. I am in favor of the
principle of the bill. We do not pass a
bill like this because it is barely possible
that we will have some cataStrophic fail-
ure on Wall Street because of a panic. I
am for the bill, but I do think there ought
to be more public members on thIS board
of diJ'ectors in the first stage particularly
when there is $1 billion of tl1e public's
money involved. In the first stage you
have thousands of investors involved and
that is a public interest. When you con-
sider that two members of the stock ex-
change-their presidents--complain bit-
terly about the operations of the members
of those exchanges, speaking of all .sorts
of gadgets and maneuvers. all :kinds of
irregularities and skullduggery that ex-
isted between the custOmer and the
broker, then you must give' consideration
to the fact that the public is properly
represented in ·order to see that there is
no repetition of t.hese irregularities.
Mr. SPRINGER. I thank the distin-
guished gentleman from New York for
his comments, although I may not agree
with the gentleman in what he says. But,
nevertheless, I respect him.
Mr. FULTON of Pennsylvania. Mr.
Chairman, will the gentleman yield?
Mr. SPRmGER. I will yield to the
.gentleman from P~ylvania.
N'.cr. FULTON of Pennsylvania. Why
must we have tills authority ahead of
time to borrow $1 billion from the U.S.
Treasury, and. then it is conditioned upon
the fact that the' carporation has really
fail.ed? .
You see, the ·way tills bill is set, the
provision for the borrowing frpm the
U.S. Treasury comes into eil'ect only after
failure' in the private sector, and then
the public interest takes place.
This would be the first time that I
. know of that on such an indefinite occa-
sion there has been authority by this
House .and the Congress to borrow $1
billion from the U.S. Treasury, increas-
ing the debt, unper. ciicurastances thflt
we cannot tell at ,this time what tbey
might be~wpy not put that oil' until
later? . Mr. FULTON of Pennsylvania. l:t,:
Mr. SPRINGER. May I say to the dis-
. tinguished gentleman from Pennsylvania
that~ order toassur.e, tills. should. be
cove~ed. very similarly to .the FDIC. The
gentleman has rnentioned $1 billion.. That
~;aot the way t.h~ .bill reacis.It ,says up
Dece1nber 1 , 7 n·
....... I'.'
to $1 billion. 1 do !lot anticipatr- ..
WI]] be any borrowing of that 11a'. t." .
. But may 1 ,say in reply tD t~~\·",.
tmgUlshed gen t.lema n from PennsYl"~o:·
that the bllJ provloes additional -a;;:""
ments to Jl13ke t.hat up, a.nd that !ll;'~~":"
done under the statute so that the]' .;::'
question of borrOWing without ~::,:.,
ances to the Treasury t.hat it \';'iit.' ..
repaJd. f.
M1'. MOSS. Mr. Chairman, will .
gent.leman yield? li .
M1'. SPRINGER. I yield to the gen",
man from California ' .. ,
M1'. MOSS:]s it. not a fact that. rat l" ..
than an e~ldence of failure, We ~;:.
merely proYJdmg a. means of CUShioUit;·.:
to prevent failure in the event th;,':,:
should be a collapse of one or two mai~:
houses. but not exceedi~1g the size of i.!~,:
f':ll1d plus the pnva te 1ll1e of credit. a!!l~
gIve access to tile Treasury line of cred"
precisely as was provided in the OJ'icrLlJ":
FDIC? b Col
M1'. SPR:1NGER. I think the gentleman
has explamed It. There are-I dono',"'.,'}
know how many houses on Wall Stree;'
and if you have tv"O failures. that, i~ . :,,;.:.
enough-but the reason yoU have FDIC
was that you had literally hundredsr.f 'Of'
baJlks all over the country fail. We ha\'e. "'<'f':
not had too many failures in tills indufciii".};\
try. and we are trying to preventtl1nf..
from happening. It is too bad that';'!!' ' ..
have had two, that is enough, but oIthe. \,}.:i!
hundreds of investment houses that..we···...
have' we have only had two majorfiiii:':
ures. What would have happened iI!'V:'~.
had had 50 such failures?· Everybod\c
would have been outraged. What we'are
trying to do in this bill is to bring further
responsibility into the industry itself,alia
they have been willing to accept this}e-;
sponsibility, and by forming this corp' .
ration and assessing themselves they .
t.rying t.o meet the responsibility, as
see it. But we are leaving them under'
supervision of the Securities and':
change Commission to be sure by the
ulations of the Commission that .
carry out exactly what the intent is
tills bill so that we get.some resul
Now. if it came to the point w
we had, as the gentleman from C .
rna has mentioned, a whole g;roup':j
failures, they certainly would probap
go the Treasury with this, butili.~
would have to be assessments, j ..
under the FDIC. It is true that unCi
provision of this, if there are no f '.
over a period of years you would·acc
late a lot of money, and they.n:Jay·l
the assessment. I think that is reason
But I think you will see a lot closer SUil
vision by the industry itself of this·pi
ter .by virtue of the fact that we are C;.
ing up with this kind of legislation .
you would have had had we ignored it.
. Mr. FULTON of Pennsylvania..
Chairman, if the. gentleman willy
for one more question-'- .... X
Mr. SPRINGER. I yield to the gent,!.
man from Pennsylvania. ...,
is so similar to the FDIC in. policy! '."
administration, but in an allied field; W...
establish a new separate ,agency? •. ,c
not have the' FDIC broaden its poWe
and doit? " . . ",.
Th'f'!l'e is one'tillng ida not undrm'i t
 jJ/i(f),Uer 1, 18?'O
• ,;.," f.< that when people own stock.
":'~ \;'~l~;ght be in a street name, but
".,,1 ,:.~:.dess the ownersh1P lS clearly m
n('::\";;di~idual investor or theeustomer of
;~~" i;;okerag e house, J:ow 15 1t that thos.e
....... ":2 cannet get theJi stock nght back,
;.,(.,,!.', 'i~kIY? What is the trouble now?
"",0, flllS-PRINGER.. The mere bookkeep·
... ~",~iOl1e-and I am talking about be·
~·':;.:'r1Je computer system-tl1ere were
"-:':'\'~ of from 30 days to 3 or 4 months,
!l~~;~ej~ from tbe paperwork involved but
~~~'stionable practices have aggravated
. 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
. ,;: t by coming up with a computer sys'
U.rl.·tJ·l~t would make this more rapid.
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.
MrMOSS. Mr. Chairman, will the
'!teiltl~Jllliny:ield? . But this situation in 1970 is tlle situ-
';':.ND..;·SPRINGER. I y1eld to the gentle·
:"R'i.all.. ' . . •
:''J'1>f:{MOSS. Mr. Chairman, I think we
.. C1le ' 'falling level on the combined
"ges of about 25 to 30 million
fesK daY several years in advance
.ti#~·:p;rojected studies. This load did,
·eedli"ov.ertax the abilities of the brok-
'i!¥i)louses to effect a tran.sfer. There
luLiiirtoo much lag and, as the gen-
"lUi':"!illows, the committee has indi-
'ts very strong concern and its in-
" a t this matter be overcome;
ess is being made. It is. not
problems will continue for
. But we are keeping a very
':Sigbt on the activities both of
Di.nd the excbanges.
BRINGER. Mr.Cbairman, may
lJ'O er points and then 1 will
1;Iave assessments by this cor-
o "maintain . a fund that we
be liquid enough to meet all
.risibilities, put routine' assess-
'take into' account various
'ctors including business prac-
tl:ie brokers themselves. Tbat is
. imIJortant.
.d may be built up to $150 mil-
eVen more if the SEC under its
i(jri 'sees so fit to do. This would
.' sessment of one-half of 1 per-
,.the·gross reveilUe,,-,one-half of
t.of .the gross revenue. Of this
i!iply $50 million may be credit
ust be gradually phased out.
.ents may drop, but they must
en the fund dwindles s'o there
@ce of the fund going down al-
.. we put in here this"borrowing
"ifF,ederal Gover=ent only on
lythat if we had. an unusual
'arise,' then of course we would,
••FDIC, come to the Federal Gov-
tfqr assistance. But may I say
)?en they borrow from the Fed-
yerI1lIl ent, then the assessments
',cuP. That arrangeme..."'1t must be
h the Treasury and it JIlust be
Gtory. with the Treasury, that the
.,.el:1ts. an d other charges must be
.n,t.;to .repay whatever is borrowed.
. 'are, I think, the essential parts.
~.')Vant to give to the House how
"fJipJhis situation where :we are on
',+ e).',. 1, ,1970, and why we arrived
CONGRESSIONAL RECORD - HOUSE 3'9'349
at this situation and, third, what we are sion to make these brokerage firms walk
attempting to do about it. the chalk line.
There may be disagreement here as to Mr. SPRINGER.. The gentleman is mis'
wl1etl1er or not we are doing exactly the taken there.
right thing. Some of these Questions Mr. GR.OSS. No; I am not mistaken .
have been quite intelligent-son;e of the Mr. SPRINGER. May I say they did
suggestions that have been made, I not have this authority. This is one oj
I.hink, perhaps have been good. But I the problems we have faced, and this bill
think the subcommittee wrestled with is an effort to try to do something about
this tfJing for weeks and Jor 2 or 3 it. The SEC did not have that autho1'iLy.
months before they tinally worked out Mr. GROSS. Instead oj creating a cor·
something here that they thought was poration wH.h two public members and
respon.sible and that we could bring over five members of the brokerage industry
see fit to pass. . stead of doing this, why do we not try
Personally, I am inclined to believe giving the Securities and Exchange Com-
that the subcommittee did a boood J·ob. mission the necessary authority and see
agreement on it so far as the committee Mr. MOSS. Mr. Chairman. will the
is concerned. gentleman yield? .
Mr. SPRINGER. I yield to the gentJe-
ation we had to meet. Perhaps it should man from CaJifomia.
have been done a long time ago. But I Mr. MOSS. On page 94, section 15(c)
guess like everything in American life it (3) we do in this bill considerably expand
takes a few failures before you finally the authority of the Securities and Ex-
measure up to the responsibilities that change Commission to maintain super-
the Government has in this great broad vision and exercise regulation over these
field. When we had bank failures in the phases of the business of the broker-
.1 930's;1 remember 1 lost money Jl1 two dealers and of the security houses in this
_banks ana how happy I was to see when Nation.
'yoU haa a OF Metal Deposlt Insurance Mr. KEITH. Mr. Chairman, will the
"'""eorputatlOn a'"tj~tugmrrantee your gentleman yield?
'money, to whatever the figure was, Mr. SPRlliGER. I yield to the gentle-
, ~[9und $10,000. man from Massachusetts.
~. I think we are attempting in a way. to Mr. KEITH. I refer to the report, which
do the same thmg m th1S bm that we our colleague from Iowa read so thor-
'ella then. oughly. One pages 13 and 14 the fo1Jov;'ing
Mr. GROSs:J.\m"'. Chairman, .will the statement appears:
gentleman yield? Because of theSe events the Commission is
Mr. SPRINGER. I yield to the gentle- of the opinion that its authority to adopt
rules dealing with free credit balances and
man. segregation of securities bas been made some·
Mr. GROSS. Does this bill provide that what uncertain. To the extent that that has
there be an examination of the sOUnd- been a problem, the reported bill ·remedies it
ness of a brokerage firm before they by making it clear that the CommIssion has
come'under this corporation? authority to promulgate rules with'respect
. Mr. SPRINGER. Yes; we have left to the' financial responsibility' and related
this to the regulation of the Secur1·ties business practices of broker-dealers includ-
ing, but not limited to, the acceptance of
and Exchange Commission. May I say custody and use of customers' securities, and
to the distinguished gentleman . from the carrying and use of customers'· deposits
Iowa, you cannot bave a' bm of this or credit balances. In addition the amend~
nature wij;hout leaving with the Secur- ment to section 15(c) (3) would give the
ities and Exchange Commission its own Commission such rulemaking. power over
power to put' into effect rules pursuant both the exchange and the over-the-counter
communities. Now that the matter has been
to this--and that is what we expect them clariJl.ed, your committee directs and expects
to Qo. the Commission to be alert and strong in
Mr. GROSS. Yes, but the gentleman is tills area. This will, of course, reqUire similar
well acquainted with the fact that before . alertness and strength from the self-regula.
a .bank can become a member of the . tory organizations, and if that is not forth-
FDIC, it must stand a searching investi- coming, the Conimission and, I f necessary,
gation by the FDIC as to soundness. I the Congress, will have to insure it. .
find no such provision in' the legislation Mr. CELLER. Mr. Chairman, will the
which would create this proposed cor- gentleman yield?
poration. . Mr. SPRINGER. Mr. Chairman, may I
Mr. SPRINGER. I think if you go back ask how much time I have consumed?
to the beginning, you will find that was The CHAIRMAN. The gentleman has
probably done under a nile. I do not consumed 24 minutes.
know all the intricacies involved. There Mr. SPRINGER. Mr. Chairman, I am
may be 'several thingS that ought to be sorry to say that I eaIlllot yield to the
done.. But I think we can rely on the gentleman. I have only 6 minutes re-
Securities' and Exchange Commission to maining. I yield that to the distinguished
put this into. effect right.· gentleman from Massachusetts, the
IVlr. GROSS. Mr. Chairman, will the ranking minority member of the sub-
gentleman yield further? committee. .
Mr. SPRINGER. I yield to the gentle~ . The CHAIRMAN. The Chair recog-
man from I o w a . ' nizes the gentleman from Massachusetts
Mr.. GROSS, We are in tbe condition for 6 minutes. .
in which we now find ourselves because Mr. KEITH. I thank tbegentJenian.
of the failure; somewhere along the line, Mr. Chairman,' the gentlenienfrom
of the SecuritiesHnd ExchangeCommis- Iowa' and New York have raised ques~
24
 Vtcembel' 1, 19';'0 CONGRESSIONAL RECORD -
,;,,;,t fail before eIJad.menL. at the
n;ilc--;i~ta law. 'We early aOllCJpaLed tIllS
b,.~ db'lit.V but we have speCiiiCally de,
1':. \0·
15... _ make the bill retroactlve m lts
[!111"'::.. _ The bill is prospective from
"per~~~':'~f its enactment.
l-1',~.of lC~·;'il''''e
1jj. J..Gl
U..l ,
in recent mont])s, of the
""'"~Devonshire Corp.. Plolln /;) Co.. and
r ':'I~i.JlSon & Co. has recelved a great deal
R,,~ .'ention from the press and from
?,~nli.~~}I1I.i1ittee because the ~ew York
s;':ck Exchange has decJmeo to make
:'~"':.iltlble from its trust fund moneys
~ ~1Jrotect the customers of these three
iifUlS. . present authority of broker dealers to
. The committee has been 111 close COl1-
Eul!.2.t1onwith the officer~ of. the Ne~
,-orkSto ck ExchaI;ge-wlth l:-S presl-
dent, Mr. Haack, WIth the chamnan of
itsbollrdof governors and with the vic~
I oirnlaIJ of its board of governors-ana
~:~"havereceiVed firm and unequivocal
.'ll',surruclC ''';; that they will recommend to
.',:,!the,.,b,oanl of governors tbat they take
.~,'n",i ",,,,,ion within their power to pro-
··;~~~t;B~~E\~:torn~:r~of tl1ese three firms
.'
I ~l;f.~~~'~Il~~itt;~thatthat commitment
will be met by the
HOUSE
have a reinvestment credit w]1icl1
amoU11ts to a payment for the use of
the customer's funds.
Am I correct that under this tm it
is not intended Lllat this new insurance
be used to toste)' a new form of savings
account? Is it not our purpose to protect
the public against loss from insolvencJ'
rather than permit a type of deposit that
might compete WitIl banks, savings and
loan associations and credit unions?
Mr. MOSS. Let me say to the gentle-
men, this bill adds in no manner to, nor
does it in any manner diminish, the
handle free credit balances. It ha.s no
effect whatsoever upon that. That will be
a subject for the rule making by the
Commission.
Mr. McCLORY. Mr. Chairman, will the
gentleman yield?
Mr. MOSS. I yield to the gentleman
from illinois.
Mr. McCLORY. I thank the gentleman
for yielding.
I am very interested, in behalf of the
customers of First Devonshire Corp.,
many of whom reside in my congiessional
district.in lllinois, in this subject. Do I
39'35]
Mr. SPRINGER.l'."r. ChainTJ8J1, I yie!c
SUCll Lime as he lTIay consume to the gen·
Lleman from Nortll Carolin~ l]\1r
BROYBlLL) •
Mr. BROYHILL of North Carolina
Mr. Cllairman, I urge the passage Gi
H.R. 19333, which
• I represents a balanced
Judgment reac led by the House Inter-
state al1d Foreign Commerce Committee
(·0 provide greater protection to smaD
investors il1 the securities market. Our
eonmlittee 11as, I believe, pI'epared legis-
Jation that meets a current and future
need in tl1e establishment of theSecuri-
ties Investor Protection Corporation .
The New York StOck Exchange has
maintained that no public customer 11as
suffered losses because of the ipsolvency
of a member firm. Such a record has
been possible because of the "trust fund"
established by the exchange to advance
money to liquidators or receivers or
broker-dealers in' liquidation.
Recent declines in the market have
seen difficulties develop where losses by
investors have occurred and their inter-
ests have not been protected.
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 -
gO ,~ . .,tdoes not 7l1EEn I have to t-flke e'/c;:y
~~·:;\·i~ijOi1 of tJle bill. 1 think the bil) hns
se ~~:e or two fJ3\\'S a;~d it i:: our d1..1t-y-it i!:
l-~e
l"'~V dlit::-ta POil?t theril out: ~ .
,d ~~]e dirncuHy IS, as I ,5Ee it, 3ilQ WJ1;C11
el 10 ~l1Y lllil1d is as jTJ'H2ti~}g as ~ hang~aiJ,
I :5 the fRet tl1a 1- tller~ ]5 an :].J~UfflCh:lnt
I- !"";i':nber of pubHc 1Jle1l10ers en ~nlS Baal·d.
\;\j~ ha . . . e heard it said t~at the n::oney
i] :l1vclved in U1e first stage lS the lTioney of
n ~he broker-the ]'es~jt ,cf assesane,nts ~f
11 t'le b;-d:e:·s. That true--but tnat
IS 15
-, 0;11, half of the story. There is grea t.
j
~ut]jc interest invclved in tnls matter.
T
e
'.i TI\i2J e 31 e 3D IJ!ilntJn Investors In ::::eCUri-
,~!6st Oi wlucl1 pass tnrilugh the
s ;1.
ilan~--ur-tlre members 01 tne vancus
'f
1 '~,~.ll31}i1es.
~ c
Il that hct is not of public
)
in teres danoi Know ,,-,hat. is cf p-.lblic
. interest.
'-wtraThas hap!Jened heretofore? There
llave been great derelicticns on the part
of the members of the New York Stock
Exchange and other exchanges. They
have conducted their operf.tions as a pri-
vate club. "What is good for the New
York Stock Exchange members," ~ara-
plJl"asing the language of Charlie Wilson
of General Motors, "was good for the
country." Wen, it has not been good for
the countn'. The results we know of.
Some concerns have gone into banJ;:-
i'uptcy.
. It is time to can a halt. The responsi-
1::l1'e'members of the New York Stock Ex-
~lJange want to call a halt. It is time the
e;;:change cleansed its Augean stables.
To change the simile, the boil has been
-'ia:i1ced and lots of bad stuff is coming
out. But not enough. We do not know
Jl0W many more firms may be approach-
'iug bankruptcy. We do not know how
nJallY more are teetering on the brink
'Q:f:how many may be insolvent. VlIe are
:n'ot toid.
'oj',Thisis .very strange. The members of
'Jhe exchahge and the boards of gov-
",.'ei·nors of, the two exchanges are lill-
I;)uslmiJy silent. They do not tell us. And
\:,·'the. very committee, which I commend
)",.,peGause of their bringing forth this bill,
"-':'does not know the exact state of facts.
'.:1'I.,qmore does the SEC know. And the
:".~\=cUrities and Exchange COJ11..ll1ission
. :~']j6,uJd have known long since about
itW=seoperations. But the SEC has been
'lrlo:St;apathetic. Self-regulation has not
\w.tirked.
CVntiLthe New York stock Exchange
/anilithe··,American. Exchange put their
:\lse~in order, there will be no recrea-
--of confidence in those exchanges.
ten to those g'entlemen on the high
ee of importance involved in these
.apges:
.'·the beginning of 1970 New York Stock
_!illge .members held approximately $3
l'l0f...customers' free balances, funds
i:lra-oiiable on demand. These free crecUt
cis are used by member firms to main-
-,poEitlonE In securities, t<l finance mar-
<purchases of other customers, and for
~r'general purposes.
;·,Js.estimated that the total of cash and
: 'I~Ies held in the custody of brokers for
..,!,,,,,punts of customers is approximately
,billIon. These assets, In many cases, can
,,~~plied 1Jy credltms of br<>kerage firms
,_ ,t~···adequate .segregation practices have
.tibeen followed.
±hei·e. was no se~egation. And when
.:e·brokerage houses got into trouble,
HOOSE 3S3GI
the c,'Edj~orsSEized [.he secL'rities and ihe teed Ihat the Dier:.Jccr ,,'ouJd be r~:-j;:l:njLv
'-,lGn2VS Lha L bciongeci to the customers. cC'ncerned with tlle !Jub~ic jr11 ej'eE l? .
Th~ CH.';IRMAN. The time of the gen- M1. CELLER. I think l,E wowd be
t·Jere'":J frcm New York has expire~. n10re. !E~e]y to be con':::2-jied than the
(By u11Enirncus cCl1sent, I\'lr. C£L:"ER selfi~!l p€:r~Qn \"0'])0 h:;,~ 2 ~clf-.l::1terc:.;.
was ~JJo,,:ed to proceed fc·r 5 ndd;ticna) who ]~3S 2n ax to g:dT"ld. w~""Jo \'~·b11t= tc
H1inu~es.) protect hin1seH and his feE 0','.'.". I ~j;h:;.:
r"lj·. CELLER. The Pre:3idEl1t of the j~ is :s.r tetter to l'J.QvE E. r:'-ij;:'li·:' '':1;":::':;::"
New York Stock Exchange, M1. Huack, than La llave a director wbo he5 a n:lEn-
speaks, and this is his e:-~act langUage: CJEil ~nterest in tlle prOCeeGiJlgE.
111trj2uE5 ::ind n19chi::Jations, bjatar:,t l?in1- j\1r. STAGGERS. My. Chairmen, will
m:ckry ~ all EClrt.s c·f cadges 2.110 piays oct;·.e.en
the g€Dtleman yield?
brake:i5 a;;d their customers ~o avcid prQpEr
lVlr. CELLER. I yield tv tl1c §Ent1<:iT:f!.l
regulation and CC·Duol. frGm West Virginia.
Ralph Saul, p!e~j~ent of the AnlericRn My. STAGGERS. Mr. Cbairman, !J,e
Ex~hange, speaks of the "exch~l1ge's gentlem::.n said t!-Jat the public member
-" "flimsy capital struct.ure." would have a greater inte,;eEt in th:5
~, e 1
J:jj'C.~ rage ~10uses use
t1' t
_1eJT CDS on1- than the man on the stock exchsnge. I
ers' mcney freely to condEct business, disagree with the gentleman wlJoleh"&rt-
r2~nJ' to specl21ate, with no segregation. ed:!y. The men who pay the money into
They use also their capital reserves, the fund are going to wa tcl] over that
supposed to protect customers' asset.s fund. They will be people wbo know whet
against loss, for their own speculation. they are doing. They will say to othrrs,
Thus two heads of the exchanges, the "You will not take any more money." It
American and the New York Stock Ex- t.akes a crook to catch a crook. If they
changes, show exactly what the prac- have somebody who does net know what
tices are of many of these brokers. is going on, tbe wool will be pulled oYer
I want to say this. I ail not want to his eyes. A.ed 'l.~e must re!J1elnber, it is
bring an indictment against an broke:-s t.hei.r n-!oney. Let us Jet t.henl watch c,'er
and all brokerage hOUSES, because of the it.
derelictions of the few. It is these bad M"r. CELLER. MT. Chairman, I am
ones that taint the atmosphere and af:-aid I c:;.nnot be F.S naive as the gentle-
cre2.te t.hese bad impressions. We have to man frorn West Virginia.
have criminal laws not for the good P20- l'.l'r. STAGGERS. IVir. Chairman, 1 am
pIe, but against the bad people. We must not as naive as the gentleman frilm New
forfend against bad operators. There- York about the'se matters.
fore, we must be sure that the laws we MI. CELLER. While the gentleman
pass will be eflective. from West Virginia may trust them,
We hear tell much about the SEC, there are some members of the New York
