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 j1-om 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
u. S. Documents /' D.-l9..1
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FEDERAL BROKER=DEALER NSURANCE,
AUG 1 7 1970 i

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,BEFORE ::rHE .

I COMMIT1rEE
I,'
SUBCOMMITTEE ON SECURITIES

ON BANKING AND CURRENCY

OF THE

,UNITED STATES: SENATE

NINETY-FIRST CONGRESS
SECOND SESSION
O·N

.S. 2348, S. 3988, and S. 39'89

BILLS TO PROVIDE GREATER PROTECTION FOR CUSTOMERS
OF REGISTERED BROKEIRS AND DEALERS AND MEMBERS
,OF NATIONAL SECURITIES EXCHANGES

APRIL 16 AND '17, JUNE 18, AND JULY 16, 1970 ::? '1
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 34
Mr. REGAN. Unfortunately that is correct [lnd I for one think t.hose
reguliltions should be strengthened and strengthened immediately.
I see no re[lson 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 kiJoTI'lec1ge of how to manage a business. It occurs t.o me t.hat. many
of the f::liJures, with t.he exception of outright theft and embezzlement
type of f::tilllre have occurred becf-l1lse of mismanagement. If we are
gOll1g to be called upon throngh self-insurance to underwrite these
risks, Lhen iTe should weI] insist upon a much higher standard and not
be just. TI'i]]iJJg to underwrite the poor business judgment, or the 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.noards marginal firms can
come into the business.
Mr. RE-G_"-N. Ye,'3.
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 over-the-counter market that is the only way you can
prot.ect yourself, sir.
Sen3Jtor WILLIAlIfS. Well, thank you very much, 11 r. Regan.
Mr. REGAN. Thank you.
Senator ,VILLIAlIiS. We would like to continue now with 1\1r. John
E. Leslie, chairman of the hoard of Raehe & Co. and then recess and
return for :i'l1r. Latour, managing partner of Francis I. du Pont & Co.
at approximately 2 :15.
Mr. LesEe, we have your statement. You may proceed any way you
want, presenting the full statement or summflrizing if you care to.
STATEMENT OF 'JOlIN--KLESIJE;CHAIRMAN -OF Tlih BOARD,
BACHE & 00., INC.
Mr. LESLIE. My nameisJ olmE. Leslie. I lim chairman of the hoard
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 S .. 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 Sl1P-
poitsince aJ.le}ementof insurance protedion would unClo~lotemy cone
"tTiliute to remfor~ pu6T:iccomlitei.1Ce-nTtlm-SB13uritiw-industTy;-a11-a-
. w6UIu-a.tsoprovlde. the public WIth a. measure ofJ.nClerrmiii-cat:iun-ill-
cas~ ofLl1efa:tl~1:ITOKeragefirm. ' :.. " . . .. ....
-rfeeI, however, COinpelleato 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 secondneedjsto 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. MUSJUE, ON INTRODUCING THE