as fu as the law is concerned-that law Stock Exchange that I do not like to
has been more honored in the breach trust.
than in the observance. We seem to have Mr. MOSS. Mr. Chairman, I rise in
lost confidence in the SEC, and when opposition to the SUbstitute amendment.
we say the SEC will do this and that, Mr. Chairman, the easiest thing in the
I wonder what indeed the SEC has been world is to step into the weU of the
doing all this while. If the SEC had been House and level an indictment against
doing its duty, we would not have had the securities industry, particularly at
this sorry state of affairs. Therefore, this moment when it is caught in a
because of the machinations and the in- rather tight squeeze. Of course, if we loolc
trigues of these brokers, I want more for the reasons for the difTIculties of the
public members on this board. indllstry, it is easy to point the finger
There is more involved here than the at the Securities and Exchange Commis-
nl0ney. There are 30 million investors sion and say, "You gentlemen are re-
who have their money riding here. They sponsible because you have not done your
must have protection against these in- job."
trigues, against these maneuverings of But let us look a little beyond that, The
some of these brokers, and I think we Seourities and Exchange Commission
will get some protection if we have the is an arm of this Congress. It has on
substitute amendment offered by the numerous occasions asked for mare au-
gentleman from Iowa. I intended to of- thority and more power the.n the Con-
fer a similar amendment, but he beat me gress has been willing to give it. Had we
to the punch. I welcome it, of course. I given it at the time it was requested, and
am siding with the gentleman. I d6 n6t had we permitted them to exercise it, I
always agree "\Vith him, but certainly I doubt if we would have the problems
am in agreement with him now. If we here as serious as they aI"e at this mo-
do not have more public directors, it ment.
would be very much like setting a cat to I happen to believe that the commit-
watch a bird in a cage. t:;e showed a great deal of care and a
We just cannot have implicit faith in great deal of responsibility in fashion-
many of these brokerage houses in New ing a rather uniaue Board of Directors.
York because of our sorry exPeriences I believe it is a better Board of Directors
v.ith them. I want to forfend all these than the SUbstitute would create, because
excesses and all these difficulties. \¥hat we have representatives. of the ex-
is wrong with having more public mem- changes, of the National Associati-on of
bers? Why should we not have more Security Dealers, which isa quasi-gov-
public members, since this is a 'public ernment agency, alreadY engaged in the
corporation? . regulation of the' licensing of security
IVfr. MOSS. Mr. Chairman, if the gen- dealers, and then we haye two public
tlema...>iVi>il1 yield, when has the appoint- members. . ' '. .... . .. .
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 -
n,j lr.n'ltr to 'TRAINING OP PAMILY PHYSl-
,tCllJ~lJ" btlti i CIANS-CONPERENCE REPORT
la tIO!);,! StCUt_
ry 1,1910,10: !]>1r. YARBOROUGH, Mr. President, I
'lance to eu,_ ~'Jbmit a report of the committee of con-
xch.og E, sbe21 ,('renee on the disagreeing votes of the
10 'ueh lru,: :4'10 Houses on lhe amendments of the
ncorne Lo .,,;: 0,jbuse to the bill IS, 3118) to amend the
nder aoy pre: "",'.:blic Health Service Act to provide for
, COde of IG5, ," , h 1
ootribullon Gt' i1,e maki~g of grants to medIcal sc 00 s
n aS51OSsInenl; ilJii,~hospltals to assIst them m estabhsh-
II) (4) 01 th,,'~~specJal departments and programs m
,talUS, as Oldi: " ",field of family practice, and other-
under seel!c,,, e to encourage and promote the train-
e Code of 195~- iof medical and paramedical person-
lions IDfide t~ the field of family medicine, and
, a L any tim, ' 1 t T
dissolUtion ~;, leviate the effects of rna nu n lon,
let assets ShEll to provide for the establishment of
I its member:;,': tional Information and Resource
fUlly absL'1lC~ r for the Handicapped, I ask unan-
'Its to his 0,,';' ' consent for the present consider-
, or embed,,;:, of the report.
;beO~\t!~1: PRESIDING OFFICER (Mr.
6ballbe,'J1i,j,jj- L Is there objection to the pres-
mpJ;isoned'1l4i nsideration of the report?
,meIl~,,~j,~i{ ee~e~gc~~i~~~e~~i~~'e;~:t.senate
's PurSUJmt"fr.; 'conference report, see House pro-
e) of thi~ ,', , s of Decemter 3, 1970, pages
-por!' '" --, 9874, CONGRESSIONAL RECORD,)
So 'ARBOROUGH. ] urge Senators
~'7" "ort thi~ conference report on S.
, e ,Family Practice of Medic,ine
970.' Stated simply, the purpose
,iegislaLion is to encourage and
,..the training of doctors in the
family medicine, where there is
"dous shortage of doctors.
ample, Wrangell Island, in the
teof the distinguished Senator
'ka (Mr. GRAVEL) has 3,000 peo-
',are without the services of a
", octor. In areas in the eastern
.oregon and Washington. 3.000
,8 without the aSSIstance of a
'o,clor. , '
,over 75 percent of the physi-
this country were engaged in
raetice; by 1949 less than 50
':ei~ in 'general practice; and
",'are only 20 percent in gen-
'ce, ,The ngure promises to
'er;'since less than 15 percent
'emcal school graduates have
'hi tention of going in to gen-
.,lll other words, while there
,"ly doctor for every ],000
'3.1, this figure is now one for
,rsons. ' bill, strike out "5 per centum" ,and ,insert securities,inQustries:' :', '-.'",'" ::',:
, em,is compounded by the
" have a shortage of 50,000
,"s country and the induce-
:,lJ:ito; 'specialized practice are
.",' iii ,.the fainily pra,cUce of
'statUs and stimUlation it
mh. ,~reating' separate de-
-.1ai:nily medicine, in ,our
:is we may be able to re-
end. Already 15 medical
,such departments in ,the
e fur
,and '20 ,other schools have
, tember 16. The House sent it back with safeguards ,to assure :thatthe '''mvestoi-
MY' hope of getting badly
,JaIlS, into our ,rural and
,~t .will ,be by giving em-
'stige" to the family prac-
!,:}VJP~ll this bill ~oes. "
";medical schools and hos-
'erees"agreed on' authCiri-
:,'inillion ,over the 'next, 3
",;:mJ;'l~g and ~evelo'p­
~.~' ~'~'. .
1.....;,.:;'.
. ' :,.-. ..,~:
SENATE 408G7
menl to gel t.he programs underway, we minimum ra te of royally Lo be charged
agreed on 58 million, under geothermal leases, The Senate ap-
I consider this program one of the proved 5 perc en l. The House insists tha t
major llealLh bills of this session, H ex- the rate be 10 PErcent. This change is
presses the policy of Congress that we acceptable to me, and has been cleared
are not going to let the health of the on both sides of the aisle,
people 01 the Nation be neglel:ted from I have jillt finished a long discussion
inaction in the area of health manpower. on the question with the Senator from
We must develop the necessary doctors Colorado (Mr. A LLOTT), the ranking
to see tha t better health care is possible minority member of the Committee on
in both lhe rural and urban areas. Interior and ]nsuJar Affairs. The change
The PRESIDING OFFJCER. Tlle
meets with his approval. as does the en-
question is on agreeing La the conference tire bilL
report. The time has come to complete con-
The report WdS agreed to, gressional action and seDd the biJl to lhe
While House for the President's approval,
so that the potentially enormous geo-
ORDER OF BUSINESS thermal power resources underlying our
Mr. MUSKlE. ] suggest the absence of public lands can be developed and used
a quorum, in the public interest.
The PRESIDING OFFICER. The I move that the Senate concur in the
amendment of the House of Representa-
clerk will call the rolL
tives,
The assistant legislative clerk pro-
ceeded to call the rolL The PRESIDING OFFICER. The ques-
tion is on agreeing to the motion of the
Mr. BIBLE. Mr. President, I ask unan-
imous consent that the order for the Senator from Nevada.
quorum call be rescinded, The motion was agreed to.
The PRESIDING OFFICER. Without Mr, BYRD of West Virginia. Mr. Presi-
objection, it is so ordered. dent,I suggest the absence of a quorum,
The PRESIDING OFF]CER. The clerk
will call the rolL
The legislative clerk proceeded to call
DISPOSITION OF GEOTHERMAL the rolL
STEAM AND ASSOCIATED GEO-
Mr. MUSKIE. Mr. President, I ask
THERMAL RESOURCES
unanimous consent that the order for the
Mr. BIBLE. Mr. President, ] ask the quorum call be rescinded.
Chair to lay before the Senate a message The PRESIDING OFFICER. Without
from the House of Representatives on S. objection, it is so ordered.
368.
The PRESIDING OFF]CER (Mr.
'BIBLE) laid before the'Senate the mes- SECURITIES INVESTOR PROTEC-
sage from the House of Representatives, ..-, TION ACT OF 1970
as follows: ' . - The Senate resumed ,the consideration
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
ments of tbe 'House 'numbered 4, and 5. to Broker-Dealer Insurance Corporation.
tbe bllJ (S. 368) entItled ';An Act to au- _ Mr. MUSKIE. Mr. President, every
thorize tbe secretary of tbe Interior to make Amencan has a stake in guaranteeing
dlsposltion of geotbermal steam' andasso- the healthy and efficient functioning of
ciated geotbermal resources; and for other the American securities markets. ',
purposes,", ,,', " 'I;'oda3T, more, than 30 "million ,people
Resolved. That the House- recede from lts participate directly as investors' in securt-
~~:~s~~e~;~Lnumbere? ,I, 2, arid, 3 to the ties of one class or anotfier.Perhaps an-
Resolved, That tbe House recede frpm lts 'other"J 00 ffij]Jjon' partiGipat~ illi:lirectlY,
amendment numbered 6 to'tbe aforesald blll through mutual funds, 'pem,ion funds,
,and- agree to a further' amendment, as and the like: Moreover" every :sector of
folloW6: ,,' , oUI: ecpnomy is heavily dependent on the
, In section 5(a) of the Senate ,engrossed 'strength and Viability :of ouI"Nation's
'
'''IO'P';'T centum.... '. ',''-: ',,--'" • The ,Congress has long recognized the
The PRESIDING OFFICER. Without' ,great . impact of the, securIties markets
objection, the Senate will proceed to the 'On o:urnabonal"ecopomY~aIld the crIU-
immediate consideration of the":rilessage. ~e that publiC confidence,pl1l:Y5-in
, Mr. BIBLE. Mr. President, I shall make )h,i:i ~trength' 01 ,theSe_mar1t~ts.· 'To ,::en-
a short explanation. ", , 'r': '" .-hance public, ,confid~nce, the, Securfties
S. 368 is my bill to authorizeithe Sec- . Act of 1933 wasenacfea so ,that, thTffi-,
retary of the Interior to issue leases on 'v~stor would have the necessary fuforma-
the public lands for the,'dev.elopment oftron to e,xerclse sound,judgmentin mak-
the Nation's geothermal energy' re- 'ingsecurities purchases. ADd the, Securi-
sourceii. The Senate passed, this ,bill Sep- ties Exchange A~tqf 19?4, i::I:o:;.1des
certain amendments., ,Last;F'riday, ,the Will, not, be viet.iiriized ",hy.;i:ralldulent,
Senate accepted a number of the House manipulative or 'de~eptive,::i';-s'elling
amendments, concurred in, ,others with schemes. ' " , ' ',;i,;i
amendments, ,insisted on certain Senate These two statutes are largely succ~ss­
provisions, and sent the bill back to the ful,in accomplishing ,their ,piuposes. But,
House. The House aded again today, and as recent experience. pas' shown, tl;lere
has accepte'd aU but one of,.the provi- still exists a serious,g:J,P in 'ouI;',secpiities
sions agreeduporLby the,State.:r'he only laws which neither,o;C t,he-<;e;stl>tutes cov-
remaining di:tIerence ,l;>etween ,th,e Sen- ers. An investor" ,',may .:exercise ',sound
ate and House ve,rsi0rLS deals --with the judgment in his choice of stock.- and he
 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~ •• ,~.~

970 December 10, 1970 CONGRESSIONAL RECORD - SENATE 40869

Islry_
mendalions of that ]963 study had been changes set up I-Tu:,t lunds to which LJleir er8] Government or to Laxpayers. In the
implemented, we would not now need to members contributed. UnliJ recenLly, event-of-a-m'ajoY-'crisis'"jf Llle fund is ex-
And , be here considering Lllis insurance legis· these truot funds 113ve been adequate to
hausted' the inSurance corporation mav
RouJa I

bar- ,i glVe Tlotbecause

latJOn
to the
the mdustry abllses that take care of tJle needs 01 tlle industry
need for l11surance prob- and,
borrow on appJica Lion LJuough the Secu"-
as a resuJL, there have been a few
thCSE [" ablY v:ould not have occurred. riLies and Exchange Commission up to
acLual losses. However, due to a variety
$] biDion from the U.S. Tre:lSury. While
aain- 1 Lhinf~.jJs-J.f.ar.J,baU)l£ in~1J):'?.!Jff..pJi111~" of reasons, some which could be foreseen
~t se-
some have argued that this TreasuTV
" eStablished by S. 23q8 is .:i,.necessity. And and some wbich could not, the securi- backup is not appropriate, theTe is no
: a"tld F'-;JieOlJier provisions of Lhe biJJ wiJJ ties industry is now in a financial crisis. doubt that it is necessary to assure the
':;', :'''strengthen the powers of the Securities During the last 2 years, the New York proper operation of the insurance fund.
ay ili ''i'"y'jlDd Exchange Commission in the public Stock Exchange has been required to In adcUtfon, while $1 bilJion may seem
5
CI: - , . 'V'S'IDLereSt. fuJly commit its trust fund of some $55
like a tremendous contribution to be
of:'. :~;i(.;. But it is equally clear that this legis- milJion in order to meet possible de- made by taxpayers, we must remember
cer-':i!':i;:(lation should be only the beginning of a mands. In addition, New York Stock Ex- tbat any such borrowing must inclUde a
atkin:" 6to,ad program of reform \vithin the se- change firms now face a jJ{Jtential as- reasonable plan for repayment and must
OlJt~ 'clirities industry. And this, 1 think, im- sessmentof up to an additional $30 mil- be approved by a Government agency be-
I orr? poses responsibilities upon the SEC and lion in connection with a rec.ent takeover Jore it is made. Purthermore, the serious-
upon Congress, as we]] as upon the]])- of· Goodbody & Co. by MerTl]] Lynch. ness of a co]Japse of our securities mar-
iJustry. 1 think that for its part, Con- This burden on securities firms comes
kets and tJ1e effect it would have on
gress-and the Senate specifica]]y- at a time when their volume is much the financial system and economy of this
"ould undertake broad and thorougb lower tJ1an that which tbey had to plan country isslJch that it would warrant the
rIDgs'in depth into the operations of for only a relatively few montbs ago, expencUture of many biJJJons of dollars of
securities industry, with a view to and when profits have been squeezed in taxpayers' funds to save it if necessary,
tiating the additional reforms that many firms and eliminated in many and such an expenditure would be far less
clearly indicated and necessary in the others. The failure of broker-dealer firms than the loss wouJd occur as the result
'I,. run. in recent montbs has shaken the confi-of unemployment, lack of production,
. hat we are proposing here today is dence of cilstomerswho earlier were and wasted resources if the funds were
' t h e first step, and it must not be assured that'. the industry trust fUJJds needed and were'not m.ade available.
to become the last step, in deal- were adequate to meet any foreseeable Mr. President, I do not intend to clis-
th the problem which it is intended contingency. It is important not only for cuss the details of this bill; since Senator
ver.:· ' the secUrities industry but for our en-
MUSKIE already has outlined them, and
;.convinced that if we'do that, Mr. tire economy tbat the previous conn- I feel it is unnecessar'y to repeat an he
'ent,.Congress will be able to acquit dence in our. securities markets and the his said. 1 do feel that it is iffiportant for
:ponsibiJity to the public as we]] as . firms involved in those markets be re- us to enact legislation Without delay. I
indilstryfor the proper regulation stored. Since the industry is in no posi- must admit that I do not approve n~r
'c'rlt.fCa]]y'importilnt component of : tion at this time to restore that confi- support a1J of the provisions of. this bill.
tlIipmicsystein. . : ' . '.. dence ·witho1.1t asSistance, it has become
This is no time, however, to quibble about
"president, iast week the.House of necessary for Us to enact legislation . items which are not absolutely neces-
li~nfutives'passeilH.R.19333, which whic:h will remove present uncertainties sary for the restoration of investor con-
·'aT· 'to the,bill before 'us. 1 urge . concerning possible losses of cash and fidence. The importaI;lt'thing is to get
enate approval of'S. 2348, so that securities belonging to customers. on with the job; and if changes .are dis-
, scan complete action on this im- This"proposed legislation would pro-
. covered to be necessary, in the light of
tlegislation this year." : . . Vide for. thee,stablishment of a f1.111d to
experience, certainJy we.can·make them.
, . ANIS of DeliliY~re. Mr. Pres- be' uSed to make it possible for custom- Mr. President,'as I close, I want to pay
'1 the'SenatorYJeld? . . '. ers, 'in the event of the financial insol-
my respects to the in:dustTy itself, which
.SlUE. 1 am happy to yield to vency of their broker, to recover that to has already taxed itself very heavily to
tOl'frorn Delaware. ' which tJ1ey ·are entitled, with a limita-
assume.. as an industry, tJ1e bill-dens
'1 of Delaware: I compli- tion of $50,000 for e8:ch customer on created by the failure ,of inclividual.mem-
'e-8enator from" Maine Cin· his the amoUJJts to be provlded by the fund. bers. NewYork StoCk Exchange' members
'tlpn. -I certaiiLly agree with him In additiori;,~,'legiSlation . requires a alone have alreadyco:inmitted $55 mil-
..... un ortant piece of general upgradmg of. financlal respon- 'lion for· that purpose ,and are prepared
';anct 1 think that its a prova sibility reqru!"eD;l,ents Of brokers. and deal- now to commit an adclitioiuil$30 million .
. ' on ,of Con re:w:illgo.far ers, to el~mate to: the m~unum ex-
n . · ThiS is evidence of
onfideriCe tiT; tentposslble: the nsks which lead to its acceptimce of re-
'll, think it is most essential customer losses such as have occurred. · 'sponsibility and of its good iilith. I.thiDk
ke .thisactlon before adjourn-I believe it: is important to poiJ:;l~ <;Jut this kind of evidence demonstrates that
, . . the industry is entitled to the additional
that this legislation .does not proVlde
proteCtion.to iii6ker or. dealerfums proteCtIon that this bill Would make
available to it,if·necessary. through the
therriseiYes, n6{,does iiin' any way pro-
a
TreaSury and after. proce~s 'which will
tect individuals ,.who purchase securi-
ties from iDcurring losses which mayre-
carefully safeguard· the ·safety of. this
sult from decreases ·in the market value
loariby the TreaSUTY to the'taxpayer.
of those securities. It bnly assures a cus-
Mr:' Pl'esident,r'hoi:ie·.that the Senate
tonier 'that :heW1J.l r:ece!ve seci:tr:rt:res-he
'iJiiIClJ:asedor
has he
i:igh
will approve this bili tOday"
has jeft mt:tJ.tl, so that we
can get it to conference and get it'passed
firinciii' the e~eri-t--that :fnlll flrCes hnlJ:ll-
. W oarecus omers .0 cial insolvency. I w~ti:Jdi1~tnilflMo
dealer' in Securl les throug '':' mat t,!lls'protectfon IS proVlded by a pn-
aa.
in the' remaining days' of the ·session .
tl
Mr:
MUSKIE.Mr. Preside'ht,' I aSk
, .t' ~" e--J'ate IUJJd made ·up of ,assessmen~ onunanimous .consent. to ha:vepJ.'inted·at
" . .rY.Many cus o~ers ea,: 'this point iIi ~the .RECOKo liiJetkr.l~oJ]1
tJ1'e indriStri 'itse1f;':Only if that .:fund
19;e,s apd' ca~h Wlth:th.~r should .pibv'e'iniideqUli.te iha'i:Q~jor Chairman Hamer. H. BUdge; Ghairman
~,f?rs.afekeepmgorto faclli-.· .......ul'd' p' • of the SEC, datedOctbb~r,.2;j~70,With
d "'iiI fundsb"e loaried to
g;.:If a broker-deaJer.'en- cnsl~ wg, ....... e.el.'.. . . . ....
. 'laldillicUJties for any"Of the ~U;r!lP.\l~.,p.or~ora.tl~ll,tp'l?ay.. c~­ respect to.the ad~~~C::j<9i:tpe'N~9~.~~t
;. ·'oiiS·"the' customer rrt"ay tomer lpsse~. ,Machl1lery~ proVldedun- would ,be 'cre'ated ,U:r1C!er·.. ~h~·;:.pepdIDg
a:y liJ reC~'iv:in!f his '~ash der which 'J~ds to repay thePegeral measure,aletter..frq:rp ,c'p~rl~':'~~~W~!'ir,
'e.c)lrities,pr, eyen worse, Go.ve~ent'qaJ;!..,.I;>~. p,eve1oped ,~~~ Acting SeCl'etary o(tJie.:!I'J:e~11rY;urging
the paSsag~"b:(,the pendi:hg fr\'ea=sure;: and
';"i.~r:~~~o~ei-~7t,t:o whJch ~h~gg~S;6~~;'qiip·';~eiuct·t~~iutU;e,Cit a'le"tter'from' Robei't;·W. Baack, presi-
.\'.ii:!iot~ct in;~torlr:again'St : is not-expected' iliat,tliJs IDsurf!.llCe ',Will · d~nt .of the New 'Yerk. St-o"b'kExchange,
,tiiiil:e'ncy, major stock ex- re'sult in any permanent cost to me F'ed- dated October 1, 1976.r-l'~
,;tJI.ill
';:.;;~':.'
I,'Fi 0 DetembeT ] IJ, l'n 0 CONGRESSIOT')AL RECOHD - SENATE ,10871
PERetN1AGl (II Ilkl,',: 1,\'1111 I(JSSIS .againSt IT;-~ J-bupt L\.': Co .. [or example, ( .. u~ed brink of financial wso)venc\,. While
PulLed FI J05~ cd S(t)]H: ~-2'7 million which could in
IUTf::: :::: lin [-lIlt I,i]
many sma]Jer firnls have ellher ·dis.solved
110 way bE :1lHiclprlted in advancE.
,0 v10. or merged with their compEtitors. Only
Mr HalplJ DeNunzIo reached lhj~ s",mE
conclu!:Jon In Its.pondlng to a question plJl 10 large infusions of capital have saved P. J.
Secutily
jE:ct 10
Commi,!;~jon him by Senator ELimund Muskle in a lEtter Dupont and HaYden-SlonE from finan-
'or HbJ~ bU5ine5~ 01 AuglJEl ~ in lvhich Senator Muskje asl-:Ed cial run. Goodbody '" Co .. OUr Na Uon's
e 1Y:En Monlh ending losses
"The extent 01 financial exp05urf, In fifth largest stockbroker, has been ab-
'fJ werE
dGlJar tern)s, which firms. . might cre~ sorbed b? Meni]] Lynch. contingent up-
e were
66
ate either to the Exchange or the Dew SJPC." on and mdemmfi ca Uon payment of $30
Jist on ;p,il_ •.... &9
61 47 To which 1\1r. DeNunzio replied in a Jet- ml]]lon from New York Stock Exchange
'pteIn_ raJ'--···· -- .. ,_ .. 51 ter 01 Augun ] J:
·l~UL." --" - - •.
17 member firms.
~atlo!J':: 73
,~ . 33 "1 am satisfied that nobody can make 8
ijrilSr .-. 'I 75 realistic or useful evaluation of dollar terms The insolvency of a GoodbodY or Du-
7 futr,-,
:ed t,2-
....------------------ of exposure, whEther upon ~he basis of cus- pont could create havoc in the securities
industry due to the inter-relationship
lID arE 'J'be security conunisE.JOn business was tomer protection without limit as to amLunl
,j)5olutely dreadful in the mon th of August (as in an Exchange Special Trust Fund between broker-dealers. The real losers
'17=
~b]eID.3. ;Jj,':75,lfo of all reporting firm!: had security liquidation) or protection of a customer to would, of course. be our :Fra'TIonSSii'iall
~Dul:aD5sion :incume Jm.sEs.
the extent 01 a $50.000 limit." i~mli:iy--or-wrrOlJT hrrve-'jrrvt'st-ed
e fi...-n-J2
.1~ ;~;;.:The results fOtT reT.ail firms primarily Eerv -
Our expErience in connection with CUr- a"slgnilicant portfmJlJr-thejrsavings in
lette:-.
six 21"'2 ":8.g',,.public cus omen; were even worse. A rEnt liqUidations involving the Exchange's securitJes. ][ IS ImJ'fef1i'rV-e-thartnese In-
;{;'::~~Jqcking 92.5% 01 the retail .flrms ]ost money Speci~l Trust Fund bears out the accuracy
the
of thIS Etaterllent, as estimates of possible . v-estors, who are lJ~tr;rcKlJOTIeor a
.13
leT ac- :{\t;~,: ,their security COn1nlJEE10n business in
r fij-nl'~..