AMENDMENT TO S. 2.348

Nearly one year ago, I introduced S. 2348, a Bill to establish the Federul
Brol;er-Dealer Jnsu,ance Corporation. This corporation would protect 26 millioll
direct in':estors from losing their savings through tl1e financial failure of bro];fI".5.
In so doing it would close a serions gap in 01Jr sec'urities laws.
There is nu protection under existing securities la\\" for the' investor \ylJOse
hmker goes hunknlpt. TIle Securities Act of 1933 requires that investors ha\'e
ac1eqna te informa tion to exercise sound .iudg1:llent concerning the secul'ities he
purchases. Tl.e Securities Exchange Act of 1934 insnres tbat he will not be
\ictimized by fraudElent. manipulati\·e. or cleceptive selling schemes, and that
the market in which his broker transacts his of'der "ill be maintained in a fair
and orderly fashion. But neither statnte insures that this same inve.5tor n'110
exercises sound judgment in his choice of stock, an{] places his order with :l
reputable lJroker, cannot lose his entire investment if tbat broker subseQ1.lently
fails because of operational or financial cljfficulties.·
The United States now wisely insures bank deposits uncler the Federal Deposit
InsllLRDce L6rporan~n ana-="Eh"e Fe(l(:rar~~s and T::!lJrrIlJnsnrance Corpora-
;~bi1:'l:ra1'FlI~D'i'oaeJSTOrt1.1eFel'lnaT13-r1Jh.~e1rI-er~I1TSIT.r,nlCe-earpOI a lion.
~---<J."iJt:F::S-ETre,vOTi1t1~"'gi"ve-·t1YellfVeStor.·\''1joTeit "es-ll1,nilfvin-gS-With-u--brukt>l,llJe-
--wIJJejJr6IectTontilfw affordedwe depoSitor, ",~ces Bls-IDone:nnal:lan:k~:o - -
' - T l l e Broker does not act as a slmplepass'-througn agent, whose l1aUillD' to
his customer ends at the close of each transaction. Gustomer accounts with
brokerage firms are maintained on a continuing basis. ered·it balances of c-ash
and securities J)rovic1e 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 his business. Margin regul"ations governing the purc.base of securi-
tie.s on cred·it currently require SO percent collateral in transactions in"ol\'ing
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 the net between cred·it and debit balances. in customer
margin aC'Counts, is currently more tban $14 hillion according to' a recent esti-
mate that appeared in the Wall Street Jottrna-l. This $14 billion of t.he PUlllic's
money is OJl'ly 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 tiliion.
The FBDIC, like the Federal corporations that insure savings deposits, \,Quld
sene a dual purpose. It would protect investors and the nabion-al economy from
serious hardship which can follow the failure of' financial institutions. and it
would increase the soundness of these institution~ and pu])lic confidence in
them.
Our securities markets are a national asset. They permit in{]ividuals to in
their savings in private industry and thereby contribute to the growth of
investment. 'Without strong capital markets it would be diffi1cult for our nat.ion :
economy to sustain <:ontinued growth. .
Brokers support the proper functioning of these markets, by providing a
stant flow of orders. The cont.imled financial well-being of brokers and the
omy depends, in part, on public willingness to entrust assets to brokers.
Partly because of government insurance, failures of banks are very
run on banks is virtua1ly impossible_ The same principle dictates that v,e
the Bill to insure, at a premium fairly reIated to the risk, a{:counts of 26
direct investors and approximately 100 million people "ith interest in secu
through IDutual funds, banks, pension funds, insurance <:ompanies and
institutions,
When this Bill was intro{!uc-ed, many brokers ha-d serious operational or
office" difficulties. Recently, the financial difficulties of several brokerage
ha ve compounded these l)rablems. S-ome of these financiial problems we.re
inaUy triggered by operational problems.
Stock brokers owe money to one another. The failure of one ap:gra ,a tcs
problem and reduces the financial soundness of a1l other firms to whi
indebted. Since many firms invest their capital in securities, market
may further aggravate brokers' financial problems and cause stock
failure to pyramid. This can also force the sale of brokers' securities,
ing a general decline in securities values. A combination of these ev
erode investor confidence and cause securities values to plummet. One
 143
features of thi>, insnnlDce program is to gllarrl against ~llell a situation by pro-
tecting broIlers from efl eb 01 bers' fa Bures .
. Since June D, 19G9, tbe date 1 introduced this Bill, lil]uirliltors or receivers have
been apPointed for at least seven firms. \V',Jile total losses are not l;nown, the New
Y 01'1; Sleel; Ex ella ngE' Trust Fund bas {'ommittEcl more tba n $15 million to protect
tbe cusl0mers of 11l;;'E of tbose firms.
While delilY in pr.yment and total losses to public cuslomers and other creditors
are lln);nown, since mid-196S lil]uidaturs or receivers have been appointed for at
lea.~t 2q firms. These figures uo not include those tha t ba ve merged, closed l]uietly
or nilrrowly eseapeo collapse. The actual deiays in paymEnt and total losses t'O
tbe public 2re j;nowll only to lil]uidator,; or trustees in bnn];rnptcy.
lJltimate loss 10 tile cusiomer is only part of the problem. Tbe brol;erage busi·
ness is built on the concept of liquidity-the fact that an jnvestor enn get lJis
money immecliately and not have to wait the OUl{'ome of a prolonged baril,ruptcy
court proceeding. A compulsory trust fund or insurRnce system promotes such
liquidity.
Hamer Budge, Cbairman of the Securities and Exchange COlllmission, bas
warned af the dangerously bigh level of "fails" iT] tbe SECurities iJ;dustry. In a
speech report",l in tbe Wail iitTed J01l1"nal on December 10, 1969, be said that
recent .mar];et activity indicates tbat repeated continuous higb volume could
force "fails" and other aper.a tion_problems to return to crisis levels. "Fails" are
tbe nondelivery within the 5 clRY settlement period of securities owed by one
broker to another. High levels of "fails" and opera tional problems make it diffi·
cult for a brokerage firm to know what its finanCial position is and what risks
it may reasonably ta ke .
._ In addition to tb~}roblelJ)s,...th£r_e have been bu~s on Wall Street.
NCI.{:s1{'eek M aga.z7rlC, on DeceDlber 15.,.19.6g.-I:epQr;ted-Eo=erO.S.~.tTQrn.ey. ~
.. er-t;-1i1.lIfoYgentlllf'u'Lestlm-ilte tba t "~anized cri~stealing $45 million of se,
:wnbes anllual:ry:Tbe total losses are unkn{Hvn and may be even larger. T:EiIS
:.:,ObVlOus1j1':Oili']TOllnclsoi'Okers' linanclal prol:HemS. ..- - .
. , In the ten months since I introduced tbis Bill, the securities industry bas lost
,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
'.' m'onUily reports because tbey needed "closer scrutiny." Since then, two substabtial
ember firms, Gregory & Sons and McDonnell &. Co., bave gone into liquidation
tbe problems of the industry se~JI.I t.().l:la.ve..inten8ifi~d ..- - --- .- .. - ... -.-.-- -.--'- ---
week'ago Thursday~ (lie'Securities and EXchange Commission was forced
. approve a temporary 13urcharge on brokerage Commissions because of the. in-
stry's deteriorating financial condition. SEC Chairman, Hanler H. Budge,
ted in an official letter to tbe New York Stock Exchange that the CODlmission
concerned with "tbe financial problems of the industry and tbe losses sus-
ed in tbe past ye.ar and during the first quarter of 1970." The Cbairman also
tbat the Commission acted oil its understanding tbat tbe industry required
financial relief." . .
the 1963 bankruptcy of Ira Haupt and Co., h large member firm, the New
Exchange required its members to repay the firm's public customers.
nRf'nn"nt , tbe New York Stock Excbange al130 established a guarantee fund .•
al assets of $10 million alid a line of credit of $15 million. According to
the New York Stock Excbange's guarantee fund now has less tban $3
aining in uncommitted funds. Furthermore, its line of credit has been
down to $10 million. : . '.
guarantee fund of the New Yor][ Stock Exc~ange is in tbe interest of the
and of its member firms. However, there are obvious weaknesses. Tbe fund
in comparison to the total dollar volume of trading; to tbe $2 billion to
of "fails", that bave been outstanding at various times' to the annual
of $45 million due to tbeft; or to the over $50 billion val~e of customer
held by brokerage firms. The fund protects only members of the New York
. Exchange. It is voluntary as to its application. By its terms, it need not
ed to protect invE'storsunless the Board of the New York Stock Excl;larige
to act. The fund would be unable to reimbUrse c'ustomers if one or more
ber firms suffered substantial losses and needed to liquidate. .
would extend protection to customers of hrol;erage firms that are not
. of stock exchanges witb guarantee fund,~. In addition, the credit of the
States Government would strengtben the protection now available from
tee funds. The mere availability of tbis Federal guarantee sbould bene-
brokerage community. It would encourage Cll"tf)TnO~" +n 1 ____ ---...... •
 1;52