liability made in advance of or after the h€aJtny economy, ---oe-lUljy-pfOEecLed
.' '~\Ig)lst. .. . ,
gmgp: '-'PiP!itaClllJty apparently JJJ1proved In sep- liquidation was commenced, have been sUb- agamst brokerage firm failure5. They
13 bev~ .._. er_ The record 01 present and recent ject to sUbEtantial variation during the early 'should not be forced to Sear the brunt
thE!:P~ however, makes the raising Of new part of a liquidation and until an audit can of this administration's disastrous eco-
. very difficult lor aJ] firms and often be completed . nomic polkies with which this Nation is
'ble for a firm which has a special The Exchange did. however, make a de- now forced to live.
. In· other wordE, the red ink in the tailed study earlier this year of possible fU-
ture trust fund size. We concluded at that Recognizing the precarious position
ES business exacerbates capital prob-
the problem firms. time that a program for the availability of facing the, securiUes industry and our
economic situe.tlon in the securities a $BO to $100 million customer protection Nation's smalJinvestors, Senator MUSK3E,
.does not continue, to improve, there fund would be sUfficient for the needs of in June of 1969. introduced the bj]] be-
oualy be sub.tantial regUlatory prob- the foreseeable future. . fore the SenE-te today-a bill to insure
respect to the financial condition This determination was reached by analyz- investor accounts held by brokerage
';'dealers. ing items relating to member organizations firms in an amount up to $50,000. During
, the number oj firms on the spe- such as the gross income of member or- hearings held before the Securities Sub-
ljan~ces list, as expla'ined previously ganizations dealing with the pUblic, a cal-
committee: of which 1 am chairman, it
, decline and the magnitUde of culation of those firms' mean net expenses. was suggested that a securities industry
'resented by tbe firms. as a group. . and comparisons of liabilities, capital, si.~e of task force working with the SEC 'the
rb" ·{han· has been the case during .firms and their gross income over a fOUT-
s~verai mon"ths.
year period. Treasury Department, and our sUb~om­
eMs to a response to the second a program Based on these analys·es. we concluded that mittee give further consideration to this
as proposed in the SIPC bill, lead_ problem, This bill before the Senate to-
;'asking our opinion on tbe adequacy
·'Hi.ai ($75 million) and subsequent ing to a $150 million fund should be suf- day is a result of these deliberations. Mr.
"liDrij contemplated funding of the ficient for the foreseeable future. This con- Ralph DeNunzio, Chairman of the Task
Securities Inves·tor Protection Cor- clusion, in our opinion, continues vaUd today
Force, should be commended for his
'One ··way tb measure the possible and in the future.
~xJXlsure to SIPC is to review what
Recent events in connection with litiga- leadership' in this' area .. The proposed
. itments might have been re- tion surrounding llquidations which are legislation not only. creates lasting' in-
IPC if. the legislation h·atJ been being handled under the Exchange's Special vestor protection' from in.solvency but
ce mJd-July, 1970 when th e pro- Trust Fund procedure have brought into also, for the first time, gives the SEC the
sharp focus the need for the liquidation pro-
}'ti"n was first filed in the House cedures which are included in the SIPC bills. power to regwate the use o{'free credit
balanc~s and to prohibit the hypothecli-
.been in effect since July 15, The appointment of a liqUidator pursuant
ow; a'liquidator would proh- to the procedure In the SIP bills stays. any tion or cus'tomer·securities. By ali6wmg
ir'.appointed in the case Of only proceedings under ..th.e banJrruptcy laws 50 the SEC to correct any' abuses which
Il th fi that customer accouni.s can be delivered out rriay' have occurred in the:Se'are'as~ S.
""., ree of.. these rms ,;are p'romptly while a liquidatioii using Special ~34.8 couP1es investor insurance withse-
11; and even if SIP.C funds had
.;.:,the . total amoUnt. I]]vOlyi;d Trust Funds is voluntary and IS dependent curities industrY ref6f"m.. ..
,d.....pa.ve .been limited to. .a:few uJXln the voluntary forbearance of credi- . .Although the cODJoration adminiSter-
tors of the firm. .
,nVmost. . .... ': I hope ·that we have' answered th~' two ing tbe'insurance progtarn"wilI be able
,. of the most finandally ad- .
· the 'hIstory of ·the securIties questions raIsed by the .Commlssjon stalL As to .borrow up to $1 billion ftom the US.
. g.:. th.:s· period from July' 15 you have expressed on ·..a·.Ilumber of. pc~a­ '~TieasUrY,an'occuTrEince which' we ~]]
ternb~r J5. about 109' NYSE sions, public confidelli:e 'in the Nation's hope; will nevet·occi.Jr,thefirst $150 mil-
"tJOIlS were on our: specJal securitIes markets Is important to th'e: econ- 'lion will; be: raised . sOlely; from ·a.ssess-
.. ",nce JIst. During ·.this p·e- omy of .the Nation: The SIPC bill will go 'menls fnad~ uponmeinbers cifthe secu-
nd.ltlons in the securities In- a long way to improving and restoring the rities iiJduSt.r:V_In addition, the DireCtors
· b,".Je._BS. broker~de~~r profits public's confidence In our markets. 'Jf the of theCorporaticin will consist of ·the
SIPC biJI is not passed QY the Congress, this
qn~eXlstent. Hopefully, with wi. II ser.ve ·to diminlsh pUblic.co.nfidence.· .lilld, Chairman oJ. tJ,ie'SEC, the Chainnan of
,Of 'the recent increase in thereby, intensify the finanCial problems of .the Federal Reserve Board, the Secretary
. d the adoption 'ofthe pr6- broker-dealers: .. ." ., .of the Treasury, and two members of the
ssron rate sch!,pule,.the ·fi- Sincerely, :securities industry. This preponderance
.1r ill .the securities Industry ROBERT W. BAACK. of public direCtors will, in my6pinion,
..~.~II ~mprove. . Mr. WILLIAMS of New Jersey. Mr. insure. against. any abuses in Treasury
ll'!'e can assume that economic -,.::::.::.-:.:,..:::;;;~,*,~~,:::
e,securitJes indtis.t:ry in the Pres1dent,S. 2348 would establish a:'Fed- -borrowing. . .
,y@!' l.Jn;:irove, It··woUld ap- eral Broker~Dealer':rnsuranc Cor ora- The 'neetl for 8:2348 is obvious. Srria]]
ntemplated inltlal $75' mll.!'-· lOn III or er ro ectthe -many investors must be protected. Public con-
':;~p"C would. be nioie than ':1i;0ns
.:~... . '.
at Americanswhi:rllives~ m securi- fidence must be restored in our Nation's
t1es against brokerage'firm faIlure. ';' . . securities- mark1:ts. .
e...it clear, ·howeve., that no,,:"' n,;p,J;. t.he last 6 months. the ·nee.d to While I, for one, am not satisfied with
· ~1l:!101l' make a realistic or ~ " . .
:of .thepotential dollar ex- ,p!otect consumers whl) leave their secu- each and every section 'of this proposal
'e:i;~use;there 'is no knoWn rlties WJth ·brok;er~dealerSJOl Sl;Lfekeep-. especially in theai:eas 'of free credit bal-
'"::nl.~il1tY}V):uCh·mJghtbe InR 'haS become an absoIutrnecesSi't}'.· ance regulation, 'capital requirementS
'(if bh;ker-d~afe': failureS. ~Dunng that penOd, some -tit OUI Nation'S'" and assessments based upon" risk, , thi~
.T;1:;;'brude. v.-egi,table Oil . ]~rgest stockbio~ers ·have teetered on the bill certainly moves in the right direction.
 ] 0, ] 970
"Jewl)' creat-ed they ~re ~UJl far lrom
.,~ lully funded e\'en where an adequate
'';:'0]1) o11unding }13.!: b~en under Loken. 1n
':J:1. IEsent tax IEgulauons preclude the
~~~g Df past sErvice liabilities in jL'~S
U gbout twelve year!;
result t.ErminelJon 01 a pension plan
eaD that the funds accumulated are
uatE to pay lull pensions even to those
g retirement age, let alone to protect
e:fits of other workers who may find
ille security thEy thougbt tbey had
·SbEd for .their older years, through the
ulat10n of pension credits. has dJs-
·:ed aveTn j gh t.
reinsurance proposal would insurE t.o
"kei-:at the pension security which he
t:Iy- come to expect; and because of its
""cing feature would not result in
ellditure of I cent of public funds. II
Plo~~~t a worker's -inVEstment in a
ftJD9 just as his saVings are insured
-ted in a s~.vings bank or B saVings
association by insurance through a
'e+nt' corporation_ It would also in-
... ·obllgatlons of the fmid to make
liyments to him Just as a mortgagee's
~-ieceive' iuture mortage. payments
ed by Federal Housing Administra-
,.most important, it would recognize
·britles by protecting wage workers
an' those ·fortunate enough to have
L:: invest in·' stocks_
....- I' . , . unfunded liabilities of agin·g firms .
~ 'PENS10N R1GHTS PROTECTED
,.di(~"rionservativeact~a~ja) st.udy
·t·ed data available, the maximum
';'rate set· ~jjy" the .bill is adequate to
Ii credits earned under private pen-
s ngaJnst the .risk of termination.
'b:ar~ concerDed about the adequacy
e,IP~1J,D1 should be further reassured
ct .that· it is higher. than that set
··e of ihe other proposed legislation
pJect. If the premium proves to be
-tpeI.e . ~r.e. prpvisi9nS to. red~ce it.
·me chance, ·the premium' should
·tie'instifljci"enti tbe bill establishes
·priorltfes for protection.·
est ·priority .would· go to those
already retired and· who are re-
.j)epslon and to those who are elJgi-
tire under the terms of their plan
..have attained. normal retirement
',pi )ine. for consid~rapon would .be
o:'are eligible to retire by virtue of
-'",ib~d the age specified in the plan
:retirement,· If early retirement is
ded,· age sixty, ·the .usualage for
ement, would be used.
,e,insurance w01,11d .be pr.ovided for
e.nsipn, credits. ·.Inan order to be
, ., If necesS';"y; ·by the$ecret(l.ry of
~:bisisof:~xpert aav.ic.e.. .
."ci¥SS~ifi,d'#d?wOUld ·provide the
verage ·'of. early" earned pension
~a to ·earlier as··the ultimate goal
\)saL Tbe desirabJIJ(y··of. such ex-
erage, if at all feaSible, need not
:-Slncethe .degree 't<i which pen-
.. -'~s "are to be ~overed is . ;Dot made
t,oll th". vesting prpvisionsof the
:::jjellsi~n ,iupqs;ilieguestlon of
SuT!JS;·U any. ·should 'pe taken to
hfoakie':; .vestIng ·of. pensirin'Hgbts
. p~nsibn pi\ins need not be ·con-
•" -~:; . ~ .,. "!
he. understood· that".'"lnsurance
or ,those -neot y.et:at J:etireroent age
I'O.".n ).lIl:';l1e.<;lI,a.j;~,pay,,",e+,t,s .. u.nd~r
n ·,r.etrisUT;lDce:; system..·..;eayments
y;.<.b": made ;·"'.hen . the"..lndiVldual
:li-enientB:g~:Thi[driiayal;;o ie'pre-
dditiCiIia'lgul.:rantel.'that 't:q'e i pre-
-h'{,·i'et'·ili· '(ihoj:ier aDd· adequate
,an '-evenbiit'~the· ·effect· 'of :shott
uatlens ;iIi,· pl.a.n:'tern'lfuatlons.,··
Ql(~LANS E~~:6§L'i{'F,dR'~-~,~NCE.
pOsa] ccliite'nYplB:te'S:: b,'srli'ilncinror
., jJ'e:C:Sfon::p1altS. which: qualify: un-
3 ;l: ··;..:;-l?.: .-: ., .,-i,'":: .!;' ~.~ ~';;' ;;- J."~: :
CONGRESSIONAL RECORD - SENA TE 40879
der the ]nlE'TDal R.tVenUE Code ;:Ind which j~ contemplated the progran1 would include
have befn in operation and h&\'(' paid pIe- reguJ3tQry provIsions pfnnittlng n.S5umption
mium..s tor 2. specJ11ed number 01 yean be- 01 a p.Elrt oj the ]jabilities. T11e severitv of 3.
lore t.he jn~urancE became EflecUve. The pIO- reoueUon in work force would be mea-Ellled
gram WDlJld exclude "pay as you go" pJan.5 by whether the per capital past service amor-
but would include all funded plans whether tization payment on a plan exceeds some
the Junding payments are deposited with nn specified percenta.ge (for exaDlple, 200 per-
insurance company or in a trust lund. The cent) 01 the initial per capit&J past ::E.rViCE
program would cover those plans which pro- amortizaUon payment. The re~nsurance
vide for terminal iunding. those which pro- would assume any past service Hablllty
vide for the funding of all future servi-ee ]ia- financing required whjch is in e:Kcess of the
bilities but only pay jnterest on unfunded ::pecified perc en tage_
liabiljty, and those which provide tor the A second type of risk different from those
iunding at both past and future servi-ee lia- discussed above and Which should be indJ-
blliUes. Jt is recognized, of course, that since rectly insured against, 1s the risk of de-
these dillerent types oj plans bave signifi, prEciatJon of the funded assets. The overall
cantly dillerent levels oj fundtng. that the degree of risk involved in such situations is
unfunded liabilities will vary from plan to probably very slight. However, theblll would
plan. Since it is this unfunded liabiiity that allow the establishment of formuias and
wilJ be insured, the amount of the indi- st&ndards con-eerning the n.ssets which CBn
vidual p],an's premiums will be computed on be deducted from gross l1abJlJ ties to estab-
the basis of the amount of unfunded lish the unfunded liabIlJties. Assets of dubi-
liability. ous value or beld wit.hout adequate guaran-
The bill does not propose "ny funding re, tees of fiduciary responsibility could be
quirements beyond tbose already imposed by wholly or partially excluded from calcula-
the illternal Revenue COdE .. Bowever its ad- tions with the result that the.fnsurance pre-
ministration will lea·d to the accumulation mium would illcrease, The bJll would there-
of experience which will allow an informed fore do its part In promottng higb stand-
JUdgment on whether any additional fund- ards of adm.inistratlon and investment.
ing legislation is necessary. Such legislation
F. ESTAELISHMENT A'ND ADMIN1STRAT10N OF
might be desirable if it is determined that REINSURANCE-" SYSTEM
the reinsurance ~cheme would 'progressively
become more expensive because -of the large The reinsurance program should be placed
.
under the direetlon of the Secretary of Labor
since his department ·is responsible· for the
E. roSES AGAINST WHICH '.fEE SYSTEM SHOULD
of INSURE
protection of workers and already collects
detailed aDDual infoTInation on assets, ·costs
pension reinsurance system must ta~ e
A and actuarial liabilities under the Pension
intD account all risks to earned pension and Welfare Plans· Disclosure Act and dupl1-
cr'edits if it is to.provide a meaningful sense cation .of reporting can thus be avoIded. Clbse
of security to tbe empioyee.These risks fall cooperation wJlJbe 'req·uired wIth the Intei c
into two categories: (1) ·risks .to th~ plan nal Revenue Service w.hich :would impose the
whIcb depend on the degree to whicb it is sanction of disqualification ·on plans which
funded, and (2) risks to the plan which· de- do not participate in the program ·and wbicb
pend on forces outside of it ao'd which op- could make a plan Ineligible for the program
erate irrespective of the extent tow:qlch.it
if it Jailed to satisfy its minimum funding
is funded. . standards. Cooperation· woUld .also be desh-
A clear example of '8 risk In· the. .first cate- able wIth the Social Security Adm.inistJ:ation
gory :wopld b~ tbe case of a partially funded wbich has· the macbinery to notify bene-
plan terminated because of the business faJ]- ficiaries of rights. Further, these two agencies
ure of the employ·or. such In
case tbe risk a
also bave useful techri.ical expertise. . .
insured against wou·ld be itsimfu·nded JJa- ·The 1egJslation''-liutb citlzes the Secretary to
bility which is attributable· to the· rights
borrow moneys .from .the Treasury for ·th·e
whIcl;1.are -insured. As previously'-pOl.pted out, establlshment. of· a reinsurance fund. This
the p!.emium for. insuraDce of· -tbj~ risk
money would he .repaid hy the premJums
would be determined by the ·amount of un- wbich the.Iund would receive and the.legls-
fmided liabilIties.. . . . . ... , ' . . .
latlon would thereby achieve a self-financ-
Since the t.einsurance plan is ba~ically un- Ing status at no cost ..to the ·publlC. .
derwr·itlng tb·eberietit ievels set f{}rthin the - .. , . . . ' . ' : .~ .. . '
' ' .. .. ,
plan, tbe amount of tbE unfmided liabJllty, . Mr. HARTKE. Mr·. Pre.sident, the ·leg-
both for the purpose of tletermiiuIig the lia- isJabon the'Sena:tor ...from. Maine (Mr.
bilIty· insured and the premium charged, MUSKJ.E) would establish""'-s,· 2348-is a
would be determined on the ·basls. of a. set federally .charte:re.d· 'corporation to pro-
of standard .actuarial assumptJons and .pro-
cedures. These· aCtuarial ..aSsumptloIls and
tect securitiesiny.e..5 tors against losses re:'
, pr<lcedures "'ould be detehn.ined ·by tbe Sec- 'sUltmg nom nflanC;Ia::Ulj,iIure of broker-
· r';t~rYoi:i. tlJeb~JsOf meetfugs'..y;tb tj)e,e x - 'aeaJer fiJIllii ..:,J;'l'ie,·:ap:1enClmenk I .(j!fef~
pert Advisory CouncJ] estRbJJshed speclfj- woUJdpJO~eCL . the . private .pensions of
: ·call." f?T the purpose ·iif c·onsultatlon on the millions ·of··Am~.ric!'U1wOrkers.through
: ·proposed.'prograin. ;Federal insur,anc~.of t~eir·pension plans.
·.,·;,When ,the employer. has ·not ··gone out of 1,.. believe the"n~\ld :for iJIsurance. plans
..: buslnes:s, but ):las closed ·a plant'.or reduced ~l\ichWould.pr()~ct, bpth: the .s!'curjtiEis
· tbe·:.worir:force, .cpntinu.ed flindingof:·the
investor agd the average wage earner.is
·{j~t~i~~No:~~~~~tt~~:~e :~;t::Jci~ihth:
rein'.:Jnlng opeJ:atiim.:ToprotEctthe rights of
pbvious. ,·The ,justice of .0ifeIing protec-
.tionnot,qnlY to· ·iityes"t"ors, b1Jt also. to
botJi· iermiillitiiig and continui:D.g employees, American..workl':I:s.i.s . equally clear...,: .
• -.: .
·theblll·prii{;lqes sUllfcl.ent flexlbilltY'so.that .It goes .without'" saYing tha't ·1 applapd
· where tber·,ds a ·partial term1natlon as deter- the basic intent and purpose of S.· :;1348.
niined iin. accordance ,with Internal Revenue When i President ·NiJi:on spoke to ·,'this
Service Reguiatlons (Code, sec. 401 (a) (7)).
,.all appr.QPJ:li'ta.pljTtlo110f ;th.!' -!,:ssetsgpUiit be probleiJi i.n his.ec;pnp,mic speech oYJurie
· !i.ll9.catr~ ~o pie: te~':'tlnr,:".emjJ!9y,~~~:: The 17, imdi,called·.it one··of the measures
reinsurance would··then ·plck up any addJ- needed to ;'he)p,.tiie,p~ople who need·helP
':tfc";;:"l :u.abhity":Qh oohaJ! <if·those,employees. ·,most ina periOd. of economic transition,"
· :Ibe·:;employer· "IV.ould ··contlnue operation. iif .I :quickly.,indicated ,my support...Alld it
'.~1is 'plan, V;ltb;:the.:.rerpal.n:.Ing, "'9sets, p~ ,h!,- .. h~ ~eep ll};); pje"~siI!'e to sllPport the· pre-
N!!i,?f, ..r:pe.:,c.o.~~In~'i'.gep'By!y,e.r.~··· ..: ".< .·vious :initi!L:tive· anCi·imaginative .leader-
.. Where there ·Is no:,te1;tninatJon; .the .]lro-
:gfiuri ;~Flu~d:n'6f*-o~'~llj 'Qe :apIi!iCabi~but _Ship pi; ·.the':d.iSj;u1gUlshed,:jJ.lT!or.Senator
,if tbere· Is"a severepeductlon· In ''the work ,·fro.m ,.Main.e·, (Mr..".MusKm) .. Se.natar
_.::fnr.r.A· 9:ue..,td~b?Ss·B:tI6n .pi :So;rne .operations; 'It ,. MUSKIE ::was .:the .original sponsor: of this
~: :-.~' i .: . .. '._:.' - I . : . . • - ·i:;~ :-. : • ~:;: .- : "'::':.,:.:' -:~ ••-. ;: 1 .' ~ .J
 ] 0, ] 970 CONGRESS10NAl RECORD - SENATE 40885
i7D program as the Pick-SJo3n MissourI Basin
. \CouJd again like to pay lribule 10 Ihe lhe investing public the lype oj protec-
program; tion it needs.
,,:'BIOJ from Texas IMr. YARBORO[)GH).
S. ]"199. An act to nnme the .3uthoriz.ed lock
~..: fWjJresenLaLJves BUSH D.! Texa.s aJ?d 2nd dam No. )7 on Ll1E Verdigris River
] commend Senator MUSHJE for origi-
;,,0 f,1JER of New York for thelr leadershJp in Oklahoma JOT the Chout-eau family; nal]y introducmg this legisJ3Uon and Jor
""~eCUJing passage of this biD, The bi]] S. ]500. An act to name the authorized Jock the excellent job he has done on its be-
- 1.11e Congress of the Uruled Slates l'tnd dam No. ]8 on the Verdigris River half.
in the belief that all mothers, in Oklahoma end the Jake cre-ated thereby As a member of the Sena te BanlUng
JJJil Ltcr h ow poor, should 11a ve lhe 10r Newt Graham; and and Currency Cornmlttee, 1 wi]; continue
to determine t.he spacing and num- S. 3]92. An act to desJgnate the navigation to work with Senator MUSKJE and the
Jock on the Sacramento deepwat.er ship chaD-
of their children, a right Lhat the nel in the State of California as the William
other members vf tha t commi tt.ee to seek
aflJuent mothers already have, G. Sl,one navigation lock. ways to make sure tha t the investing
further researcn should be car- publIC JS gIven maximum protection.
aD in t.he field of basic reproduction, The message also announced that the Just as I favor legislation to 9rotect
biological, gynecological, and con- House had agreed to the amendment of the investor in the securities market, so
€pLive technology, just as such re- the Senate to the amendments of the do I believe it fair, just, and essential
'b shouJd be pursued in the other House to the biJ] (S. 3431) to amend sec- that. we have legisla tion to protect the
'I.h fields, The importance of this leg- tions 13(d), 13(e), H(d), and H(e) of worker whose investment is in the form
aD can noL be minimized. It. rep- the Securities Exchange Act of 1934 LTJ of his contribution to his company pen-
'f,s a much needed step forward, order to provioe additional protection sion fund.
'YARBOROUGH. Mr. President., I f or investors. Currently there is no legislation that
ateful to the distinguished Sena- will protect a worker's pension in the
from Maryland for his kindness event a cOmpany's pension plan fails.
SECURITIES INVESTOR PROTEC-
'd me. I hapepn to be chairman of Senator HARTKE stated that his stUdies
TION ACT OF 1970
ommittee and was in a position show that between 1954 and 1969, more
'ilitate the progress of the bill. The Senate resumed the consideration than 10,000 company pension plans have
tshould go to the Senator from of the bill (S. 2348) to establish a Fed- failed, resulting in "100,000 workers with
land's persistence and wiJ1ingness eral Broker-Dealer Insurance Corpora- reduced or no pensions at all.
'the work. ' tion. With the economic situ a tion as it is
PRESIDING OFFICER. The ques- Mr. HARTKE. Mr. President, I yield to there is a distinct possibility that many
'on agreeing to the conference re- the Senator from Michigan. more companies and their pension plans
Mr. CRANSTON. Mr. President, over wi1l gO under, leaving thousands of work-
jAV:rTS. Mr. President, I just wish tDe last 2 years -the general economic ers out in the cold.
"tbat I introduced the administra- situation in the country has steadily de- On September 29, 1970, Senator
bill, which contained many of the teriorated. Interest rates are at a near HARTKE int.roduced amendment No. 967
ions in the bill now before us to record high level, unemployment has to S. 2348. Senator,HARTKE'S amendment
, e and expand theJam.Uy planning soared to 5.8 percent and t1;le latest cost provides· for Federal reinsurance of 'pri-
s', of the Federal' Government.. I of Jiving figures show an annualized in- vate pension plans. The Hartke amend-
he Senator from,Maryland (Mr. crease of 7.2 percen t. ment is designed to afford to the work-
s) has rendered a signal service AJI segments of the economy have been ing man-,,-who does not have the funds
country in the way he,has worked severely jolted by the economic down- to invest in the stock markei--the same
d to get the concept 'of family turn. Needless to say, the, securities in- type' of protection that. is extended by
g accepted. I joined the Senator dustry is no exception. Wa11,Str"et is in- S. 2348 .to ,the securities investor.
exas (Mr. YARllOROUGH) in work- deed in a crisis, as the cover story on one The only form of investment that the
tters out in conference. I am very of the national news magazines declared average working man makes is his con-