THEFTS SEEN AT PO MILLION

sour~e ates tbat tbefts tbis year at Big Boa,d member houses alon,e
~ill r~$20 million, up from. m . . :fOS; i",rilleover-tl1ncrsses;J'fl'CTiiCllng ,
.~explained di~pea~Jct:t;, ~Jllc111ll1)tO$ito-rtrrI11Oil, up from $2':; lllJl·llOn lilsf
year. ____________________~__~~------------~_:----
--"P1:fe secUIities loss problem has been well publicized in r~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
year,g, wbicb tbrew tbe securities bandling operations of brokers illldbanks
into cbaos.
This chaos bas made it easier for di-sbonest employes and otbers to dip into
the securities till, and there 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'atlJe the pro-blem,

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 insuf'ers say the problem won't bebrongbt under
control fullyunhl all ffiree mdustnes cooperate to estaolJsb central secuntIes
dep(')§1 torI es, co veredoy; Ii IS ill iJ IT!'e, \\ b'ere-nrosf~ehaTIge-s"iTJ-owTIeTS1Ji}JL'UU:!t!-ue-­
effected SImply by bookkeepmg eDtnes. IllIS woula("jJ(duwn snarply on-t~
'~les certific3tes:'they say.
~'ve JustgOt 10 geCnd of illCtoaCpaper," exclaims an official at one large
insurance company. "Tbe only question is, wil,1 the ini>urance last long enougb
until everybody fin'ally get around to prDviding the answer."
Wbile insurance cDmpanies' 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 and other acts of
employe dishonesty were $8.1 million in 1967, compared witb $7.1 million in
premiums received, a ·$1 million net IDSS; in 1966, the net loss was $400,000:
Figures for 1968 still aren't available, but insurance officials say the situation
worsened 'last year. As' for 1969, one executive remarks: "God knows wbat the
·figures.will be;.this.J'ear:,has.been worst of all." ."
Moreover, tbere 'bas been a recent 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 COOlJection with tbe disappearance,
a preliminary indiea.tion that the loss might have been a tbeft.
Indeed, the easily negotiable Treasury bills have been tbe type of securities
t.bat bave been disappearing most recently. One insurance executive says bis
company canceled two poliCies with brokers in recent months after eacb firm'
suffered back-to-back losses of Treasuries'.' . .
"After the' first' loss at· each place, we warned tbem to take more 6afeguird~
in stDring 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 bigh official at a large brokerage house, wbich earlier tbis year lost $2 million
in Treasury biUs 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 th 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 could wake up, one morning and find tbat, all of a sudden tbe insura:nG~'
companies won't cover us any more. Then we might be faced witb really striCt
controls imposed on us by tbe Government. I don't think that would be tb'e,
answer, any more than self-insurance would. We simply have to cut down on
tbe movemen t of securities."
And, ruefully comments an insurance executive at a major company:
 155
1I1r. Moss's letter disclosed that a government investigator, from tbe f'taff
of the general acC"Ounting offiC'e, had been looking into tbe situation at 1I1cUon-
nell & Co. since last September, at tbe request of 111 r. Moss.
His assignment bad ,been to ascertain whetber tbere was 8.JJytbing "tbe Secu-
rities and ·Excbange '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
I1ltribut3!bl e to i-ts ·being uDderstaffed.
I Tbe inquiry was undert.aken .as part of tbe committee's over-oll rei;ponsibility
to oversee tbe activities of tbe S.E.C. and other regulatory agencies.
1I1r. lI10ssbad wanted a more EXtensive inquiry into Wall Street's financial

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

tions, bis letter {]isclosed,butCbairman Staggers turned 'bim down.