,e,were sUCcessful. a couple of weeks ago. . tribution to his company's pension plan.
:TYDINGS. Mr. President, I have Over the past several months, approxi- I agree' with' Senator HARTKE, 'that we
,rd. mately,150 brokerage firms throu'ghout shou1d act now to protect the American
r.distinguished Senator -from New the country have been forced to liqui- workers investment. I support, the
(Mr. JAvITS) was the ranking mi- dat'e. In my home State of California be- Hartke amendment and I urge my col-
.,member both of the Health Sub- twe,en July 1968 and July 1970, eight leagues to give it their support. '
.ttee, and. of the fun cbDilllittee. It brokerage firms became insolvent, result- Mr. HART. Mr. President: I sha11 be
Judgment .of 'many that. if,it had ing in a lossto California investors in the very brief. I simply rise to commend the
en for the leadershp of Senator neighborhood of $2 million: " Senator 'from Indiana for bringing - to,
.,the' administration might not The failure of one of the, counti-y's the floor ,-today this amendment" which
versed its initial position and sup- largest brokerage, ,firms w'as narrowly provides an opportunity, as I see it, to do
this .legislation, ,Senator JAVITS' avoided by a inerger arranged at the 11th something for the man about whom so
pd 1eadership "in this particular hour. many speeches have been matle-'-theblue
!is crucial to the successful en- :A11 these failures and nearfaiiures add co1lar, "honest; hard-working American.
t .of this Jegislation.' I think his up to:~JDe thing: a.1oss of confidence by 'The ,right of a'family breadwinner'to
lqhou1d' be',recognizedand com- the mvestiilg p:lblic in the securities in- have an' adequate pension is now rooted
dustrY., ' deeply 'iriour tradition. Social security
~-,PRElSIDING OmCER.The
'I am deeply concerned .over the plight benefits are accepted 'parts of the :sys-
n is on agreeing to the conference of these investors. Many' of them' 'are tem.' Private pensions as a supplement
sma11 investors who,have been liter:l.ny' tosociaJ security are . today strong un~
wip.i~d (lut 'because .there.IS 'Db Govern- derpinning, for the, retirement needs of
mentor industrif;unq .tci'protect them. mi1lions of ,. our fe]]ow citizens." In fact,
Investors who have not been wiped ot!t some 21 'million workers are covered by
AGE ,FROM TIlE HOUSE are unable ,to, get 't1;leir cash"orsecurities private pensions on file vnth the DB.
back because theii 'assets' are .frozen in Department of Labor.
ssage from the House of Rep- bankruptcy proceedings which might The issue before us is how we cail 'best
tiv,~,' by:Jiq:r.. :E?erry, one: of its take years to resolve. ' ' protect the private pension plan from
clerks! announceq that the House ,S. 234,8, is designed to protect investors SUdden, unexpected co11apse. This ianot
.ed, Wltb.outlL!l1en,dment,thefol-, against losses due tothil nmU:fl'! of broker an imaginai'y fear-it 'happens; ina,pe-
bIlls of ~h.e l3ena~e: 'CIealerfums. Under it, a nonproilt corjiQ.: riod:of eMn'omic recession it happens
...,An ac,t.t,;,.provide,tpatthe reservoir §tion woUld be set~ptcimamblm ~d increasingly. Plants shut down,' a cbm~
by the lock aI~d dam referre<:i to as administer an insurance ftind to nrotect pany goes bankrupt, 'a' corporate take-
lliers Ferry lock and dam", 'on t h e " • ' ,,' 1; , ... -"'.- --,
Ii::. RIver; Ala.;'" shall hereafter be ~stomer s losses llP 0 $50,000 result- over, closes down ,an oldline operation.
'as J.he William ,~';!3Jll",:oannelly Res- !?g from a broker ~ v - There are' dozens of, economic. reasons
ency.. , , why: a: particular 'operation can ':cease
Po."An ;';'i; t~ d;;'~~~~ the coropre- l' SUpport this legislation and· believe operation''in good times and" bad.'.What
e :Mlssourl River BasIn development that it is a good firS't 'step toward giving h'appens to ,the pension' plans 'for the
 40890 CONGRESSlONAL RECORD - SENATE DecenLbeT ] 0, ]9'10
10 elimin3te those unsafe 01 un~u\1nd prac- male]y responsible For that reason, \ve a.ccept Lhis alneJ1dment. JL is based \J
lIce5 llave a parlicul3r obl!galion to provide as the sClwld precedenls WhlCh have :on
.~1Jl-OAJIilillJ;;.Mr. Presidenl, beJore much protection 8S possible. establl.shed in other Federal JJ1l'Ur eeU
explaining the amendmenl, I commend Moreover, the SIPC has no authorily programs. 1 see no reason to depart fan ee
t.he fine leadership exercised by t.he Sen- to revoke the insurance oj a broker- t.hose precedents in this legislation ron,
at.or Jrom Maine CM..r. MusHlE) in bring- dealer if it Engages JJ1 unsafe or unsound do e·therwise would open t.hE insUr~1'o
ing this important and vital legislation practices. By way oj conlrast., the POIC, Jund t.o potentially heavy losses and eE
t.o t.he floor. the FSLlC, and the National Credil the JWlds provided by the U.S. Treas~k
This bill is of crucial importance to t.he Union Administ.ra tion can revoke t.he As long as the Federal taxpayers ":
21 million Americans who own common deposit insurance of a commercial bank, st.anding in back of the SJPC, he is
stock and to the additional millions of a savings and Joan association, or a credit tltled to reasonable safeguards. In
::;0
-
Americans who own stock indirectly union if it engages in unsafe or unsoW1d view, it would be unsound and
t11rough pension funds or mutual funds. practices. While this authority is rarely to establish an insurance program Withe
un':2'
TIle recent wave of failures on Wall used, it does strengt.hen Lhe efiectiveness ouL at the same time providing for sp -
St.reet has sent shock waves throughout of the Federal government's supervision cific standards of eligibility and for e-
t.he financial community and threat.ens over insured bank.s, sa vings and loan as- voking tl1e insurance where necess;e-
t.o weaken the public's confidence in our sociations, or credit unions· Thus. t.he and in the public interests. 11'
capital markets. potential losses to Lhe insurance fund Th.ird, my amendment would TeqUir
The legislation reported by the com- and to the public are minimized· SITC to compile a list of unsafe or une ,
miLtee wiJ] Provide the custom'ers of During t.he committee's execuLive ses- sound practices by brokerage firms and
-brokeTage firms with proteCiToi1-li11he~sian on Lhe leg isla tion, I ofiered an report. on what action.s it is takingtii
"-evenrtne-bTOkera:gen:ffif-ran:s-:-custom::~amendmenL which would have required eliminate those practices under the au .'.
-ers who rnamtam crean lJalances or se- the SIPC to screen all broker-dealers thority of existing law. The SJTC IJim£,
curities with their broker would be in- and reject thOSe W]10 were not financially also give Congress its recommendations:
sured for up to $50,000 in the event the qualified to receive Federal insurance. on any additional legj.sJ.ation which rna}/i
brokerage firm failed ..This, of course, has This is the same procedure which was be added to curb unsafe or unsound pr8.cu:·
been modified by the McIntyre amend- established when deposit insurance was tices. This report would be due in', :6···.
ment. The legislation is similar in con- set up for commercial banks and other months. ....
cept Lo Fe.deral deposit insurance pro- financial institutions. However, in the The Senator from Maine (Mr. Must)·
vided to the customers of commercial case of broker-dealers, there are certain KlE) has indicated there are a number'BrO:""
banks, savings and loan associations, or practical difficulties. Given the present questionable practjces. engaged in.'bY'!!
credit unions. It insures that the invest- climate of uncertainty on Wall StreeL, bmkerage finns. Now that the U.S. Govi·
ing public wiJlnot be called upon to pay if a broker-dealer were to be denied Fed- ernment is making a direct financiii(-
for the financial troubles of brokerage eral insurance, such denial.could easily commitment to the. securities indust1-Y:::
firms which overextend themselves. trigger a ·run upon the brokerage firm. I believe it is essential to eJim.inate 'iiri}i:,;.'
In most respects. th.e bill reported by If the firm were forced to liquidate, !ts un.safe or unsound praCtices as sOOJi'··'ii:S'.fi1
the committee is a fair and .workable customers could suffer a severe financlal possible. ·.'",;'f::'.;
bill. Howev~r in ·my view there is one hardship, which is directly contrary to Mr. BENNETT. Mr. President, willtJi~,~:
serious defici~ricy: This is ·the lack of the objectives sought by the legislation. Senator y i e l d ? ' . ,i,"!'..
membersh·lp. requirements. For this reason I withdrew the amend- Mr. PROXMIRE. I am happy to YIel11'S::
As presently ·drafted. allbroker-deal- ment. However, I believe it is possible to the distinguished Senator from UtaIg;·;,
ers or members of national securities ex- to establish membership requirements to . Mr. BENNETT. Mr. President. the Seflt'i:
changes \vould-automatically be entitled protect the solvency. of the insurance aLor from Wisconsin knows of the t
to membershjp in the Securities Inves- fund without creating the psychological cern of the Senator from Utah that i:6:
tors ProteCtion Corp·oration-':'SIPC...c..and problems entailed by an ilIlD1ediate rejec- vertently his amendment might tran"
would thu.s have their customer accounts tion. I therefore have sent to the desk some of·the authority and responsib"
insured ..,Thjs l5'iL substantial departure an amendment designed to achieve these of the SEC to thjs new prjvate corpof- .~.,:.
from the procedures established by the ends. tion. It is my understanding this ·ba:~)j'i
Federal Deposit Insurance Corporation, First of all. the amendment would pro- been corrected. . "We'"
the Federaj Savings and Loan In.sunince vide that all brokers or dealers or mem-··Mr. PROXJv.IJRE. As I understand'iPn
Corporation, and the National Credit bers of national securities exchanges who the amendment specifically provides lJi[.t\',:
Union AdIninistration. Commercial were in operation prior to the effective SEC can reject any action in thisTegaf(i'ji
banks. savings and loan associations, and date of the 'legislationwould b~ auto- by SIPC, .' ,:t{\'ij.,'if.
credit unions are 'not automatically" en- matically' entitled to insunince as pro- . Mr. 'BENN:ETT. So SIPC cannotta'it1¥i'I
titled. to deposIt insurance'. They '~ii:l1ist Vided ill the' reported' legisiation.· an~action With. respec~ to anyone it isi#~~~
apply for insurance and . m.eet certain SecondlY, new firms which 'wei-e. es- sunng or refusmg. to' msure, which SE.c;;\
standaids .h¢fQre .they 'can .be insured., tablished after theeffectivedate of the cannot review";: '. . :' ·;H.,•.;
The'reai;oh is to protect the assets of tJ1'e' legislation would be required to apply for Mr. PROxMIRE. The Senator j.s c6~.~:l]
i1,1Suia~ee hind. If deposit insurance were insiirance and ineetcertain standards 'of recto :.i::;"" ' , ' . . . . . . . '<U:~;~;i
extended to.:any,financial in.stitution re~ finandal eligibility before ···theywere Mr.· ·BENNETT.··I thank the Senator'::{'
gardless oHts solvency or manageriaJ ca~· 'givenlTIsurance.TIiese standardswoUJd Mr "MUSm' :My' President will.'tHtB.r:
pacity;' the'.losses·could increase sUbstan-be similar to those :contained in the Fed- seMnar··to
tian;\'. 'The#.~losses would; .ofcoUrs·e,.'be eral Deposit Insurance Act and the Na-
1,;... ·:.·E··..·I·.'y.·l'e·l·d·. ;.
.. 'pIRYoi.eXMIRld. \"~.,:.:.:,:,~.·:!.·.~.·:t
.•
born'ebY the.niore soundiyni!i.n.iged"fi- tionalCredJt Union Share Insurance Act Mr,MUS:K;rE. :1 :havedisclLSs'ed tl,JjM~
nilpClaJi:riStitu't,ioils. Th~y woUld. be pay,:, which. :was reeentlyapproved by the Con- amen~ent at :~6J):Si~erable length ,:w1Alf:!~
in'g· th(pr.emiluns to support the insUr,:, . gress. The SIPC would be .directed .to the·SenatorfrpmWisconsin. The amenI!t,(.i:
ancili:ir.ggi-~tn;;.. .•. . . '.. , consider the'mstqry, financialc.ondjtion, ment unaertak:es 'to' Implement arrierii'iH',,~
In.the· case' of the : broker-dealer :in- and management policies of the appli- m'ents that' '",'erE/added to the bill :~i;i,';~
suran~e' bill, .there.is no .way the SIPC cant, the economic adVlsabilitYof insur- coninii~tee that'iiislire or st;ipplementtI11t':~
can reject 'brokeragemms whcFpreseht i1).g tfie applicapt without undue risk of insurance' program.'I;he .senator .frQilt::~
an :undue·· risk:tothe'msurance fmid. It the ftind,' and the generaJcharacter and Wisconl'ill; .si.nce~·till~ bjJ; was report~g;;{
j.s·som·ewh8:t ap,aJogoils to a)ift:::-insur-. fitness of the applicant's management. has 'de'velppedthis'mechanisrri to :tm,iM7:A
ance cO!llpan'y:agreein~.to insure ail ap'~: These· ani the same' standards which ment thatiJbJective.. . '. c::',;.}'
~li~!jLrits'wi,~Jj61ifc-orj9:u~~Jig:ln ex~ili.~.,.. have peenapp:tied foX. 37 yearsby.;.tlie I recbjj@end that the isenateagreei0>
~~9;I)~·;Pp'pef.tl,:ies",;clJ,"~Ul1l~tanc.es,:tJ.1.t::,J.i:fe. F~dera)Deposit InsurllDce Corporation tJ.;e., ~in~i:!!f!eJ;l1;., . . , . ' . ' .. " :~,:.))
ms;uranJ:;e.cpmpany wO)ll.dsoon.go..Qroke..· Wlth r,espect to commercial banks. I .be- .";J\\ir, .P,ROXMIRE. I wish to say ,to...tJ;1eh
A.;.~ii):JiJar;,~~p!:p:iGial .thieatris,,·PTes~iited li~ye. 1):ley . ~0.p~tij;pte:a:·s.6und preiC~dentsena:tor: that, as'
'he knows this' amend",;:
to.. ·the"SIPC <and ,to the.;U':?; Treasur:J7 for administering the brokef-q~aler in~' njel,lt was. 's6irie~h~t:dili~rent ':whe:ii:;t;:
which.is obLigated to 'lend up 1.0$1 biJJiiJli surance program.· .. ',.' .' "', ..' . . m§t·propo.'ied jt.The.Senator fro.m Mrtj.ri~,,·:'
to·tJi~;SIP<::iri thfeye~,(th,a.t'i(~ciinn_9t· "MI-:Pn:siderit;I Wo;.ucr:h~p~'tl?at.the clid.. ~g,geS:t,a moderation or change::p;t,,,,;
cove.r. *~O!>s!=s. So; the customer is ultl- distinguished manager of the .bill coUld' the'amendn1imt \vlllch I think made i~.;·'
,".
DC{i'niber 10, ]970 CONGRESSIONAL RECORD - SENATE
QnJendJ11En t, t.he interest on the segre- plete the liquid:;Lion of tile broker/dealer, activity flnd daily turnover In theSE :1C-
~BI,ed C~Sll which wouJd be held wouJd It is an Licipa ter] tha I, even under thesE counts will either cease or be ~harp]y
"UJJ inure to the benefit of t.he broker- procedures liquids Lion of the broker / reduced, lL wouJd appear t~1 bE i.o the ad·
~eB]er, and not to the benefit of the in- dealer could take some considerable vantage of the customers and the truslee
',estor. So we are not taking anythJng period of Lime to complete. Customer's that maximwn fiexibjJity bE allowed in
~W3)' from the investment induslry; we securities which are held by the firm negoLiating with such credit.or" 10 con.
are LryJl1g to protect them, but at the could well decline in value if the cus- tinue sucl] loans. withdraw the secllnLies,
am e time to protect their c\L5t.omers, tomer were required to wait until liqui- and liqUidate t.hose loans in an orderlv
~aD1el)', the investing public, dation was completed, The protection manner. Pr0.l!ll2Lreceipt of thesecuritie~
I thank t.he distinguished Senator. afforded by this bill could not be effec- be( the customers coul'd'weYIf:iemore-vaT:-
The PRESIDING OFFlCER. The ques- tive \D1less the means were given for uabTeLot:hecustomers -than-a-pa'S'ment
tioD is on agTeeing to the amendment of those customers to promptly receive their i~the trusreefi5T1FiEvartie~of
tbe Senator from Massachusetts, securities, This is the basic purpose of thesecurnre-s:-su-ltm-g-asthe-credi-j,or-l1as
The amendment was agreed to. the legislation. - t11efigIiLTh-foreclose against such col-
]IiIr. BENNETT. Mr. President, I send The legislation contemplated that la teral at any time, that creditor wi]] be
amendment to the desk and ask for secured and general creditors shouJd encouraged to continue the loans and
immediate consideration. participate in the liquidation proceedings cooperate with the trustee in paying the
The PRESIDING OFFlCER. The and receive payment of their claims as in amounts due and delivering the securi-
will be stated, normal bankruptcy, The reorganization ties pledged to the trustee and the cus-
legislative clerk proceeded to read procedures of chapter 10 of the Bank- tomers, It is the clear intent of this leg-
amendment. ruptcy Act. were adopted to give the islation to facilitate and encourage such
BENNETT. I ask unanimous con- trustee the maximum flexibility in man- cooperation and flexibility and to dis-
that further reading of the amend- aging the affairs of the broker/dealer courage precipitate actions by creditors
ent be dispensed with. pending liquidation. This' procedure is which will be damaging to the rights of
,;The PRESIDING OFFICER. Without necesmry to meet the special require- customers.
bjection, it is so ordered. Tne amend- ments of this legislation. ShouJd these creditors also hold cash
"'ent will be printed in the RECORD. One power given to the trustee and accounts of the broker/dealer they are
'>rhe amendment reads as follows: the court in chapter 10 proceedings, not damaged and wouJd suffer no detri-
,ill)end sec. 35(m) (6) at page 58. line 5, which is not generally available under ment from a stay of enforcement of their
: ,striking the perlnd after the wnrd section 60 (e). is the power of the court rights to use such cash as a set off against
ebtor," inserting a comma and adding the to stay enforcement by creditors of their a loan under section 68 of the Bankruptcy
, pWing: "but the Cnurt sball not stay as right to set off and, their right to Act. The right to set off can only be
inst a bona fide purchaser, as defined enforce valid nonpreferential liens delayed. not abrogated.
der the Uniform Cnmmerclal Cnde or in
er applicable state law, the right to en-
against property of the debtor. This stay This amendment wouJd accomplish
eE 'such a 11.en."
authority is discretionary but m'ay be these objectives by amending section 35
necessary. for a period of short dura- (m) (6) at page 58, line, 5, by providing
r. BENNETT. Mr. President, this tion, to allow an orderly commencement that the court under its stay authority
s a ion es a IiSlles procedures for the of liquidation procedures, to pay the couJd not stay the rights of a "bona fide
mpt and orderly liquidation of SfFC claims of customers and to complete stock purchaser" to enforce a valid nonpref-
bel'S whenever required. These pro- transaction orders of the debtor entered erentiallien. This amendment merely re-
ures are tci be conducted as if they prior to the final date. This procedure ftects existing bankruptcy law as regards
, lli1der section 60 (e) ,of the Bank- generally. will in no way be detrimental the rights of a "bona fide purchaser" and
"'tcy Act. which section is the present to the rights of creditors because the would appear fully justified to accom-
, ptCY law goverillng liquidation of stay authority is specifically stated to not plish the basic intent of this legislation.
'ckbrokers. Certain shortcomings have abrogate any such rights. Mr. President, I ask the manager of
'ome apparent in seCtion 60 (e), as it However, in one specific instance, the the bill if he is prepared to accept the
lies, specifically. to liquidation of exercise of this stay order couJd be amendment.
ker/dealers. Therefore. this bill pro- detrimental to the rights of a creditor. Mr. MUSKIE. Yes, I am. I think it is
es ,that SIPCmembers will be liqui- Creditors who hold securities pledged by a necessary technical amendment, and I
d in special'proceedings outside the the broker/dealer as collateral against support it.
ptcy Act. The actual liquidation loans where that creditor isa "bona fide The PRESIDING OFFICER, The
edure will be conducted in accord- purchaser" should not be stayed from question is on 'agreeing to the amend-
e 'with. and as though it were being enforcing their right to immediate fore- ment of the Senator from Utah.
ducted under: the provisions of 'chap- closure against such collateral. if neces- 'The amendment was agreed to.
,'10 of the ,Bankruptcy Act. which sary. Normally, these creditors will be The PRESIDING OFFICER. The bill
ws business reorganizations. provided financial institutions which hold loan is open to further amendment.
ever. that no plan of reorganization accounts With the broker/dealer to fa- 1VfJ. JAVITS. Mr. President, I shall
be filed. A trustee shall be appointed cilitate trading .and margin' 'security take just a mCallent of the Senate's time.
shall have all the 'powers and duties operations. Theseloimaccounts are ac- I understand there was a discussion 'at a
a trustee, under the BnnkruptcyAtt. tive ,and change daily both with regard time when,I did not happen to be present
,liqUidation procedures have been to the amount of loan and the amount in the Chamber' about the customers of
eflilly designed to allow flexibility, to and type of securities pledged. These the brokerage :firms which have gotten
' the special needs in liquidation of types of lOalls arean'integral part of the into difficuJties, that will not be covered
jdealers to assure, ,that the', cus- securities, busineSs. These creditors run by this bill, and that a telegram .of com-
tirs can receive prompt return of their the'same risk as customers of substantial mUnlcation was produced from Mr. Rob-
"Ities arid cash held by such broker/ detriment 'and loss in the event the mar- ert W.Haack,cpresident of the New York
ie;rs. ','" .. ' , " " ket value' of those securities falls during Stock Exchange.
lie basic purpose of these procedures the' stay :period. The status of a "bona fide I think perhaps it wOuJd also be of
give the trus~ee, authority to return, purchaser" for value is well established ,help to us if a telegram which I have re-
, promptly, aSP9.ssipl,e, specW Cal1Y in every jurisdiction and existing law ceived from the chairman of the board
tifiable property to cilstomers oI:the shouJd remain the same': as regards the of 'the 'exchange, who is himSelf a lead-
'ker/dealers, to,payJto customers 'rights of such "bonafide ::imrchaser." ing broker and represents, in a sense,
eysady'anced by ,S,IPC which 'has :As iJ. practical 'matter, ''the threat of those who will be paying out the money,
left :With such broker/dellJers and "
a
beiate ,the buSiness'of the debtor.in, :such stay order bya cciurt coUld well shouJd 'go futo the RECORD. The telegram
is very brief,:and I should like to read it.
r·tb complete. open 'GiJD.tractual cOpl- pr~CiP~tat~~. ~ug~ ~!.~~t?~~ ~t~ c:~g It shows why I have bird-dogged the
, 'ents:p;f1;he broker/Q.ealer. s:rPc,:wm s??h,loans al?'d enf~rcPJ:g .therr :ngpts Senator from Maine on this bill:
bro'gated to the,:rig'lits of ,the,icus- pnor to,the fil:u:tg of ll.c;IlUdatJon pro,~eed­
'..Ass'um1ng the, SIPC leglsl!J.tlon, presently
S to the extent it "has advaDced . ilJ.gs. l3.ecau,se 'of,~he natut13 ;of ,these loan ,p~ndlng iIi':Congress becomes 'law, I wIll'rec-
'eys to the trustee and stand as a "accoimts these' creditors would in most ommend to ,the ..board of governors that ,the
erred creditor in ,the liquidation pro- ,cases be aware that a broker/dealer is in exchange provide assistance. 11 necessary, to
dings. Finally, the trustee shall com- financial difficuJty. In such instances the, the customers of the First Devonshire Corp.•
"'i 4 . \ n~ IL-\- '.4We - ~(p
SECURITIES INVESTOR PROTECTION ACT
AMENDfVIENTS OF 1975