[From tbe Washington Post, Mar. 23, 1970J

1 WALL STREET Is HEADED FOR TIGHTER REGUL.!..TIG'Ii"

J' NEW YORK, Marcb 22.-Tber~~:~:till:Pd~l~;;,r~.t least in tbis observer's mind,

that the securities indus-try is beaded into-a period of increased regulation wbicb
wiU ultimately put it under government oversigbt to about the same extent as
banks.
It 'won't bappen soon and it won't be without a bitter 'fight from Wall Street,
", but two factors point cle.arly in tba t direction:
• Tbe sE'curities industry and the Securities &; Excbange Commission bave
:". shown no ability to ba ul the industry out. of its vitally important administrative
<JV, prublems such as exist in tbe areas of commission rates, back officers, anti-
c:l; 'k trllst.snd pnblic ownership. .
.~ :', • The pnblicand tbe 'Congress are becoming increasingly aware of tbe jlmgle-
i it'l,i~e turmoil i.n Wall Street. On Capitol Hill, wbere' 'SE'curities r.egulati?n us~allY
c', kf,:.fngbtens IE'glslators, more and more congressmen are expresSlng theJr concern
!.i/{over the fumbling pace of adjustment and reform in the Street.
GIg;:;, As an indication of tbe wa of Con ressmen are thtnItin , Seen. E~und l\1uslde
'~l~,dD-Maine an_. __.ep ... a n Moss (D-Calif.)· bave proposed a eOeral roker-
~. ~~pealer~Depo"§rnTor:P.:::~d" arIer~"Tb'c'"e·§eQj.!aCneposfClrisiJia--:WE!""eorp-:--::­
:' iFa:Iiif1.1ie're~eeri a suggestion tbat part of the p~"i:-IansactiQ[iCha~,
t \'J;'wbicb would be a'dded to reiuI~.l.SQ!DmlsslOn rates, be useB to bmlda lund to
i~'t:~c rated mvestors from brokerage :firmIamr:t~SImr'1'f'1llilications, true, ut real
;, i€)ieverthe ess. . n y a year or wa ago;- 6 Origressman would have bothered
i' ~,with sucb ideas.
i, ~o::' There is a very real neE'd for sometbing like a FBDIC. Last week, McDonnell
~ ~f& Co., a stockbroker for 65 years,admitted it had Tun out of money had had
. close ·down. EXciJange officials .and officers of t.be :firm insist the liquidation
ill be orderly and that customers will not be bur.t. The final verilict, of 'course,
ill have to wait until the auditors get finished.
Hopefully, McDonnell will fade -out quietly. Maybe it won't. Or mayb-e the
ext failure won't he so neat, or ·the onE' after that, whenE'ver it may Ibe. '
The fact is that people who send their cash into 'brokerage :firms and ,those
ho leave -their stoCk certi'ficates with their brokers, have no real assurance-
yond the exchange's 'Word-that they will ever 'see eit-hE'r -again.
':.The Big Board bas a slush fund wbich was 'originally $10 million in cash .and
15 million in standiby eredits. ThE' fund is used in liiluidation cases, to loosen
'j) the clerical jam. "So-metimes it is usE'd to paybaek investors whose shares
i!{. ~ve disappeared in tbe attempt to keep the :firm alivE'.
i\?t~,Tbe exchange -doesn',t talk about it, hut word in ·thE' -street is that t;he cash
r;;,j)~ortion has shrunk to $6 million dollars. (In addition, eac~ .firm carrying pub-
~l\li~ -aecounts must ,bave a $25 million fidE'lity bond. Tbat protects customers-up
~:t!!·.a total $2·5 .million-from failurE', ibut it does not cover fra ud.)
";,All of this money would do little good if one of the big :firms WE'nt down the
~.\ftlun. There h'ave been cases~successful, so far-when the exchangE' has worked
ttte,yerishlY to keep a :firm afloat because the failure could send damaging shocks
~~rough the whole industry. .
~T
~.
 FEDERAL BROKER-DEALER INSURANCE
CORPORATION

FRIDAY, APRIL 17, 1970

U.S. SE~.fATE,
COMlIfITTEE ON BANKING AND CURRENCY,
SECURITIES SUBCOllOD:TTEE,
Washington, D.O.
The subcommittee met at 10 :15 il..111. in room 53.02, New Senate'
Office Building, Senator Harrison A. Williams, Jr. (chairman of the
subcommittee), presidin u . .... i' ~-,. - , '
, ~.
'Present : Senators \Vil'liams, Muskie, Bennett, and Packwood.
Senator \VILLIAlIIS. The subcommittee hearing on S. 2348 will begin
, i , with the statement of Mr. Robert Haack, president of the New York
, :i 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
:·1i:
<,t+' :KLEM, DONALD L. CALVIN, AN]} MARDON FRANKHAUSER
',J~ ;~, Mr. HA.<\CK. M1'. Chairman, Senator Packwood: My name is
:c;, ~:Robert W. Haack. I am president of the New York St.ock Exchange,
>'!: ,~hl vVall Street, N ew York. \iVith me today are several senior officers
;?'l'!J}'of tl~e e,xchange., R. J oh11 'Cunningham, Charles Klem, Donald .L.
" ',Calvll1, and Mahlon Frankhauser. All these men have some specIal
,:" ~,\expertise in the various topics which will be discussed in my state-
~~;P1ent this morning. IVe will be pleased to attempt to a.nswer any ques-
:~~lons that the members of the subcommittee might have at the can-
";,' ~~lusi{)n of m,y prepared remarks.
i~ I would like to begin, 11£1'. Chairman and members of the sub-
.,', mmittee, by announcing 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 le trac itional concept of indu'stry
'f-regu a . < en e 11l a wa 0 mc' CIon 0
Tes aI'S cea mg III securIties. liVe think that the objective of the bill
II e accomp IS lec a a su stal1tially 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
red to bank depositors.
(175)