· ", HEARINGS
, BEFORE THE

SUBCOMMITTEE ON CONSUMER PROTECTION

AND;'FINANb:E ' "
] , COM~{ITTEE ON
.. ,.
:"
,
:OF THE
:c. 0

INTERSTATE AND FOREIGN ,COMMERCE'

HOUSE OF REPRESENTATIVES,
NINETY-FOURTH CONGRES,S
FIRST SESSION'

, H.R. 8064 P' ;

A ,BILL TOAl\~END THE SEOURITIESINVESTOR

PROTEOTION ,AQT OF 1979 ~ . ~';

, ,l~:;,.~ 6RL.{ L L~ ~1; \1;\': ,: li:;.~

OOTOBER 20,21, AND ,22, 1975"

. _ , ".' -iJ .,4J ,G ~j ,"," ",= --,_-

, , P~i~teiJ,for the us~,Oftl:He~:-" '
5?~mlTIitt~e o~Inters;tate and F?r:~ipnOommerce

,1,{X,~·t:- :.',':' ,"t· !~.;

",:-~;,-r .:'. ~:::~~/X.i~rc

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.
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'STATEM:Em:T45F )IUGIt.~F..,'dWEN~, '. CHAIRMAN,.. 'sEbuRiTIESY:(N~

7Y,~S.'rOlt'PkOTE6Tlol'i/cdXfO:R'~T,I(}N,.ACCO:MfA~~'~D~R'X?t.,' w..
"'~HESN:EY;VICE PJm~IP:~:wi};;;~;1iAN'CE,;jX~¥'Q:[},OR~ li!.,jf9:¢~T,
-Jo .- GENERAL) C01J:NSEL ;iAN1l ,W!LERED:R: CARON,'cASSqdTATE ,GEN-
;;':<E:RAL :COUNSEll'
if{1.£.l Jr(ri "e· ;~ :;~ ·,:·'L}.] ;~,.:..:~i.-::::.
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,-
 53
One of my first officinl acts as Chairman of SIPC was to appoint
a task force to review the 1970 act n.nd its operabons, with a view
towa.rd achieving better, faster, and more efficient methods of investor
protection. That tn.sh: force was headed by SIPC's Generrd COlUlsel
and Iva.s composed of repreEentatives of organizations hrwing a su b-
stantial int.ere.st in the e.fl'edive oDeration of the act. It conclucted its
studv during the first half of 197"4 and made its recommendations to
the SIPC Board of Directors in July of that year.
Although the membership of the task force represented diverse
views n.nd organizations, it was able to arrive at a consensus on all
subjects,exce.pt one. Its recommendations represent an appropriate
compromising and blending of views and positions in order to obtain
the goal of all of us-increased investor confidel1ce because of the ex-
istence of a v'"1a.bleal1d efficient SIPC program.
The task force report serves as the foundation for virtually all of
the changes which. the amendments being considered by you this morn-
ing would maIm inthe 1970 act. Accordingly, Mr. Chairman, I request
that a copy of the Task Force's July 1974 report, Report to the Board
of Directors of the Se{'.urities Investor Protection Corporation of the
Special Task Force to Consider Possible Amel1dments,to the Securi-
ties InvestDrProtection Act of 1970, be included at this point in the
record of these. hearings.
Mr. STUCKEY. It is so ordered, and will be made a pal't of the hearing
record. [See p. 59.J
~ir. OWENS. Tllank you, Mr. Cllairmal1.
- The Bo·artl of Directors of SIPC approved virtually all of the task '
force recommendationi?:which were sulbsequently put into legislative
form and were submitted to Congress in December of last year. In
addition to having the, strong support of the Board of Directors of
SIPC these proposals are also supported by the Securities and Ex-
chal1ge Com.mission and the securities industry. I understand that you
will behearing from the SEC as well 'as from many ,of the securities
industry organizations over the. next few d a y s . ' '. .:
The proposed amendments carry out ·the task· force .re.commenda-
. .
\ "

ti.~~ are 'designed to make the ad mole IBSflon51ve to the expect:r-

tiC\GB of investors. Even thongh the QYverrdl pLtIflose of. the act is "oeing
met, that IS to prOVIde protectIon to customers of bro -81' . Miers cus-
tomers 0 'm e rillS s e leve le are no receivin 0: the rotection
,tlle t'hought t ley were o-omg to o-et and in the :way they believe they
sl10uld ge 1. .' e ropose amenc men s WI el lance l1lves or con-
.fi.de11ce 111 ~uritles mar e S.· .
 54
. . even stolen. If there are claims for more IBM stock than is on hand,
lmder the p1-esen't statute J oIm Q. will receive only [L prorata portion
of his 100 shares. For the remainder of the. shares clue him, he will
receive cash in lieu of stoc.k !based on the market price Oil the date the
liquidation proceeding is initiaLed.
Naturally, if IBM stock goes up in price while John Q. is waitirig
to have his claim settled, he will be decidedly unhappy with the check
he receives from. the trustee. On the other hand, if IBM dec.lines in
price, we may receive 110 c.omplaints from John Q. But even ill that
situation, custom.ers can suffer certain clisadvantages, for example, tax
conseqllences of wha't is, in effect, a forced sale of their stock. .
The second major )I'oblem Iwith -tIle act is that the )rescribed liqui-
dation proee mes ares ower than they need be. This wor's a hardship
"on customers bee-ause, while they are wartIng to reCelVe th811' property,
..-they <ere. ttu,cble to m~r[:lnow diem in their acoounts. They sLaIll!. at
the"TIsk of Lhe Hralket. Then, LObi ·ehe normal l10w of chvidencls and
_ ot1ler chstrrbuhons is drsrupted and, ill certain instances, tax problems'
can anse.
cThird, the procedures are not only sometimes slow, 'they -are expen-
sive. There have been Smile eases where the trnstee'sadtninis'trative
expeilses have exceeded the amounts advanced to su;tisfy customer
claims. The framers of the aet apparently had in mind the liquidation
of la:rge firms 'such 'as vVeis Securities, where there were 34;000 cus-
'tamer claims. Theydidll'ot contem.plate thfLt the bulk of SIPC'cases
would turn out to be c.onsiderably smaller firms.
If I may depart for a momerlt from the text to pointollt a'n'illustra-
tive situation. About three weeks ago we commenced a broker/dealer
liquidation proceeding in Pittsburgh where it is evident that the
outside number of customers will probably be not more than five, and
in all proba.bility about three; neveTtheless we have to crank up the
ponderous Federal 1l1achinery for a liquidation process in that case
So, under the present statiIte, whether a broker/dealer has 50 cus-
tomers or 50,000, the same judieial procedures ·have Lobe follo·wed.
Virtually everything a trustee does have to be sanctioned by the court.
Naturally, this is comparatively costly in a small liquidation proceed-
ing-. To date, we have had liquidations with under 50 customer claims
in 24 pereent of our cases.
It was interesting' to me to note that the majority of the letters of
comment received by this c.ommittee in response to your chairman's
request for comments on SIPC discussed these san1.G problems. The
proposed amendments are designed to meet these shortcomings in the
law, as ,vell as to make numerous other improvements in the 1970 n,ct.
The amendments will, we believe, serve to maximize customer protec-
.tion, t.o add greater flexibility to existing procedures, and to reduce
administrative expenses where. possible.
As I mentioned earlier, the amount of money which SIPC eall
a.dv.ance to satisfy anyone customer claim is limited to $50,000 ,'lith
a maximum of $20,000 to satisfy a claim for cash. One important pro-
vision in t.he proposed amendments would raise these limits to $100,000,
with a maximum of $40,000 to satisfy a claim for c.ash.
This correspoilds to changes last year in the FDIC and FSLIC
legislation increasing the covera.ge for bank and savings and loan
deposits from $20,000 to $40,000. Out of the 100,000 claims satisfied i.n
all liquidations to date, there have been 131 c.ustomers in 31liqllida-
 55

: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

of total claimsancl 0.4146 percent of the total dollar value of all

claims. Viewed another way, while investors' mutual fUl1.d sales m~d
. redemptions for the same 4-year period amounted to over $30 billioh,
the $170,000 of claimed losses amolUlted to 0.0006 percent otthis t6t.\,1
~~ ,
I
lillhat would this have cost ~ Based upon our sui-vey ·alrea,dy referre'd
to, we estimate that for the same 4-}Tear period the cost to brokei'-
dealers at the retail level for including mutual fund revenues in their
assessment hase would have been about $2,817,000. . .. '
The seven failed retail brokerage firms, the names of which ,ve~'e
given to us, were relatively small. There is no evidence to indicate that
the losses occurred because of any practice on the pa,rt of the seve.n
firms to use customers' money or securities during the course of their
normal business.
. .
Rather,
r
the evidence is that the losses occurred by I"
naso sun Ie mi'sa J JrOpnatlOn. . ...
~ The names 0 t e 39 c a1man oS were supplied to us by SIPC.li\!e
sent each claimant a questionnaire seeking the details of his loss.
Fifteen of these 39 claimants responded and their responses dealtwith
transactions by 3 of the 7 brokerage firms involved. It appea~'s
from these responses that the losses occurred because the broker-dealer
poeketed the money received from this custoinerand then either failed
.to even advise the mutual fund underwriter of the order or.confir'rned
the order to the underwriter but sent a bad check to pay for the shares.
I~T e think that these 39 cases o:Uoss through some sort of :ri1.isconduCt
is 39 cases too m:any. Although the fig'ure is de minimis .from the.
legislative standpoint, we are concerned that proper ren'ledial steps
I
be ta,ken. The losses which occurred might well have been obviated if
the broker-dealers in question had appropriate fidelity bonds. I~Te
I
believe that the SEC and the self-regulatory bodies have adequate
authority to make any change in bonding requirements that may be
eallec1 for, or otherwise to tighten the rules. I
CONCLUSION I
, In summa,ry, the events of the past 4: years prove that Congress was
clearly right when. it refused in 1970 to fOl'ce mutual fund under-
I!
writers to join SIPC. These lUlderwriters do not use customer::.;' money 1
or securities in their business, no claim against SIPC on account ofa !
l
!
fund underwriter has ever been made, and under these circlUl1stances r
it would have been monstrously unfair for these undeTwriteTs to pay f
the. almost $5 million it would have cost in assessments had their f
membeTship been mandatory. There is nothing ·at present 01' in the
foreseeable future to justify a change in the earlier view of Congress. I
On the level of the retail broker-dealer, we think t.hat the claims t.hat
SIPC has paid in cOlmection with mutual fund trades are legislatively !
de minimis and that the cure is not to saddle the small Tetail broh:er-
dealer with new assessments for mutual fund revenues, but to tighten
t.he 1:eg111atory proeess, if necessary, and possibly require a ppropria.te
I
f
ficlehty bonds. . . r
I
lille "believe these exemptions were wisely legislated and should not
be repealed or diluted..
lille appreciate this opportunity to present our views.
MT. STUCKEY. Tha.nk you, Mr. Augenblick. I
l
\
!
,
~
r
f
l

./
 139

Mr. STuCKEY. TJmnk yon. And thank you, Mr. Chairmnn.

Mr. VAN DEERLJN. MI'. Eckhardt.
M1'. ECKHARDT. No qnesbons.
M1'. VAN DEERLlN. Mr. Metcalfe.
Mr. J\UTCALFE. No questions, MI'. Chairma,n.
M1'. VAN DEERLlN. Counse1.
Mr. BOWEN. M1'. Macklin, efm yon give us a, brief history about the
question of SIPC advertising, (md tell lIS what the Sta,t.1.1S of tha,t is
todn.y.
M1'. MACKLIN. It will be brief, I am sure. The original bill was so
written that SIPC could develop rules '\vhieh wonId .govern how theil'
members would use, on n. vohmta,Ty bnsis, the SIPC name fmd logo
fOT a,dvertising purposes. SIPC ha,d a proposnJ to ))1ake the use of
that symbol n'lanchtory, whieh was Te.jectccl by SEC.
N ow it is before yon for the first t.ime, and without consideration of
t.he task force that developed t.his legislation, to make it mandatory.
VlTe don't feel that it hfl.s been fairly st.ndiec1 ont, and philosopl1iea.lly
we 11[1:ve a deep Opl)osition to .forcing peOlj]e to do somet.hing. where
there IS 110 clea,rly demonstrated public interest..
Mr. ROWEN. V\Tns the action t.a:]mn by t.he SEC on the basis of merit,
or because ot a, bck of anthority in SIl'C to adopt the proposed rule?
Mr. MACKLIN. I clon't.lmow.
Mr. DERRICKSON. Beca,use of la.ck of anthoI'icy. .
M1'. VAN DEERLlN. Is thisintemlecl to giv'e confidence?
:1\11', ~1ACKLIN. Yes; t.o the extent it. does inspire eonfidence you
\voulc1 t.hink it ,\yould insliire genera.l use voluntarily.
Mr. RmvEN. Nothing: fIlrt.her.
Mr. VANDEERLlN. Th:mk you, Mr. Macklin.
Mr. MACKLIN. Tha.nkyou.
Mr. VAN DEERLIN. The next wit.ness is .Tames .T. Needham. clnir-
Dmn. of the New York Stock Exeha.nge, n.ccompflnied by senior vice
preSIdent Robert M. Bishop.

STATKWIENT OF JAJlifBS J....E:EEDHAlI~, CHAIRMAN, BOARD OF DIREC~

. - mRS, NEW YORK STOCK EXGIIANOE, INC., ACCOMPAJSIIED By
ROBERT M. BISHOP, SENIOR VICE PRESInENT .

J'i[·r.NEEDIL\l\I. ·At ·le.l1f3kt-he·. airplanes are. "shU ,w0Tking in New.

Y ork-t.ha.t a.nd the members of theNew York St.odt Exdiange.
Mr. VAN DEERLTN. It is DOt. yet the "New .Tersey St.oekExchu.nge" '?
Mr. NEEDHAl\f. ,VeIl. if COlig:re-ss and the SEC still keep it up, I
think we will "Wind up "workin.q"·for them.
Mr. STUCKEY. I understand there is additional land available at
Buzzards Point, if t.he.y want i t . . . 1 .'

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 would like to take the;, opportunity to thank ,this subcommittee

for permitting me to appear today to express the support of the New
York Stock Exchange for R.ll. 806~the Securities Investor Pro-
teetion Act Amendments of 19'75., .':, '
Theiurpose of this legislation is the im.proven1.ent of theptotec-
tion a orcled secuntl(~scTISt~.fbMi~ii:es-In-ves­
tor ,.Pr-Q.1;eBt-iEltl-8urp., t.o more effectively aml~ieItH'Yl,eI;form
its1:01e of protectmg Guston,1ersof registered orokeI's:---and-deal-
'ers' ·;fuc:e-ClWtEll1rTa:LIOn. We'reel that t1leblTfOeIor0tliiSSlibcom ~
mIt1.ee accom rlsles tIns goal and accordingly merits enactment i11
this seSSIOn 0 t Ie ongress., ' , .,
Sinee its mception, SIPCllas compiled anoutstmic1ing record. In
its very first year, the newly established corporation was, faced with
the liquidation of 24 broker-dealers. Undel~ the leadership of its
first chairman, Byron D, 'Woodside, SIPC met that eha,llenge and
proved to the investing public and the securities industry the effec-
tiveness of the legislation passed QY Congress. "
Of eourse, SIPC was not allowed to stand on its first-year record.
In 1972, 40 firms were placed in liquidation and in 1973, the cor-
poration had trustees appointed for an additional 30 firms., In the
1110St recent year, SIPC placed 15 more firms in liquidation to bru1g
its total to 109 bl'oker-dealers in 4 y e a r s . , '
Even more impressive than tlle number of firms liquidated is the
protection which has been afforded public' custom,ers in the past 4
years. The value of eash and securities retunied to customers under
SIPC-appointed trustees amounts to $241 million. Further, through
the efforts of these trustees and the SIPC staff. the return 0:B these
assets to customers was-for the most part-accom.plished by the use
of the cash and securities held by the :firms in liquidation. Of the $241
million, only $39 million had to be pai~l out 'of STPC funds.
The human, side of the tasks performed by SIPC cannot be over-
looked. These funds and securities represmited' the savings and in-
vestments of over 97,000 public customers.·vVithout SIPC, these
savings would have been lost and their con:fidence in securities in-
vestment destroyed. Also, these funds, and addit.ional accumulated
savings, would not be available to meet the future.caDita.l nee,ds of
American industry.
As the m~Iflbers of this subcommittee are aware, from 1965to 1970,
t.he New:York Stock Exchange, through its special trust fund, com-
mitted $140 million to assist customers of :firms in liquidation. Firms
liquidated by the exchange ranged from Baerwald & DeBoer, carrying
970 public customers, to Dempsey Tegler with 35,000 customer
aceounts.
In addition, the exchange was vitally involved in protecting 300,000
public customers of dn Pont, Glore Forgan, 225,000 customers of
Goodbody, and 74,000 cnstomersof Hayden Stone. These firms, of
course, were not placed in final liquidation by the exch3.nge, but sub-
stantial outlays were required by the special trust fund. Indeed, the
assessment against the exchange membership-to indemnify Merrill
Lynch for its absorption of Goodbody-eontinued until May 1 of this
year.

...i ....
 SECURITIES INVESTOR PROTECTION ACT
i
AMENDMENTS OF 1975
i

WEDNESDAY, OCTOBER 22, 1975

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,

I Rayburn Honse Office Builc1illg, H(:l11. Lionel Van Deerlin, chairman,

presieling.
JI.:fr. VAN DEERLIN. The Cha.ir, noting the presence of an .adeqnate

I number of members, ca.lls the hea.ring to order. .

The first witness is Commissioner Pllilip A. Loomis, Jr., of the
Securities and Exchfulge
,'-' Commission.' .

STATEMENT OF PHILIP A LOOMIS, JR., COMMISSIONER. SECURITIES

- - AND EXCHANGE COMMISSION, ACCOIli[PANIED BY LEE A. PICK-

II ARD, DIRECTOR, DIVISION OF MARKET REGULATION, AND ROB-

ERT J. MILLSTONE, SENIOR SPECIAL COUNSEL, DIVISION OF
MARKET REGULATION
1
Mr. LOOMIS. I a.m accompaniec1, on my left, by Mr. Lee A. Pidmrd,
j director of the COl11l11iSsion's Division of Market Regulation, which is
j i'esponsible for oversight in the SIPC area; and on my right is Robert
.J. Millstone, senior special cOlUlsel in that division, who was the Com-
mission's representative on the SIPC special task force.
Mr. Chairm'an 'RJlc1 members o:f the subconunittee, it is a
pleasure to a.ppear before you today to present the Commission's views
011 the proposed a.mendments to the Securities Investor Protection Act
of·UJ70. Five years ago, as General COlUlsel of the Commission, I ac-
companied Chairman B1ldge in his appearances before' Congress to
express t.he Commission:s strong support for legislation to protect the
aeeounts of public c.ustome.rs Of broker-dealers. At the time of those
appearances, the securities indust.ry was in. a grave crisis; public con-
fidence in the market.s was at its nadir a.nd significant numbers of
Qroker-clealers were failing, frequimtly -ea:USlllg substantial losses to
p1.1blic cnstomers. . . '. . '. . ...
.. In·enaetin·o· the SIPC legislation, .COl}gress aCted ql1ickl:v~nd de-.
cisively to r~store public confidence; many' investors' sa.vi.ngs were
restored to them. beeanse of t.his' aGtion: At the. sa,me time, COll:~ress
O'ave 'the ChiilInissiol1 a elear mandat.e to: determine. tlie underlYing
~auses of t.lW.~r.isis faeiirg tIle iJJ.(histi'y·a~d to:r~tnecly those problems
thiol'whstrepgthene.c1 fjjia:i1ciar:re}3i)bnsib~lityJeqlUremelits aJ'lc1,Sll.ch
.b .. ' \ i " " " ' ( 1 5 9 ( ' ',' " . . ..,
 161

fulfill customers' expectations, in a most. a .lUsLances, resormg, ·lelr

securities to tJleJll rathe.r LlmII,givillg t1;emcm:;h'.in exc}mll<Te lor :their
. ClaImS,'[\; u (speee l.lllgS.Up. lese. 'are t e'areas in whi .
---::-mill ie l[\;S. com J allle , . 0 . open\. loml; t1at liquidations are too
slowane til'at they '(h 1 t get 1enseeUi'.i .... ' ,: , . .
. Als?, SIPC wllIbe 'ab~e to use more lllformaI procedures, partieli~
lal'lYlll small e~ses.and .lll thpse' oases tJlereln\.s not oJlJv:been delay,
but administration expenses in proport.ionto the size oftJlereQOyery
for t.he cw:;tCY{p.~rs.:that was unduly high, simply 'beea.use oUhe neces-
sity.of 11~~11g ;fOl:m,al!b.allkruptcy. types of proceec1ings.wll~n c:ustomer
daim.sa;n):ount,eel to nOJD.oreVhana>few thousa,ncJ,.dollal's. . .
. The' Jegisl'atio:n also would' increase the Ilnlit of prot~ctiojl to
$100,000 for securities and $4:0,000 for. the.,e,aslJ.pQrt.ion. lYe, think ..t llis
change is entireJy appropria,te aw:1 will. serve. to, mailltnin investor,
9.qll:fi.q~nG\l.." : .,', :," .. ;.. ... ". . ',,'
, I no1'9' come to one. of two proiJosed changes ,vhi9h we have. The
first of these is the sitnati,on, where.·fl. .Cllstql~~erhas a cOJltract,witl:i ri',
broker-de~.ler for the pure!iase. or.sale.of S~f!ni:!~ies.~1"~licJljs'e,xeclliory­
on the filmg date.. That IS, the money and seqlntles JJave.no{vet
eJluJ.1ge,c1 ~lilnc1s. Weh,eli.elfe .that SllCh aC;'!:lsf.OJIJg(shciul~Lb~ .protected.
a..o;amst mk 011 that transactlOn 2}Jd,he,.pElm'l:J:t~~el tq, receIve the bellefits
of hi$):>a.r.g~ill even,1£his.b,1:9k:e.(faH$· :,.:',.'. ~: '. : ' , . '
':' A~ ~ ha1'e aJrea,c1y note-el, .thy ']?ij,W;il),~~' ,pllrpQ~~.qFtl:ir.se a'];1ellc1~
J11ents IS to meet more nearly the re·asollable expectatlOlls of brokerage,
firm customers. '
 165
b115ines5. Institutions lend securit.ies in OlAel' to levera.ge tlleir port-
iolios,fI,nc1 the,y rec.ognizefLncl ire c-fl}Jo.:ble oi fLccei)ting the associate,ll
business risk: The institutions generfllly require thebOTro\~'illgbroker-
deflJer tcq)ost c.91J(\.tel'il). ~q}lfLI tD fit least. 100 percent of the value or
the seemities bCl1,l;Ow,ec} arid then mark t.he'\?olln.t.e,rrrl to the mf\.rket.
It would not seem thfLt sueh lenders need the' prpte~tion of SIPC.
. . Oil the othei<hilrid-; brokers might borrow ::hOlT). 'ilic1i,ridual invest.ors
who would no't re:aliz~)hat 'by e,ntel'ing into sueh arrangeme,ntsthey
would los~ SIPCcoyQ1;age... ," " . ",
. The, point is not, of major importance, f\.nc1 we'do.not:object to the,
proposed ehang,e, but we believe t.hat :what SII:lC proposes to do should
be made dear, "at least iiI the legislative history. If ,.the. proposed
ehange is made, Ibehe,Te the COJ11miss'i,oll woul.a find it ne,cessar)'
to provide a.c1ditiona.l 'protections for retail enstomeis ,vho lencl
seemities t.o their brokers; f\;ncl Ibe.1ie1Te w.e wonldbe able to do so.
'lh lia,ve ali.ot.h:eJ~'tn;ciblem with the p]"{)poseel ,mnenelments to
section 6{c) (1) ,.whic}:lwOlll,c1l)Iovide thp,t. onlY)If?c)..lrities receiv,ed or
held ;bythe broker-rea.ler ·"in the orclina:l:y'cq~T!3eof.·bil:;;iness as a. broker
or (le<l.1e1:" C:9ulclb.e. t1~e:hasis fOT a chim. I nnc1en:itriTiJl that .SIPC pi-o-
po~es,: this jl} {ll:~l~r: tq;'c'Qd~f:Y' :¢ertail'l eases;· which have: ,deniecl c1n.ims
of [l, ellstomer.· w,ho ,a.iited. in~gl11ly orili1prbp~rly ill his, trrtnsa.ctions
with th.e debtor. .' ',' '.". -, ..' . ." • .' ,
Ii,! Ii? agte,e with these decisions ancl this:' objective., Bn.t we think
the.;lallgua.ge is,too bro~~t ;It Sh011ld ext.end. only to situa.tions where
thecustcimel",c1ealt, witld,lwbroke.r lmpl;6pei'1y';'a;tiN;;;}lQnl~11Iotexte,nd
to,Cl\SeS where ,it w,as:th~ debtor not the, cn~t9me.r;.~~·h.o diel not ac.t'''in
t.he 'ordinaJ-y cOllfse orl;>:n!3il)~ss:l' l,Ve thinktha.t:-would be unfa,ir to fI,
cllstOlJler if,·.he we.r~' j:\;Kchlde,d 'b~ca.l:ise, the' 'clettor; depa.ited irom the
ordinary conrse Dtbli.sh,+e.ss,i:ii"(le;tiingwi£li':hiITi~: . :' .'.: :,'. ,'- .
e
. -V'i,T, dOli~t'tlriiili:' this additional 1a.ngua.ge jll·the st!\o~l1te:is rea.11y nee-
.:.1
eSsa.ry"tQ ac~o.mpl~¢.h SlPC's 'plii'pOse: ';rhe cOl:!-rts'1lave; a.lreac1y so, hel el,
but if. it is lo.be include,d, wd;Jlinlr it shollJd'beliiliif;e.clto, ca.~es where
the·customerdicl' not ·c1eai. ~¥i th i~he."hr;okei'i~i'the, qtGlil~.:ty cDUrSe' of
Q11siness;' Tather tllhi'J. the other w:f1,y'aro.lUlcb:,,: ;., l' .:'. ~', : :," , " ..
'.' 'Dlils' )e.gj~la.tlbli ·J.m~91v.e5· ma.iIY,other;: t1iflj.cul~.questions, a.nd, the
Commissionoffirs its ,~ime.:r\ol1,cl theti~ne,'Q;fj~l{:~t,a;:(f to' a~sist CO~lgTess
in a.nywayd'11ring.the legislative process.,: ..::',::.' ...... ' : .. , . . ' , '
'. ):11/ q01ichi?ion, ~he Commi~s,ion wishes, to mjtemte its.wholehea.r;tecl
$.Up'pql;t: O£.: th.is.le:gi~laMo~} ,'which '~'Ve "helieve: wi~l p~-ovid6J better, cns-
tomer prot~6tiollll~, a tim~ly~·.ii.nq .ecoP91\1fc~rt'i,s.~ii'oll. '..,. ". ' "
T 'will b~'ha.ppy. tcf~l~gWeI' a.nyquestions.the81;1,qGQ~11lnj~t\>~'[.l}il.y llaye.
, [1i([r. LoolIns' :pr:~l:).a'r;e~l ~t9-tement a.ncl the.mem?randum referreCl".to
follow:] ,: .. " " """ ' ".' ',:' ,',::;:." , , ' : ' : ',,'
S~ATEMENT,0F..GO:r;{¥IE'SIONER, ~H:riIP A. LOO:MI:;;; Ji.; S1'Ci:rRiTIES '~:ND EXCHANGE
r-' ,." '" , ",'.': . ,.....,;, ·,','T;i~:tl;M!~SIf)N,.· , .::' ~'::'.;' ;:',.'~<;_:~:, : " " i " , , ' ,

Mr. Cbaitma:n unc1 nienii,lers 'of the Snbcbmmittee; 'ij;r.is··Q:"pleasur.e;to appear

!J!;j.'ore Y01;I today to pJ:eseIlt the Qonpnission's views'.orr'the' pr,oJ,josecl amendment,s
tot1:ie ~eG1ji·iHes''i:p'iiestQ\i.''~rQtecti(itJ'Actof::\.070. iFive;yeal:s ago"as; General OQ,1lJl-
fiel '6fthe Comillissiiiii. I 'accomp'aniecl',8hah'bilm ;BuclgedIY bis,appearances, before
C(;:rigr~s~ to' exi:if~ss :thg: 'Grmmisi;;i"ob'sstropg'''suppoi·V',;fol'.tlegislation ,to 'protect
{h'e itccihiilfsb.':E'j)lil)TiC·' c\isto'me'i's. 'of bl'bker,[dealers:\!:A:.t ithe'tin:i'er'of 'those :appear"
.
~n,r.;~ii:'i:l?:~:;'~~,srti.~1:ef:!it1~li,stl'r; :y~~ .~ll~!).':;~i;a vi!'; C'ri;sis),ipn l~lic'1-con:ficlenc:e .in . e tll
lilarkets 'waS"a t·;lt~;m.l,cl]1,I:a)lil,Slglllficant,nl1m h"erSiofL bl'.oket,cleaJerfi.were"failing;,
frequentLy cau'srug substantial losses ,to public !=l1stomers. In enacting the' :,:;1'pc
65-114~7fl--,--12 ' . .
. " ' . ! . ' •. ~ ..

'.". ":'. .
 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.

STATEMENT OF DAKIN B. FERRIS

:r- .
Mr. FEHRIB. M:r. Chairman, the Marketing Committee of SIA is
concerned with the programs and a,etivities of the securities industry
aimed at broadening' participation in the market for securities invest-
ment. We on the committee believe that continual and broadened in-
vestment in securities by tl1e public is important to the growth and
prosperity of the country, and it is particularly important at this time
to provide more jobs for an expanding work force.
Public cOllldence in the financial responsibility of securities firms
whidl are actlve m the markets amI who i'tea.l wiLh t.he public, is it pre-
req'tIiSite to hroad public participatlOn 111 the market for securlt1es
invW:JJ:umt.
The amendments under consideration by the subcommittee provide
improvements in SIPC which wiJ1 enhance confidence in securities
markets. :Many improvements wiJ1 be recognized by persons with a
detailed knowledge of these markets, but the public investor wilJ be
interested immediately in the one big, obvious improvement for his
benefit-an increase in the maximum amolU1t of SIPC protection to
$40,000 for funds and $100,000 for securities.
Thi,s im roved protection not onI )rovides for increased confidence
in the use 0 t e mar ets through members of SIPC, but also confidence
to eneuurage castomers to leave securitles wlth the firm rather than
obf~very. .
..:1:11 absenceoJ:such eonfidence "ITould frustrate the efforts of the
industry to immobilize the stock certifieate and to provide an efficient
nati0l1al system for the clearance and settlement of securities transac-
tions. Therefore, adoption of the amendments obviously wilJ be bene-
ficial, both to the market system and the users of the system.
The question of including distributors of mutual funds and v~riable
annuities as persons who should be covered by SIPC and subJect to
the assessment, was taken up with the Securities Industry Associa-
tion's board of directors at its meeting last week. The board voted
unanimously to urge that these persons be covered and subject to the
:assessment as provided in H.B.. 8064.
 188
The board took into account the fact that their previous exclusion
was based apparently on the argument that since they are essentially
sales organizations, not carrying customer accounts and generally not
holding securities or funds, they present no risk to the SIPC fund.
However, as Chairman Owens stated in his testimony before this sub-
committee:
Although those firms do not hold customers' securities or funds, they cl0
handle them. Accordingly, the possibility of loss or misappropriation exists. In
addition, the theory of inclusion in SIPC membership for many membei'S has
been that all who derive their livelihood from the securities industry should
help to build the SIPC fund which is used to support a program designed to
restore investor confidence in our Nation's securities markets. For exam pre, floor
members of stock exchanges (who have no public customers) are required to b'e
members of SIPO.
He also called attention to the fact that cash in lieu of missing
mutual fund shares has been paid to 50 claimants in eight diiIerent
SIPC liquidations for a total of $190,655. In addition, in three of
those liquidations, mutual fund shares having an aggregate value
of $69,483 were distributed to 14 customer claimants.
The SIA Board concluded that-since mutual fund transflctions
can give rise to claims in SIPC liquidations and since it is inequitable
to be using SIPC funds to satisfy such claims if, at the same. time,
mutual f.und transactions [l,re not part of the assessment base for SIPC
assessment purposes-the changes provided in H.R. 80Gel: on this ques-
tion are appropriate. I might add parenthetic[l,lly that all of the in-
creased participation would not be paid by those firms that are not
now members of SIPC, but [l, large portion would be assumed by those
firms who are already members of SIA and who endorse increasing
their own assessments for this purpose.
Finally, it is appropriate in our view to call attention to a notable
achievement of SIPC which we would expect to be continued. That
achievement is the fulfillment by the SIPC board of its responsi-
bilities without establishing- a·n extensive and expensive bure[l,ueracy.
We understand that SIPC has covered its admVlist.rative expenses
for its internal operations by using one-half of the interest income
SIPC has earned on its investments. The SIPC board, with industry
participation, has perform.ed its job in an outstanding" mallner and
deserves, in our view, public [l,clmowledgement of the achievem.ent and
.congratulations.
I wish at this point, Mr. Chairman, to ask Mr. Lubin to comment
further.
STATEMENT OF BENJAMIN L. LUBIN
Mr. LUBIN. Mr. Chairman, I am here today as the Securities In-
dustry Assoeiation's task force representative responsible for provid-
ing the task force with brokerage operations expertise. In this capac-
ity. I wish to express nw unequivocal snpport for H.R. 8064.
As you will reeall, 1969 and 1970 were c.ritical years for the securi-
ties industry. In addition to the failures of firms both large and
small, others were forced to terminate their activities because of the
severe economic pressure brought about by continued declining volmne
and the tremendous expense involved in straightening ant. t.he paper-
work crunch of the late 1960's. As a resnlt of the industry's cleteriorat-

58
 189

ing f:iJ1flJlcj~l hf'~lth, the innsting public began to lose confidence in

brokerage firms, causing a concomitant deterioration in the strength
of the co~mtTY's capitallnarkets. ~
In 1970, Congress, recognizing the severity of this pl'oblem~ passed
the Securities Investor Protection Corporation Act.. In doing so, Con-
gress brought about a certain measure of calm to the investing public
in that it extended an FDIC-type of insurance protection to fin inves-
tor's brokerage account. Unfortunately, however, because of the urgent
necessity for this legislation, the 1970 aet. was structured arollnd the
wholesale incorporatjon of the Federal bankruptcy statute.
As SIPC began to liquidate debtor members and indemnify public
customers, as provided for by the act, it soon became apparent that
the 1970 legislation was far too rigid for the efficient handling of many
brokerage liquidations. The act did not contemplate the complexities of
such industry phenomena as clearing corporations, fungible securities,
(~ol1tinnons net settlement accounts, and omnibus accounts.
Accordingly, liquidations were lengthy and cumbersome, customers
became disillusioned, and final settlements were inordinately pro-
tracted. The public was unhappy with the indemnification procedures
and trnstees, because of their inability to exereise routine discretion or
business judgments due to the rigiclity of the act, were unable to be
responsive to the many unique situabons which occurred on a daily
basis during the liquidation procedure.
In May of 1973, Weis Securities, a large New York Stock Exchange
member with over 35,000 public and institutional accounts, failed.
For SIPC, the enormity of this undertaking, even with court autho-
rized accelerated payment and distribution procedures, showed con-
clusively how the inflexibility of the 1£)70 act could be costly, inefficient,
and unsatisfactory to the public investor. At this juncture, I would
like to quote briefly from the .July 1974 report by the SIPC task force.
Fnrthermore, SIPC's experience in Weis served to re-enforce the conclusion,
already well supported, that the liquidation procedures presclibed by the Act are
in some respects inefficient, expensive, inflexible, and not necessarily the speecli-
est methods practicable. It appears that many Weis cnstomers were in some
measure dissatisfied with the protection afforded by the Act.
Since many clients were receiving indemnification in cash instead
of securities and because their accounts were frozen for protracted
periods of time, the task force concluded that "it is clear that what
the public customer wants is the speedy delivery of his account intact
and not protection resembling insurance benefits~"
In order to achieve these o'oals and for the purpose of expedienc
aIi~nom, e task force eterm111e a ee ee are eXI e st.atu-
tory guide mes designed to allow IPC trustees to exerCIse ciscretion
.to maKe customers whole quiclr'ly and with minimum expense. SIPe
must be gi ven smrlTad:ditionul i'ttlthority and clisGrlstion as ar@ lHlc@ssapy
.~ entble it t;a l?el'fQT:m j~s. ral: more effecbvely and efficiently ana
. lere y to aSSIst 111 mall1ta111ll1g 111vestor confidence."
'The amendments offered 111 H.R. 80b4 include procedures to satisfy
the foregoing pri~lcipals and desires. Among them are:
Added flexibility and discretion for trustees;
Improved allocation and liquidation procedures;
95TH CONGRESS} HOUSE OF REPRESENTATIVES { REPORT
1 st Session No. 95-746

SECURITIES INVESTOR PROTECTION ACT

Al\lEND~lENTS OF 1977

OCTOBER 26, 1977.-Committed to the Committee of the Whole House on the

State O:f the Union and ordered 1:0beprinted~~= =~===~~

from the Committee on Interstate and

]\,11'. ECKHARDT,
Foreign Commerce, submitted the following

REPORT
[Including cost estimate of the Congressional Budget Office]
[To accompany H.R. 8331]

The Committee on Interstate and Foreign Commerce, to whom was

referred the bin CH.R. 8331) to amend the Securities Investor Protec-
tion Act of 1970, having considered the same, report favorably thereon
with an amendment and recOImnend that the bill as amended do pass.
The amendment is as follows:
Strike out all after the enacting clause and insert in lieu thereof the
following:
'SHORT TITLE
ISECTIO::f 1. This Act may be cited as the "Securities Investor Protection Act
_\mendments of 1977".
MEMBERSHIP OF SIPC
SEC. 2. (a)' Section 3 (a) of the Securities Investor Protection Act of 1970
.(15 U.S.C. 78ccc (a)) isamendecl to read 'as follows:
"( a) CREATION AND MKMBERSHIP.-
"(1) CREATIoN.-There is hereby established a body corporate to be known
as the •Securities Investor Protection Corporation' (hereafter in this Act
::referred to as 'SIPC'). SIPC shall be a nonprofit corporation and shall
have succession until dissolved. 'by Act of the Congress. SIPC shall-
"(A) not be an agency or establishment of the United States Gov-
ernment; and
.. (B) except as otherwise provided. in :this Act, be subject to, and
:have all the powers conferred. upon ft nonprofit corporation by, the
'District of Columbia Nonprofit Corporation Act (D.C. Code, section 29-
·1001 and fol.).
"(2) ,MEMBERSHIP.-
.it (A) MKMBERS OF SIPc.-SIPC ::ohall be a membership corporation
ttbe members of which shall be all persons registered as brokers or
.dealers under 'section 15 (b) of tbe 1934 Act, other than-
 21

THE PL~:RPOSE J\ND NEED rOR THE LEGISLJi. TlOX

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'

purc lase e I:lJance of the shares in open market purchase. However,

'\\-here. ~is no "fair and orderly marlre-t"-iilWIl:lch to )urcllase
sikurI -les 1e tms ee 1S rOVI e wi' 1 au on y to satisfy claims for
securities with cash. Securities distribute to customers are to be
·-\.:a1ued as of tlie filmg date.
Section 8 (c). TIns section establishes the priority in which customer
property shall be allocated.
First, SIPC is entitled to reimbursement for discretionary advances
made to recover securities through payment or guarantee of any in-
debtedness of the debtor to a bank, lender, or other person, to the extent
that the securities are apportioned to customer property under section
6 (d). The recovery of securities given by the debtor to others as col-
lateral for loans is an important means of facilitating the delivery of
securities to customers. ~
Second, rema.ining customer property would be allocated ratably
among customers in satisfaction of their respective net equity claims.
To the extent that a customer's net equity claim is unsatisfied by cus-
tomer property, the customer is entitled to an advance of funds fron1
SIPC up to the amount permitted by the bil1.
Third, SIPC shall then be reimbursed as subrogee for the claims of
customers which it has satisfied with its own funds.
Finany, SIPC shall be reimbursed for any advances it has made to
guarantee or secure any inderrmity pursuant to section 9(c) (2).
Any customer property remaining after the satisfaction of claims
by customers and SIPC becomes part of the general estate. A cnstomer
ma·y file a claim against the general estate to the extent 'that his net
,..egu2 t y exceeds hW share of customer propersy_plus SIPQyrotccbon.
rnder subsectIOn 8TC}(2rtlfetrllsfee 1S dIrected to deliver 'customer
name securities to customers if they arc not indebted to the debtor. If a
 37
Based on tllis revicw~ it nppNlrs that no ndditjonfll cost to the gov-
ernment. wonlc11Je incll]'J'cLl n::; n ]"rslllt of rllnctnwnt of this bill.
Sincerely,
ALICE M. RIVLIN, Dii'ectoT.