06A
 20a
lNDUSTHY l'ROGR,Hl FOR H1PROVED CUSTO~JER PROTECTION
L
l' This Exchange bas joinell with olhe!" Dl:1jor self-reglllntoTY org>lni2ntions
S ;·lnd certain industry groups to forDJulilte a program for the jJUT]}OSP of ex-
Is jl;lU(]iug the protection afforded to tbe fnnds 2nd seclllitie~ whicb brol,!"!" denIers
e bold for tbe iDves-ting public.
is Tbe go~ls of this prognlDl will jnclnde the follon'ing: nr.st, ]Jrodding protec-
It tiD], for tbe funds and secllritip, of cllstomers of all bro],er-llealers witbin the
j. ",[ilbushed frarneTI'orl; and traditiou of self-regulation; second, (lfveloping iln
II equitable formula of financing sucb il program and assuring tbat it reflects tbe
Ie ueeds and CiTl:11msUlnces of e?ch segment of the industry and its cllstOIl1:'r;;;
h ,binL presenting to tbeSEC 3nd to the Congress a unified and constructive ap-
I'luncb on behalf of the entire. se;:urities industry.
The question of inBurance protection for customers of member firms is in-
e~:ricatllr bound up with tbe broader questions of member firm capital require-
wents, membership st.andards, finane-ial responsibility, and operational prO-
n- Cedures. TbesE' fae-tors, in turn, are tied to tbe way in Ivhicb self-regula tion
id witb appropriate SEC oversjgbt, governs tbe brokerage commllnity.
,r Congr€ss recognized tbe lllliqlle character and desirability of se1f-regulation-
~r .. "ben it fra!lJed the Securities Exeb~Dge Act 36 years ago, by writing into the.
lawa .posHive responsib)lity fOI" tbe industry to· regulate itself, subjeet..1<LSEC.
oversight. In the 36 years since tben. this original CongresSlUDal lriteiil bas been
I"med frequently, and in tbose years an elaborate and effecti.e syst€m· of
k· ations, surveillance and compliance proe-edures h.as been developecl to
ed the public, the broker-dealers with whom they deal, and tbe market
o1l aces thev use.
lS, One measure of the effectiveness of tbe system tbat bas developed is tbe fact
~S,:_ . t in the three-and-a-h_alf decades Slnce the passage oJ the Securities Ex-
be. Act, no public customer of an American Stock Exchange member or-
Lion ever suffered financial losses beca use of the insolvency of a firm with
be dealt.
CONCLUSION

. Tbe Excbange believes tbat any program designed to provide improved custo-
financial protection sbould build upon the self-regulatory capabilities Hnd
rces developed over the past tbirty years. It recognizes tbat federal assist-
ay be needed to finance tbe most effective program for ,the protection_ofg)J_
In this connection . .the Excbange stronglY'urges that tbe- Si.ibcclrrilllittee
ailmY tbe·iii-di.lstryto· develop the approach outlined above and to make its
endations, prior to finalizing any legislative measures that may be

APRIL 14, 1870.