AGENCY REPORTS

S·L\TF~.IEXT BY HrGlJ F. a'WENS, C1L-\IRl'L\N ECURITIES INVE~!9A-_..~._

PROTECTIOX CORPORATIOX
-------~=---=-
::\1)'. Chairman, anl1 ])1embe]'s of t lw 'subcommittee, it is n pleasnre
fur me to appear before y011 this morning ane1 prrsent the yirws of the
,spcllrit]es Investor Protretion Corporation on H.R. 8331; the Secllri-
ties Investor Protrction Act amrne1ments of 1077. A very similar bill,
n.R. 8064, was thp subject of lwarjngs brfore this Subcommittee in
bte 1975. The- present bill incorporates many ~ll.ggestiolls made by
thE' Secllrities and Exchange C'ommi;.;sioll, SIPC, this SllbCOlllmittl~(>'s
OI,n staff, and othcrs in regard to H.R. 8064-.
Before I revic'w the many important imp]'ovemrnts ,v-hieh H.n. 8331
,Yonld make in the Securities In\'Pstor Protretion Act of 1070 (here-
inafter referred to as the (;1070 act"), pel'ha ps it "\\"Quld be n:;:efll1 if I
snmmnrized briefly the nctivities of SIPC ~inC'e its creation in De-
epmber. 1970...:\s many of von "\yin recall, SIPC had its ori!!ins in the
rlifficllJt. years of 1D68~1 07() wllPn the pa-l)('l' cl'l1nch brong-ht Oll by flU
l1nexpededly high tmcling 1'0Ju111e in secnl'ities was follO\n'd by the
most severe decline in stock prices since the Great Depression. Hlln-
dl'pds of broker/dealers were merged, ncquirecl or simply 'Yl'nf. out of
business. There ,yere some "\yhich were 11nnbl(' to meet their obligntions
to customers and 'wnt bankrupt. Public confidence in secllrit.ips mar-
kets "\,as in jeopardy.
-=-.In order to protect customers of failer] brokrr/cle:l)rrs against finan-
cial loss and, thereby, l'C'sfore invpsto1' confidence m the ~ecl1nties
.JH-r'tffi.cls, COllgless p.tss-m tbe 1070 ad. 'That statnte, which wns ~igned-~
into-Jaw on Decembpr ~O, ID70, created SIPC :ll1cstn lished a )1' -
gram . ere y mOJ1lr.s rom t 1'e • IPC Film] ,\"onl(l be available for
t11epur}JOse of protedmg customers of broker/clealer £inns which en-
COi:illlel'ed financial difficulty. As the Act now stal1cls, SIPC may
- advnnce a. maximnm of $!HJ,OOO to protrct the claim of flny one custo-
mer of a failcd brokrl' or clpaler, bnt no more than $20,000 of that
amount may be advanced to pay claims fo)' en;-,h as opposed to claims
for securities. Thesp. payments snpplement clistl'ibntions of avnililble
securitirs and cash from tllp debtOl'!s estate.
SUiCef11e enactment of the SiPC legbt.'1tion, ];2;) of the OI-er 8/iOO
broker/dealers which have becn SIPC members over the pa.st 61/2
yeflrs hal"(, been placed in JifJl1ic1ation procerc1ings. As of June 30, 1077,
SIPC had made net nclnmces to trustl'es totaling $:j3,411,014. In il(1cli-
tion to these SIPC full-ances, significant alllounts of seenrit.ies and
cash haye been ·distl'ibntpd to cnstomers hom assds ,yhich ,,,cre
acquired from the debtors' rstates by the tl'l1sires at tlw t.imp of their
appointments. IVe estimate that. to date securities and cflsh having a
:'alue of approximately $277 million ha.ve been distribnted to approx-
lmqiely 105,000 customers in the course of liquidation proceedings
 39
iJl~ :11)(1 blrnchnn' of views and positions in order to obtilin the goal
of'n]] of us, mll1~elv, increased inl'e5to1' confidence throl1gh the exist-
~llce of a viable anc(e'flicient SIPC Prog-1'ilm.
The, Tn::k Force Report serves :IS thee founchtion for virtun]]y all of
the ch:-mg-rs which the amendments being rOl1sic1erecl by you this morn-
in£' Iyodd make in the 1970 net. Accordingly, :;\11'. Chairmn.n, I re-
<]l~rst that a copy of the Task Force's .July 1974, Report [Report to
the Board of Directors of the Securities Investor Protection Corpo-
rntion of the Sprcial Task Force to Consider Possible Amendments
to the S~cnrit.ies Inre8to1' Protection Act of 1970] ,be included at this
point. in the record of these Hearings.
The Board of Directors of SIPC approved virtl1aJ1y a]] of the Task
Force. recommendations which were subsequently incorporated in H.ll..
806.J:. In adelition to having the strong support of the Board of Direc-
tors of SIPC these proposals are genernlly supported by the Securities
and Exchange Commission and the securities industry.
The proposed amendments carry ont the Task Force recommenda-
tions and are designed to make the act more, responsive to the reason-
able expectations of i.nvestors. Even though the. oyerall purpose of the
act is being met, that is to provide protection to customers of broker/
dralrrs, some customers of failed members still believe that they are
not. receiving the-protection they thought they weTe going to get and
in the way they believe they should get it. The proposed amendments
,\ill enhance investor confidence in our securities markets.
The diflicnlties are not so much with the administration of the 1970
nct: as with some of the specific liquidation procedures and limitations
set forth therein. The t.rustees appointed by the Court are, for the
most part, doing a good j'ob, but they (and SIPC) are handicapped by
SOllle intiexibilities in the law. In broad terms, there aTe three problems
for Iyhich the present act does not provide adequate solutions.
The first is that cllstomers generally ex )ect to reeeiY at" 1 their
ac'C6iints 1\7 len t 1(', mem er sto s doinG" ]]l1sine·ss. If J aIm Q. Investor
. has 100 fully-paid shares of IB~l and a cree lt arance oI$2Do--lIlllts-
aCCollnt, 'le expects to receIve from the trnstee a stock certiftcate-rrvo'r"'--
11JOslnlles otniH and a check for $200.
~ III IlHlIly instances that has not always ,been possible because
~~cul:1bes 'have teen lost, improperly hypothecated, mIsappropnated,
)~mrdm or even s o--en.· , . len lere 'are va I c arnls or more
- S DC \: t lan is on hand, under the pl~esent statute John Q. will
l'ccei \'C only a. pro rata portim1 of his 100 shares. For the rernainder of
the shares .dne him: he \vill receive cash in lien of stock based 'on the
market. price. on the date the liquidation preeeeding is initiated. 1\atu-
J'~lly, ifIB},f stoek goes up in price whileJohn Q. is waiting tohave
Ill? e1flim sett.led, he will be decidedly unha.ppy with the check he re-
CelyeS from tlH', trHstee. On the other hand, if IBM declines in -price,
\:e may receive no complaints from John Q. But even in that situa-
han, C1Jstomers can suffer c('rtain disadvantages, for example, tax
cOl1sequenc.es of what is. in effect, a forced sale of their stock.
. The second major problem with 'the act is that the prescribed1iquida-
hon procedures are slower than they need be. This works a, hardship
on cllstome-rs because. while they are waiting to receive their property,
they a.i'.8 ullable to e~eet transactions jn their accounts. They stand at
 41

<''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 ~
•

---~"ri:deth11t·tlie trustee \YOm-ry not ~e reqmrea \0

purc1TIi'S8secuTlf~es -
,,-here tJ1at eou d not be done lil a fmr and orderlY market. onecI1lef_
"C'i:mee.lTIlS that the trustee not be re uired to make purcha.ses in a. mal'-
k~ c IS emg Improper y con roned or manipurated. TIllS may oe . .
c ,.

1 All se-ction rt'ferenee:; are to sections uf the IDiO net a:i nmenllel1 b:r R.R. 8331.
 36326
securitles l)w-.;lnc5.<:;' rnen1.:j the SllJ11 of 1bUI
without clupll"a Llon)-
., (A) conlJnl~slon!:i em"ned In connec.tlon
witll l.rn.n~ncllons In securities clTecLcd lor
CUSl0J11CrS 11.';; llgent I net of COIl1Jnlsslons pal(!
to other brokers ancI dcn.lcr.":i In connection
with o;llch trnnsllc\.lonS) nnd markups with
respect; to purchnses 01' sales of sccurltles :,s
principal:
"(B) ehllrges for cxecuting 01' rlearlng
transnetions In "ecuri tics for other brolcL'rs
llnd dealers:
"IC) the net renllzed gnln, if nny, from
principal trllnsnctions In 5ecurilles in lJ'nel-
ing accounts:
"(D) the net profit, if an)'. from the man-
ageJilent of or partleipntlon in t.he under-
writing or dlstriblltion of· securities:
.. IE) interest earned on customers' secu-
rities accounts:
..... IF) fees fOl·inv~stmen.tadyisory scrvic',s
(except wilen renderedtopne or more regise
tered investment companies'of insurance
conlpllny sepnrate accounts) or account
superYision with respecttosecllrllJes;
'. "(G) fees for the solicitatl0l1 Orproxics
wIth respect to, or tenders or exchanges of,
securities:
. .. (H) incomefromsen'i~~cha'rgi,~or other
. surcharges wi th respecttosecufltles:
"(I) except A.S otherwiseprovldedbyrule
of ·.the Commission, divide'nds' and interest
'rece'tiled on securities in Investment nccounts
. ·.oftheSrokerordealer: . .•.•. '.' ..••.•..•.. >.
.......... ,." (J)'. f~esjnCol1J1ei:tioll\vitl1.pilt.qll ;and
.···other·.option trailsactioils.in·s~cllriti~s:
•..... (K) comrnisslonsearlledfrom~ransac­
; Uons in it) certificatesoLdep',?SIt:and (ii)
,.TreaslJrybills, .bapkers\\cceptance~;cll:.·.com-
mercialpaper which .hayea;l?lat,::,r.it~,atthe
·.~ime .::··o.f '·i.5Stli1.llCe, .oL,:~,n.ot,-::.~x:C:~~~~l_i_~:_~niile
n10ntlls,. exclusive· .. ofdays of grac.e.br ,an>;
renewal thereof., theJnaturi~Y.Cif\vhich is
!H~ewlselimited,.except 'thfl,.h.§IF'C ..shall· by
.' b}'} a" .igclu.de . illtlleaggr.egateof,·greiss· rev-
..... ~Jl~lfis qnlyan approPriatePel.'ceii tage of SllCh
c.6mniIssions based. on SI'PC'S!OSSeXperiellCe
.\vithrespe,ct to such instr~mlel* over at
, .' 'leasC.theprecediligfiveyear~:ariel
;' , ; " (L) 'f 7es .and otlH~r.jn~pnlef,rqm.such
iOtI1e,., c~t~gori~s of.Ule secliri ties bUsiness as
.,.,.ElIPCShallp!OviqP b~'byla\~.
:Spch . term ." does .not'incIUdel'eYenu~s"ree
C.. ~eivecl.li) abrDl<er ·.or;AealeYUn~Ol'ln~ction
': .•·.· ... with ;the ·.• dIstributiOll.()fsl1al'~!;qfaregis­
'.' ')ered operi endjnVestnlentfP'l1PUl,Yor unit
. in\'est,men t. trustor'. reven uesderiyedby a
< '.• broker. or dea.lerfromthesalie.ofvarlable
;§. ~.§j;~")~?\i~,s.t~ili~~}?hefon~rctDftili,'
:.:t{: .:~:~:./:":~_~::;:(_:~ l_t~·_~ ~:,Q p~,[)~.rlp.~, .,..~Rp~~~_~IN.~.~,.~'~~ _-_~ ernl
'F ·:liqui.dati6npk9ceedlng;nleal1~anyprOCeed­
:.~ ;y~:g,~PI".··t}1:e)i,9\~_i~rI~,iph:_~~-_~_:·d#bt:~r :llll'der this
,. A9tAn.\vhi~l1,,,,'trtl.steehas'been .apIlOinted
!,} :und~rsectiqil.5 LlJ)C3)<
. <}./f1,2>t{E'fE,8UFy:,__The term 'net equity'
'llle~m<ti1e.doI1~Y;ll;m()).iritofthe account or
". :·ac;c::oulj),.~.oLa "'I;:llstomer, to be determined
;,·bv'·· ... , . . . ••.. . .
':'HAJ Cal~lJ1atIng the stlln which would
,; >hay~;;Qeen.o"ed:by the debtor to such cus-
·toi::1';ri{the·t1~8torhacillqilidated. by sale
';'. ()J'- pIirCl1ase 'oD:ihe filing da teo all securi ties
positionscif.sucl1·customer (othel' than cus-
"t~nler:nnme . securities reclaimecl by such
',ccustOlner I ; mill us. . "Sec. 15. MIscellaneous prO';isions.
·;:";.'iB) any ,indebtedness of such customer
k.'t:otlicCi~.~tor·on'thefiling date: plus
' . . ','( C)'anypaynfent by such customer of
i~t such -iildebtedness to the debtor which iz
;riuLde.yith· thE' approval of the trustee and
:;\yl,tl'li.nsuch period as the trustee !"llay de-
<.t.ermine (but in no event more than slxt"v
days after the publicatIon of notice 'elnde;'
section 8 (a) ).
"'.: I'n determining net equity ',mder th!s para-
!,':. graph, lLCcoUlItS held by a customer In sep-
arate capaCities shall be deemed to IJ2 ac-
counts of separate customers.
CONGRESSIOI~ AL RECORD - HOUSE
"11:3) PEHSONS ItEl;]STLIl!":l) i\S IlHOI'::ERS
IJC/d.I-:nS.-··-The lenn 'pl'r:s.-;ns n'gl:j!.en:()
hnlkers ur tlcaJen;' lncl\ldl'~ illlr j:,rrson who
I~ [l J1WllliJer of il naLlollal tiecllrillcti cx-
.:ll11l1ge.
"\14) PIlDTECTIVE UECfiEE.····Tl1c Lenn 'pro-
lrct.! \'c decrl'enleaJ1!'; ;1. decree. Issllerl IJy a
;:uun \lPCJl1 applieatlon uf SlPC unfler see-
Lion fJ la) 13). tllal thL' el1SLomers of a mem-
lJer of SIPC arc III need of tile protection
pl'l)\'lcleej I1!Hler thl.-; Act
"115) SEcumTY.-··The term 'secl1rily' means
any note, stOCk, treasury stock. bOlld. de!JC'II-
Ll1re. evidence of lndeIJtednC's:;. 1\111' <:ollateral
trl1st ('(',·tlficate,preOrl,(flUlzation c~'rtltlcatl' or
subscription .tmnsfenlble share, voUug trust
c:ertificate.certi'ficate of depo~!t, certlficnte of
cleposit. for.a security, Imy Investment con-
tract orcertlficllteot in tel' est or particlpatiou
in any profit-sharing agreC'ment or Ju any 011.
gas. ormill eralroyaityor lease (if such in-
vestment,c011tractor interest. is the subject
of a regIstration· statement with the Com-
mission .pursualitto the provl,;;ons of the
Sec uri ties Act (11933) ,any certlfic:lt~ of In-
terest orparti.clpl1t:ion.ln. temporary or in-
terim ceriificrtefcir,Teceipt for, gU:1ran tee of,
or warrantor'i"ight to subscribe co or pur-
cha~e.crsep al)yoftlle foregoiJJg. and any
NileI' .instrull1eh t commonly known as a se-
curity. The term 'security' does not inciude
any currency, or any ·C.0111J11f'ditv or relnted
CO;l tractol'fu turescon tract, or [my warrant
or right to .sUl?SCribeto or purchase or sell
any of theJoregoing:".
AMENDMENT TO THE "SECURI7IES EXCHANGE ACT
Of' 1934
SEC. 15.Section3(a) of the Securities Ex-
chall ge . Actdf 19,34 (15 U.S.C. 78cia») is
amended ·by addIl'lg at the end thereof the
follo(vingnew pa'ragr\\ph:
"(40) :The t'erm ,·'financinl responsibility
rnles: .menns the rtl.lesand regulations of the
Commission.or the r:ules and regulations pre-
scribed 'by any' self-regulatory organization
relating to financial responsiblIlty and re-
lated .practices which are designated by the
Comrni~sion, by rille or regUlation, to be fi-
nancial responsibility rules ....
TAULE OF CONTENTS
SEC. 17. The tnble of con ten ts of the Se-
curities Investor Protection Act of 1970 (15
U.S.C. 78ann et seq.) is amended to read as
follows:
"TABLE OF CONTENTS
"Sec. J. Short title.
"Sec 2. Application of Securities Exchange
busi-
Act of 1934.
"Sec, 3. Securities InYestor Protection Cor-
poration.
"Sec. 4. SIPC Fund.
"Sec. 5. Protection of ~ustomers,
"Sec. 5. General provisions of a liquidation
proceeding.
"Sec. 7. Powers anel duties of trustee,
"Sec. 8. Special pruvisions of n liquidation
proceeding.
"Sec. 9. STPC ad\·ances.
"Sec. 10. Direct paymen t procedure.
"Sec. 11. SEC funct.ions.
"Sec. 12. Examining authorIty functions.
"Sec. 13. Functions of self-regulatory C'rgani-
zatiolls.
"Sec. 14. Prohibited acts.
"Se~. 16. Definitions,".
The SPEA K~rl pro tempo!'e, Is a sec-
ond d.ema.':,i.1ed?
Mr. BROYHILL. Mr. Speaker. I c1e-
ITl.J.nd a second.
The SPEAKER pro tempore. \Vithout·
objection. a second will be considered as
ordered,
There was no objection.
The SPEAKER pro temnore. The gen-
tleman from Texas eMr. ECKHARDT) I~'ill
be recognized for 20 minutes, and t.he
]V () n:. m fN:' r J, I .1) i"i
OIl
gcnl.leman from NUI'1l1 C" ru!ir", 'H I'
as
BIIOYlIll.J.i will be nc':ognizc<! lIJr :!!j
minut.es.
Thc Chair n~C:llgnizc.~ the gcnl.lcln:ln
from Texas 1MI'. EClHJIIJ< IlT' .
Mr. ECKH/lHI.'T. Mr. Speaker. I yield
JTI-:\,' ~('i'f""ii11"C1TTi'l11l"":TSI m:1 .v C (J ns 11111 L' .
Mr. Speaker. t.!le Securities In\,e:;-
tor Protection Act, :IS mnny of
my colleagues will recall. was cnacted
in December I !l70 in reSpollSf to a l:risis
within the brokerage communiLy. After
~he b~ar market ane! back olFicc paper
erisis of 1%:3-70, the ma rket drop)Jed off
sharply. During Lhis time. a number of
brokerage firms went out of business, and
public confidence in the securities mar-
kets was badly shaken. In an effort to
rc'<t.ore investor confidenee, Congress
ad;nted the 1970 act, crea ting the Secu-
rities Investor Protection Corporation
I.SIPC) to provide financial protection
for customers of insolvent broker-deal-
ers and to administer the new law. SIPC
became t.he FDIC of the securities indus-
try.
In the 7 years since its creation, SIPC
has appointee! 123 trustees. Through
their experience, cert.ain glaring defi-
ciencies in the existing liquidation pro-
cedure have become evident. Accord-
ingly. SIPC appointed a special task
force to review the 1970 act and consider
the ileed for amendments. H.R. 8331 es-
sentially reflects the recommendat.ions
~ h e task force. Tl1e amenoments
\VTIl streamline the otherwise liquidation
procedures, and reduce the expense and
administrative complexity of the process.
In light of the fluctu?, ;ng state of the
stock markAt, and th<: potentially disas-
trous consequences for smaller broker-
dealers of a precipitate downtown, we
need more ~han ever before to insure
SIPC's ability to liquidate insolvent
broker-dealers quickly and efficient.ly.
These amendments are very important,
and very much in need by SIPC.
The bill would achieve a number of
important changes. Among other things,
it would increase the extent of SIPC pro-
tection for customers' cash and securities
in an account with a broker-dealer. The
act currently protects customer accoun~
up to a total of $50.000, with a ceiling of
$20,000 for cash. H.R. 8331 would double
the amount of protection, raising to
$100,000 the total amount of protection .
and to $40,000 the level of protection for
customers' cash. There was unanimous
sentiment that such an increase in the
amount of protection \Va:, an important
mE:ans of improving inve5tor cOi,Sdence
in the securities markets,
In addition the bjJJ would seek to
sat.isfy more adequately customer expec-
tations; and also reduce the time and
'-expense of liqUidations by revising the
procedure under certain circumstances.
Under the bill. the trustee -,""ould be
'reqnired. to the extent he can do so 111
a fair and orderly market. to pm chase
• ;;ecunlles on the open marKet 111 saus-
1acLIOn 01 a customer claIm for sec til: 'ies:-
,-erne of the greatest shortcomings of the
C proceCiUre Ulidert-he-tiT'TO act. to be ,r:me-
'died bv this bill. IS Llle [aHUle to meet-
"'legitimate customer expect-at IOns of
recelvmg I\'hat was 111 their account at
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
 ""'~
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 SECURITIES INVESTOR PROTECTION ACT
AMENDMENTS

TUESDAY, APRIL 25, 1978

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

Senator WILLIAMS. At the very outset I should state that I am

very pleased about the bill our cou'nterparts in the House have recom-
mended for the subcommittee's consideration. With the exception of a
technical amendment to the title of the bill to reflect the proper
calendar year, 1978, I believe an excellent bill has been fashioned.
The hearing this afternoon should reinforce my analysis of the bill,
that the bill in its present form can be enacted into law with dis-
patch.
Since the Congress has not revisited or reexamined the Securities
Investor Protection Corp. since its creation in 1970, it is necessary
first to place this bill in perspective by reviewing briefly the cir-
cumstances surrounding SIPC's creation and its experience during
the past 8 years. ,
In the closing days of 1970, the Congress established the Securi-
ties Investor Protection Corp. in response to the Wn.ll Street back
office crisis and the bear market of the late 1960's. During this turbu-
lent period, a number of brokerage firms went out of business. Their
public customers were exposed to serious financial losses and public
conficlence in the securities markets was badly shaken. To restore
public confidence in the securities markets and' to protect' public in-
vestors against the faIlure Rnd Insolvency of brokers and dealers, the
mUles IIIvP,Rtot Protection A~t of l!'l'j'O was adaMeC! .
•:olncp. that tIme S [PC has admInJsterert 128 broker-dealer liquida-
tions. The value of cash and securities it has distributed fo,r aC9funts
(1) 71/--\
 6

But we don't think that Congress should bother to consider revising

the. rulernaking provision in the SIPC Act unless and until it looks
at the whole subject in the context of the Exchange Act as well.
Senator WILLIAMS. What is the rulemaking tesU This is drawn
from the other act. What is the rulemaking test here to avoid
abuse~
. Mr. LooMI8. Well, you mean the time frame ~
Senator Wrr.r.::tAllfs. Not the time frame, the---
Mr. WILLIA1IfS. The procedures used 1
Senator WILLIAll[S. Yes.
Mr. J""OOllfIS. Well, the general standard isn't very clearly specified.
It simply specifies that the Commission sha11-1 am looking for the
exact language.
Senator WILLIAMS. Is that an "arbitrary and capricious test ¥"
Mr. LoOMIS. Conceptually it is the same public interest standard
that we have in the Exchange Act.
Mr. WILLIAMS. Procedurally, the rule changes will be published
for public comment, and they are subject to Commission review. In
addition, the Commission is authorized to require SIPC at any time,
"to adopt, amend, or repeal" any S1PC rule, so the opportunity
ror arbitrariness is pretty well precluded.
Mr. LoOMIS. The standard essentially is whether the rule in ques-
tion is necessary or appropriate in the public interest to carry out the
purposes .0£ the act.
Senator WILLIAMS. I think that covers us very well. Thank you
very much.
Now from SIPC, Chairman Hugh Owens, General Counsel and
Secretary. Mr. Thpodore H. Focht, and the Vice President-Finance,
Mr. Lloyd W. McChesney.
STATEMENT OF HUGH F. OWENS, CHAIRMAN OF THE SECURITIES
INVESTOR PROTECTION CORP., ACCOMP ANTED BY THEODORE R.
FOCHT, GENERAL COUNSEL AND SECRETARY, AND LLOYD W.
McCHESNEY, VIOE PRESIDENT, FINANCE

Senator WILLIAMS. I included all of my praise in the statement

opening the hearings, Chairman Owens. You are very good in your
chainnanship, in whatyou have done with SIPC.
Mr. OWF.NS. Thank you very much. Mr. Chairman, on behalf or
not only ~:vself, but my colleagues, we are very grateful ror your
kind remarks.
[The statement read by Mr. Owens fonows :]

------

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

Mr. ChaIrman, and members of the Subcommittee, It Is a pleasure

for me to appear before you this morning and present the views of the :.

Securltles Inves tor Protectlon CorporatIon (" SIPC") on H. R. 8331, the

SecurIties Investor ProtectIon Act Amendments of 1977. This blU was passed

by the House of Representatives on November 1 of last ye~r. II wuuld make

Important Imprpvements In the program establ!shed by the SecurIties Inveslor

Protection Act of 1970 ("SIPA"), and SIPC supports the leglslatlon In Its

present Corm.

Before r review some of the many Important [mprovemenrs which

H.R. 8331 would make In SIPA, perhaps It would be useful If I summarlzed

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

when the paper crunch brought on by an unexpectedly high trading volume

In securities was followed by the most severe decllne In stock prIces

since the Gre"t DepressIon. Hundreds of broker/dealers were merged,

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

In our securities markets was In Jeopardy.

In order to protect custOmers of {alJed broker/dealers against

fLnancLalloss and, thereby, restore investor confldence In the securities

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

c~stomers o{ broker/dealer firms whlch encountered flnanclal dlfflculty.