H. BUDGE,
SecuriHes and Exchange Commission,
D.C.
I.RII.,:rull(Jn

consistent with the established public

poliCy of self-regulation in the sec-urities indllstry.
Third, to devel'op tbe program to reflect tbe particular needs and cir-
of each industry organization.
tll, to provide an equitable formula of financing such a progralll-
in terms of both the ~ize and nature of the risk involved.
to present to the Securitioo and Exchange CommissiDn and to Con-
unified and constructive approacb by tbe entire securities industry.
, within the fabric of self-regulation and based on appropriate analy-
e securities industry is undertaking an unequivocal commitment to develop
07
 210
a plan that will protect public customers of brolier·clealers up to certain defined
limits.
A "tasli force" composed of the following industry representatives was formed
to d~TclC}jJ a plogrITill consistent ,,~vesagreecl upon and to plovi'de
nreport by Jul.v 1, 1\}70: ~~~--.~~----~"'.
~n:-Ra·lpli"·Der'unzio (New York)-New Yorli Stocli Excl1ange-Chainnon.
IvIr. Watson B. Dilbney (Louisville)-NatiC'nal Association of Se(":llrities
Dealers, Inc.
Mr. Robert M. Fomon (Los Angeles)-Pacific CO:lst Stock Exchange.
ilir. Clifford W. Micbel (New Yorl;)-Association of Stock Exchange
Firms.
iIlr. Francis R. Schanck, Jr (Chicago )-lI1idwest Stock Exchange.
1I1r. Robert C. Van Tuyl (New York)-American Stock Exchange.
Mr. Wheelock Whitney (Minneapolis)-IIlvestlllent Bankers Association
of America.
The Committee hopes that the precedent of· careful study :lEd consultation be·
tween t.he Securit.ies and Exchange Commission ancl the securities industry will
be followeel to provide a sounel program for the protection of all public investors.
Sincerely,
--americari Stock Exchange, Ralph S. Sanl; Association of Stock Ex·
-t1ra1l}5e-Fh~·arol:d--A~-R0usselot-·;-Boston-·Stoc1.-E:S:ClTIinge,
-~E:-:I3u"Wcl~:::-New~Y:ork--Stocld!lrcln11l"ge:-Rohert·"W·. Hllal:j{;
.' Pacific Coast Stock Eicharige-;-h~6lJei"nr"FOil:iO~-n--;-lD"Ve"Stment
·....:B1iiill"e1'S-::;,:SSOClfl.tlOll of Kill eri"C"3,-:>\:nClr:e\:v-rMe1 ton, J r;-r\:tiln~·est
'-Sl~,:M:-i-eh-a-el~0I3j~1~'N-i\'ti-oua-l---m3suctit!ol1 of Se·
...__01 nfi~~lllc.; G~on, __-:S:-·-MacklJn-;-:-Jr-:-;-phliacrerpilla.
B~illore~WaShington Stock ""Excliange., ~~~J:r~""""\Y~~~~I.~~=---

STATEMENT OF ROBERT lYI. GARDINER, CHAIRMAU, LEGISLATION.

COMMITTEE, ASSOCIATION OF STOCK EXCHANGE FIRMS; ACCOM· '.
P ANIEDI BY DR. LEON T. KENDALL, PRESIDENT, ASSOCIATION OF ..
STOCK EXCHANGE FIRMS, AND RICHARD O. SCRIBNER, GENERAIi'
COUNSEL

Mr. GARDUmR. My nan1e is Robert M. Gardiner. rfi.ni ·clia:irm.an .

the. legislation comn1ittee of the Association of Stock Exchange .
and mannaging partner of Reynolds & Co., a member firm of t.he
York Stock Exchange. Accompanying me today are Dr. ,'.
Kendall, president. of the Association of Stock Exchange Firms; .'
Ric.hard O. Seribner, its general counsel. ,Ve appear here to =·'.~M~!Ci:';'
the views of the association on Senate bill 2348.
The association's membership c01111)rises 500 securities firms
whom are members of t.he New York Stoek Exchange. In
many of these firms are also members of the American or
stoek exchanges. Of course, the vast majority belong to the
Associations of Securities Dealers, Inc.
It has been estimated that upwards of 85 percent of all
business, both listed and over the cOlmter, is transacted by or
members of our association. Our members have offices in
in the Union and many foreign countries. These firms are
tered in New York City and metropolitan areas throughout
t.ion; some are very large and others relatively small; most
primarily in the ret.ail securities business while others
stitutional sales, underwriting, asset management and
activities, or are specialists or floor brokers on the New York
Exchange.