As the statule now stands, SIPC may advance a maximum o{ SSO,OOO

to protect the claim of anyone customer o{ a {ailed broker/dealer,

but no more than S20.000 of that amount may be advanced to pay clalms

Cor cash as opposed lO claims Cor securitles. These payments supplement

d{Sl.rlbutions of avallabJe securltles and cash from the debtor's estole.

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

advances to trustees lotallng S54,518,825. In addltlon, significant amounts

of securllies and cash In the debtor's possession have been distributed

to customers by the trustees. We estimate that to.dale securLtles and cash

having a value of Dver S279 million have been dIstrIbuted tD apprDxlmat~ly

105.000 custDmers In the CDurse of lIquldatlDn proceedings. We belleve

 29

Section 9

§7(al Df the Act--Pursuant to the declsiDn tD delete the general In-

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)

and (3), which may be exercised only wlth slPe apprDval.

§7(a}(l) of the Act--The powers granted here are the same as those

granted by §6(b)(l)(A) of the exlstlngAcl. I

§7(a)(2) of the Act--The trustee Is specifically authorIzed to use SIPe

employees In connection with a liquidation proceeding, thus makIng theIr

experience In handJ!ng such proceedings ava!lable directly to the trustee, It

Is antlclpated that this will Increase both the speed and efficiency of l!qulda-

tlon proceedings.

§7(a)(3) of the Act--The trustee Is authorized to malntaln customer

accounts to facHltate their transfer under subsectIon 8(0 of the Act. As In

the amendment to subsection 6{a) above. reference to completJon of open

cDntractual commIonents 15 deleted.

§ 7 (b) of the Act--As elsewhere, Incorporation Df a particular section of

the Bankruptcy Act has been deleted In favDr of a general reference whIch

wJll nDt be dJ'sturbed by amendment and renumberlng, In addltlDn tD the duties

Incumbent on a bankruptcy trustee, the SIPA trustee ls charged with the follDw-

Ing duties: to del1ver securities to ~omers to the maXimum extent possible,

and, under approprIate clrcumslances; 10 guarantee the debtDr's Indebtedness

75
 42

estele, but merely held by the debtor es bol1~e. This, Df COutse, I' not

Intended 10 I1mlt the exclusive Jurisdiction of the court handl1ng a I1quJdation

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

has signed Btock powers.

§16(S) of the Act--ThJs section defines "customer property," the

concept which takes the place of the" single and separate fund" of SIPA

as now In eflecl. Customer property. brlefly explaIned. consists of all

cash and securities (other than SIPC advances and customer name securities,

avallable to the trustee fDr the satisfaction of customer claims. It Includes

all Cd sh and securities held from or for the accounts of customers. Includ-

log the proceeds of any such property transferred or unlawfully converted.

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.

S 16 (6) of the Act--The definition of "debtor" 15 changed to make It

conform 10 amended subsection SIal (3).

§16(71 Df the Act--The deflnltlon of "examining authDrlty" Is changed

to make It conform to amended section 13.

§16(8} of the Act--The defJnltlon of "filing date" Is changed to

make It conform to amended subsection SIal (3) and new sectlon 10 of the ACl.

--' \".. ...

 230

TO CUSTOMERS. WHILE THIS IS NOT A LARGE AMOUNT, SIPC

ARGUES THAT BECAUSE SOME LOSSES DO OCCUR, MUTUAL FUND
REVENUES SHOULD BE SUBJECT TO ASSESSMENT . .IN ADDITION,
slPe ARGUES THAT THE MAINTENANCE OF PUBLIC CONFIDENCE IN
THE MARKETS AS A RESULT OF THE SIPe ACT BENEFITS ALL BROKER-
DEALERS AND, ACCORDINGLY, ALL BROKER-DEALERS SHOULD PAY
ASSESSMENTS.
THERE IS ANOTHER ASPECT TO THIS PROBLEM, HOWEVER.
PERSONS WHO DEAL WITH BROKER-DEALERS EN~AGED EXCLUSIVELY
IN THE DISTRIBUTION DF MUTUAL FUNDS HAVE NO PROTECTION IF
THOSE BROKER-DEALERS MISAPPROPRIATE THEIR FUNDS OR SECURITIES.
IN MAy OF THIS YEAR, THE COMM1SSION BROUGHT AN ACTION AGAINST SUCH
A BROKER-DEALER IN TENNESSEE ALLEGING VIOLATIONS OF, AMONG
OTHER THINGS, THE ANTI-FRAUD PROVISIONS OF THE FEDERAL
SECURITIES LAWS. SUBSEQUENTLY, A RECEIVER WAS APPOINTED.
ALTHOUGH OUR INVESTIGATION IS NOT YET COMPLETE, THE
INDICATIONS ARE THAT AT LEAST NINE CUSTOMERS HAVE LOST SOME
5200,000 WITH THIS BROKER-DEALER. THOSE CUSTOMERS CLEARLY
ARE AS MUCH IN NEED OF THE PROTECTION PROVIDED UNDER THE
SIPC ACT AS ARE CUSTOMERS OF BROKER-DEALERS ENGAGED IN A
GENERAL SECURITIES BUSINESS. MUTUAL FUNDS ARE TRADITIONALLY
AN iNVESTMENT MEDIUM FOR THE SMALL AND FREQUENTLY
UNSOPHISTICATED INVESTOR AT WHOM THE SIPC ACT IS MOST
CLEARLY DIRECTED: . ·THE .COMMISSION BELIEVES THAT ALL
 S. REP. 95-763

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!.)

*] *764 P.L. 95-283, SECURlTIES INVESTOR PROTECTION ACT AMENDMENTS OF 1978

SEE PAGE 92 STAT. 249
HOUSE REPORT (lNTERSTATE AND FOREIGN COMMERCE COMMlTTEE)
NO. 95-746, OCT. 26,1977 (TO ACCOMPANY H.R. 8331)
SENATE REPORT (BANKING, HOUSING AND URBAN AFfAJRS
COMMlTTEE) NO. 95-763, APR. 25,1978 (TO ACCOMPANY
H.R.833I)
CONGo RECORD VOL. 123 (1977)
CONGo RECORD VOL. 124 (1978)
DATES OF CONSlDERA TION AND PASSAGE
HOUSE NOVEMBER I, 1977; MAY 2, 9, 1978
SENA TE APRJL 26, MAY 4, 10, 1978
THE SENATE REPORT IS SET OUT.

(CONSULT NOTE FOLLOWING TEXT FOR INFORMA-

TION ABOUT OMlTTED MATERJAL. EACH COMMlTTEE REPORT IS A SEPARATE DOCUMENT ON
WESTLAW.)

SENATE REPORT NO. 95-763

-. . APR. 25, 1978 -
THE COMMJTTEE ON BANKING, HOUSiNG ANIJ ORBAN AFFAIRS, TO WHICH WAS REFERRED THE
BILL (H.R. 8331) TO AMEND THE SECURJTIES INVESTOR PROTECTlON ACT OF 1970 HAVING CON-
SlDERED THE SAME, REPORTS FAVORABLY THEREON WlTH AMENDMENTS) AND RECOMMENDS
THAT THE BlLL AS AMENDED DO PASS.

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.

A. AMENDMENTS TO SECURJTIES INVESTOR PROTECTION ACT OF 1970

THE SECURJTlES INVESTOR PROTECTlON ACrOfJ91QJSjPALWAS .E1lACTED TO PRQYIP:E TO

, USTOMERS OF SECURJTlES BROKER-DEALERS PROTECTION AGAINST LOSSES WHICH MIGHT
OCCUR AS A RESULT OF THE FINANCIAL FAILURE OF BROKER-DEALERS. SIA:B1:TSFlEUT:F1:l:
SECuRITIES INVESTORS PRo1"Et'I ION CO]{PORJITTOl'T"1SJ~AND1'WKOFJT CORPORATION, TO
ADMINISTER SIPA THROUGH STATUTORY ASSESSMENTS OF SIPC MEMBERS.
SIPA HAS DEMONSTRATED CONSIDERABLE SUCCESS SINCE JTS ENACTMENT IN 1970. AS A RE-
SULT OFBROKER-DEALERLIQUIDATlONS IN WHICH SIPC HAS BEEN INVOLVED, APPROXIMATELY
105,000 CUSTOMERS HAVE BENEFlTED DIRECTLY FROM ITS PROTECTlONS. THOSE CUSTOMERS
HAVE RECEIVED IN SUCH LIQUIDATlONS CASH AND SECURITlES WORTH APPROXIMATELY $279

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.

 S REP. 95-763 Page 2

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.

©20IO Thomson Reuters. No Claim to Orig. US Gov. Works.

 S REP. 95-763

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-

© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.

 S. REP. 95-763 Page 12

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-

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S. REP 95·763 Page 13

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

PARTIES SUPPORTING THE NET INVESTMENT METHOD

]. BAKER & HOSTETLER LLP

45 Rockefeller Plaza
New York, NY JOlll
Telephone: (21 2) 589-4200
Facsimile: (2] 2) 589-4201
By: David Sheehan
Marc E. Hirschfield
Oren J. Warshavsky
Seanna R. Brown

Attorneysfor Irving H. Picard,

Trustee for the Substantively Consolidated SJPA Liquidation of
Bernard L. MadoffInvestment Securities LLC and Bernard L. Madoff

2. SECURJTIES INVESTOR PROTECTION CORPORATION

805 Fifteenth Street, N.W. Suite 800
Washington, DC 20005
Telephone: (202) 37]-8300
Facsimile: (202) 37] -6728
By: Josephine Wang
Kevin H. Bell

Attorneysfor the Securities Investor Protection Corporation

3. SECURJTIES AND EXCHANGE COMMISSION

] 00 F. Street, N.E.
Washington, DC 20548
Telephone: (202) 551-5148
By: Katharine B. Gresham
Alistaire Bambach

Attorneys for the Securities and Exchange Commission

4. CRAVATH, SWAINE & MOORE LLP

825 Eighth Avenue
New York, NY 10019
Telephone: (212) 474-1000
Facsimile: (212) 474-3700
By: Richard Levin

Attorneys for Optimal Strategic US. Equity Limited and Optimal Arbitrage
Limited

5. Simon Jacobs (Pro Se)

 16. SHEARMAN & STERLING LLP
599 Lexington Avenue
New York, NY 10022
Telephone: (2] 2) 848-4000
Facsimile: (2]2) 848-7]79
By: Stephen Fishbein
James Garrity
Richard Schwed

Attorneysfor Carl Shapiro and associated entities

] 7. SONNENSCHEIN NA TH & ROSENTHAL LLP

] 22] Avenue ofthe Americas
New York, NY ] 0020
Telephone: (2]2) 768-6889
Facsimile: (2]2) 768-6800
By: Carole Neville

Attorneysfor certain investors

Pro Se

1. Hugh de Blacam

2. Ethel and James Chambers

3. Anthony Fusco

4. Herbert and Ruth Gamberg

5. Cynthia Pattison Germaine

6. Lillian Gilden

7. Phyllis Glick

8. Yo]anda Greer

9. Joseph M. Hughart

10. Marvin Katkin

] 1. Marshall W. Krause

]2. Jason Mathias

13. Michael and Stacey Mathias

14. Shawn Mathias

6
 I S. Herbert A. Medetsky

] 6. Josef Mittleman

] 7. Josef Mittleman, on behalf of Just Empire, LLC

18. Arlene PerJis

J 9. Gunther and Margaret Unflat

20. Lawrence R. Velvel

2 J. Alan J. Winters

PARTJES NOT TAKING A POSJTJON ON THE CALCULAT10N OF NETEQU1TY

J. JOHNSON, POPE, BOKOR, RUPPEL & BURNS, LLP

9J] Chestnut Street
Clearwater, FL 33757
Telephone: (727) 46] -] 8] 8
Facsimile: (727) 443-6548
By: Angelina E. Lim
Michael C. Cronin

Attorneysfor Anchor Holdings, LLC

2. MORRJSON COHEN LLP

909 Third A venue
New York, NY ] 0022
Telephone: (2]2) 735-8600
FacsimiJe: (2]2) 735-8708
By: Michael R. DaJ Lago

Attorneysfor David Silver

U. \,j ''0 "j!

C "'''I

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,

at least from 2007 forward.

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

customer resources were allegedly invested through BLMIS, as reflected on customer

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.

D. Non-Split-Strike Conversion Customer Accounts

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

same basic method-statements were fabricated based on after-the-fact published selections of

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

Losers will be found among later investors. 24

DISCUSSION

I. THE mSTORY OF SIPA

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.

A SIPA liquidation is essentially a bankruptcy liquidation tailored to achieve SIPA ,s objectives.

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

defines Net Equity in section 78111(lI):

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 ....

SJPA § 78111(1 J) (emphasis added).

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

consideration ofthe 1978 amendments to SIPA, a House of Representatives' Report states,

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

November 30, 2008.

21
EXCERPTS FROM
ORAL ARGUMENT
 1

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK
---------------------------------x
In the Matter
of Case No.
1-08-01789

THE BANKRUPTCY LINK, THE MADOFF MATTERS

Debtors.

---------------------------------x

February 2, 2010

United States Custom House

One Bowling Green
New York, New York 10004

Hearing in Trustee's motion for an order upholding

Trustee's determination denying customer claims's for
amounts listed on last statement, affirming Trustee's
determination of net equity, and expunging those objections
with respect to the determinations relating to net equity.

B E FOR E:
HON. BURTON R. LIFLAND,
U.S. Bankruptcy Judge

VERITEXT REPORTING COMPANY

212-267-6868 516-608-2400
 16
1 decades of legal and legislative history telling us that is

2 the way we are supposed to do this.

3 And that is exactly what SIPA calls for,

4 Your Honor. There is no doubt that is what is going to

5 happen here because what we are going to do is to take the

6 cash that there were from the securities, and distribute it

7 pro rata to those individuals.

8 Now, how does that impact on net equity?

9 It impacts on net equity because you get from your net

10 equity allowance that portion of the customer fund that is

11 attributable to you, you get your pro rata distribution.

12 So what we have to start with in this case,

13 Your Honor, is let's not get confused over what we are

14 dealing with here because we are in this case, because we

15 are in Madoff, the world just doesn't go upside down. It

16 stays right and steady. We stay with the fact that we are

17 dealing with a fund, a fund of customer property, and it is

18 out of that which distributions take place.

19 Now, there is going around in this case,

20 the notion of $500,000 as though somewhere sitting out

21 there, there is $500,000, not unlike FDIC, that there is

22 $500,000 for each customer. And each customer somehow

23 because they put money or cash or securities, I should say,

24 into an account, they somehow had insurance up to $500,000.

25 I submit to your Honor if you look at the

VERITEXT REPORTING COMPANY

212-267-6868 Q~16-608-2400
v';&
 17
1 legislative history one could be beguiled by some of the
r~---------------------
2 statements made erroneously by the senators there to the

3 effect, yes, there is insurance. They are wrong. That

4 is not what they wrote. That is not what is in the

5 statute.

6 In fact, this is the first of many examples

7 of things that are not in the statute that are being

8 advanced today as though they are the law. It is not the

9 law. It is not insurance.

10 Yes, the legislative history talks about

11 it, unfortunately, in terms of comparing it to the FDIC.

12 The senators are looking at cash being deposited into a

13 brokerage house as if it was actually deposited into a

14 bank, when the two are totally different. Cash going into

15 a brokerage house is what? It's going in to purchase

16 securities. Nobody puts money this like they do savings

17 in a bank. The two are totally different.

18 For that reason cash is not in this

19 particular case compelling with regard to the $500,000.

20 What is the $500,000 if it is not insurance? If everyone

21 who is a claimant in this case is not entitled to $500,000

22 by the simple fact they were a customer, why is that so?

23 Because the $500,000 is an advance. That

24 word is key. And it is throughout all of the case law.

25 There is no one in any of the cases that doesn't say no,

VERITEXT REPORTING COMPANY

212-267-6868 516-608-2400
DOCUMENTS AND ORDER
REGARDING DISCOVERY
 Case: 10-974 Document: 52-7 Page: 24 05/06/2010 34735 3Jjage 1 of 1

Lawrence Velvel

From: Lawrence Velvel [velvel@mslaw.edu]

Sent: Friday, October 16, 20092:32 PM
To: 'dsheehan@bakerlaw.com'
Cc: 'mhirschfield@bakerlaw.com'

Dear Mr. Sheehan:

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

cc: Marc Hirschfield

11/9/2009
 Page 1 of 1

Lawrence Velvel

From: Sheehan, David J. [dsheehan@bakerlaw.com]

Sent: Friday, October 16, 2009 3:41 PM
To: Lawrence Velvel
Cc: Hirschfield, Marc E.; Christopher H. LaRosa
Subject: RE:
Dear Dean 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.

From: Lawrence Velvel [mailto:velvel@mslaw.edu]

Sent: Friday, October 16, 2009 2:32 PM
To: Sheehan, David J.
Cc: Hirschfield, Marc E.
Subject:

Dear Mr. 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

cc: Marc Hirschfield

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.

Internet communications are not assured to be secure or clear of ._' .....

inaccuracies as information could be intercepted, corrupted, lost,
destroyed, arrive late or incomplete, or contain viruses. Therefore,
we do not accept responsibility for any errors or omissions that are
present in this email, or any attachment, that have arisen as a result
of e-mail transmission.

'7 /') ') /') (\ 1 (\

 Dear Mr Case: 10-974 Document: 52-7 Page: 26 05/06/2010 34735 j1age loLL

Lawrence Velvel

From: Lawrence Velvel [velvel@mslaw.edu]

Sent: Tuesday, October 27, 20094:26 PM
To: 'mhirschfield@bakerlaw.com'
Cc: 'c1arosa@sipc.org'; 'Vanderwal, Amy E.'

Dear Mr. Hirschfield:

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 .

2. I will file my responses by November 24 th .

3. The Trustee and SIPC will file their replies by December I st.

4. There would be a hearing on December 9 th .

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

cc: Christopher H. LaRosa

Amy E. Vanderwal

1119/2009
 Case: 10-974 Document: 52-7 Page: 29 34735 3 fage 1 of 1

Lawrence Velvel

From: Lawrence Velvel [velvel@mslaw.edu]

Sent: Wednesday, October 28, 2009 9:57 AM
To: 'mhirschfield@bakerlaw.com'
Cc: 'c1arosa@sipc.org'; 'Vanderwal, Amy E.'
Attachments: Clerkltr. RequestProdDocs,Second.doc; RequestForProductionofOocuments.1 0.28. 09. doc

Dear Mr. Hirschfield:

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

cc: Christopher H. LaRosa

Amy E. Vandelwal

11/9/2009
 Case: 10-974 Document: 52-9 Page: 2 05106/2010 34735 3

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

SECURITIES INVESTOR PROTECTION Adv. Pro. No. 08-0] 789 (BRL)

CORPORATION,
SIPA LIQUIDATION
Plaintiff-Applicant
(Substantively Consolidated)
v.

BERNARD L. MADOFF INVESTMENT

SECURITIES LLC,

Defendant.

In re:

BERNARD L. MADOFF,

Debtor.

PROTECTIVE ORDER DENYING

DISCOVERY SOUGHT BY LAWRENCE R. VELVEL

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,

expensive, irrelevant, and subject to privilege; and it is further

ORDERED, that this Court shall retain jurisdiction with respect to all matters relating to

the interpretation or implementation of this Order.

Dated: New York, New York

November 24,2009
/s/Burton R. Lifland
HONORABLE BURTON R. UFLAND

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

statements showed that they owned securities.

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

subject to artificial influences such as manipulation, which is the criterion for

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

Chart, Yahoo! Finance, http://finance.yahoo.com/(last visited Nov. 4, 2009). It also

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

Index Chart, Yahoo! Finance, http://finance.yahoo.com/(last visited Nov. 4, 2009). Set

forth below is a list of the daily trading volumes, over three months, for the securities

shown on the November 30 th statements.

Company Average daily volume over the past 3 months 9

Abbott Laboratories 8,539,280

Amgen Inc. 7,924,580
Apple Inc. 16,657,700
AT&T Inc. 27,605,000
Bank of America 228,625,000
Chevron Corp. 9,508,640
Cisco Systems Inc. 45,846,100
Cln Group Inc. 812,346,000
CLA
Class B
Coca Cola Co. 10,844,700
Comcast Corp. 9,231,020
ConocophiIIips 12,669,900
Exxon Mobil Corp. 21,071,300
Fidelity Spartan
General Electric Co. 102,765,000
Google 2,743,080
Hewlett Packard Co. 14,738,800
Intel Corp. 58,678,800
IBM 6,513,420
Johnson & Johnson 10,522,300
J.P. Morgan Chase 37,036,400
McDonalds Corp. 9,479,240
Merck & Co. 16,733,500
Microsoft Corp. 55,703,200
Oracle Corp. 32,284,800
Pepsico Inc. 7,913,770
Pfizer Inc. 50,601,900
Philip Morris IntI. 7,268,420
Procter & Gamble Co. 12,020,200
Qualcomm Inc. 17,214,300
Schlumberger Ltd. 9,197,11 0
United Parcel SVC Inc. 4,077,960

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

to Madoff investors on their November 30 th statements not only could be acquired in a

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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< Untangling Madoff's 'Winners' And Losers

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July 27.2010 - ROBERT SIEGEL, host:
your money
Irving Picard is a man in search of ill-gotten gains. Picard is the iawyer from the firm of Baker and Life Insurance Firms
Hostetler, who is the court appointed trustee in the biggest financial swindle of ali time the Bernard Profit From Death
Madoff case. His task is to recover or claw back money from those who came out winners in the Madoff Benefits
Ponz:i scheme and dole out some compensation to the many losers. The companies make
money by delaying death
Mr. Picard joins us now from Oxon Hill, Maryland, where he's attending a meeting of the Association of benefits owed to families of
service members and
Certified Fraud Examiners. Welcome to the program. others.

Mr. IRVING PICARD (Attorney): Thank you.

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...

Mr. PICARD: I would say that I'm more incredulous.

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: Is this the balance of your career being a Madoff trustee?

Mr. PICARD: It very well could be.

SIEGEL: Well, we hope YOU'll talk to us again about it at some point.

Mr. PICARD: It'll be my pleasure.

SIEGEL: Irvin Picard, the trustee in the Madoff bankruptcy. Thank you very much for talking with us.

Mr. PICARD: My pleasure.

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From: FSDWebUpdate [Press-2003@MAIL.HOUSE.GOV]

Sent: Friday, July 30, 20106:07 PM
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Subject: Kanjorski Announces September Hearing to Assess Limitations of the Securities Investor Protection
Act

FOR IMMEDIATE RELEASE

July 30, 2010

Kanjorski Announces September Hearing to Assess

Limitations of the Securities Investor Protection Act
Washington, DC - Congressman Paul E. Kanjorski (D-PA), the Chairman of the House
Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises, announced today that he will convene a September hearing to assess the limitations
of the Securities Investor Protection Act (SIPA), a law that works to return money and securities
to the customers of failed brokerages. The hearing comes at the request of Congressman Gary L.
Ackerman (D-NY), the Vice Chairman of the Capital Markets Subcommittee, and builds on
legislation recently enacted into law. This Capital Markets Subcommittee hearing will be the
second in the 111 th Congress on SIPA.

"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."

\lEO: House Financial Services Subcommittee on Capital Markets, Insurance, and

Government Sponsored Enterprises
VHAT: Hearing Entitled "Assessing the Limitations of the Securities Investor Protection
Act"
VHEN: Thursday, September 23, 2010
10:00 a.m.
VHERE: 2128 Rayburn House Office Building

Witnesses will be announced at a later date.

###

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

Too Many Madoff Victims, Not Enough Money to

Go Around, U.S. Official Says
Thousands of Victims of Bernie Madoffs Ponzi Scheme Still Fighting for SIPC
Reimbursement

By ANGELA M. HILL

July 31, 2009-

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