08
Ii 21J

I
I
I mention these bets for two reasons: to sho',\, t.hat 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. 23-4:8) to
esta51JSll a Feder,ll D1~urailce corporaXlOn. cleslgnec1~he 1'1'01 c1s of
I , rEs s')onsor, Senator Mliskle, "to prot~ct. lJ)HoSLOrS from loss because
':Q{ffi~ail~ orb~lea]erDrffiS1hrougDW1lOm t.Rey buy and seli-
I secllntles7" -------~
I" I might add Wfl t.horoughly support -the principle t.hcLt is involved
I in that statement, and I would furt.her add that ,ye support and ap-
pla.ud your opening remarks in which you stated that you..felt it ,,:as
necessary to establish our own programs which would offer full 111-
\'estor insurance protection. IVe t.horoughlysu pport the principles in-
volved in your statement, the event.s of the last 2. years.
I Event.s of the last 2 veal'S occurring within and around the 111-
dusfr}', including ou~'werr-pli.b1icized. papen-vork problems,.the severe
I : _51~::()!its.squfeeze aftlrictifn g] manfiY of ol}1r firms atnc~ t.he w.i t!ldr awal fllrl'o:HH'l1
usmess 0 . severa 0 t lose 1 rms, 1a ve crea en 8- l egl t unave t sense 0 f
il - -
concern in the pub] ic's mind for the health of t.he securities industry.
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 t.hese institutions to meet their liabiJitie--..3. Such a crisis of confi-
-. dence could only result in' seVere adverse consequences to investors,
j, _corporations seeking hmds, t.he industry, and the markets it serves.
). We fu11y recog11ize and 'accept the need tQ.JJ}'otect t~9-...l:}~L
\~,mvestor from loss clue to t.he fmlure of a broker or dealer t.o meet. .
, ~~IlsllllanclalOb~Igabons to customers. We ooheve, how.e:rer,. fli1'i:tD~
{r~son ?fl:1.1e Ul1lque character. al1Clstr.uc~ure of the secuntJes mclustry
!;~' tIllS ob]ectJve can be best achleved wIt.11m the framework of a three-
~:~tier.se1f-regu1a,tion. ThatwiH 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 rtrticulat.ely today, and,
:~;.thircUy, the 'overall oversight of .the 'SEC and Congress itself.
t.~ Our industry has hist.orically, and as recently as last month, dem-
ffi?nstrat&l its' cormmtm.ent to full customer protection, and we would
'~~ike to take the opportlmity this mo'rning to share with you our views
~on why self-regtilat.ion is 'a necessary, workable and obtainable alterna-
~1ive .to the legislation under consideration by t.hi~ s~bcommittee.
~, Smce S. 2348 was drafted by analogy t.o eXIstmg Governmental
!l'guaranty pro,gTams-the Federal Deposit Insuran.cB Corporat.ion p.nd
~;~he Federal Savings 'and Loan Insurance Corporation-it may first
"f#,~ useful to consider the reasons underlying enactment of these laws.
~:·Both FDIC and FSLIC arose out of t.he total collapse of the Nat.ion's
~@pal1cial structure i!l the great d~pression. Their dominant purpose
. ~as to restore publIc confidence III the soundness of t.he syst.em of
~}Y~ich t.hos~ institutions were a part. The p,rimary means of achieving
·lfkhIS Oh]ectl.ve was to erect ~ C?ffiPre'hens:n !3. r:etwork of reg'ula!'-ory
T

,r;;Il3:.~d superVISOry controls to h11nt the p-osslbIhtIes of bank or savmgs

~~J:ld loan failures. The crucial factor of public confidence was further
iRjIttressed by safeguarding ·the savings of individual depositors
'~1irough deposit insurance.
~I{The -Jan,g-uag-e employed in S. 2348, encompassing terms like "insured
1l!?roker," "insuranced dealer," "actuarial considerat.ions," "insurance
.1±if

09
 218 ./
,
Se.nator ·WILLIAMS. Thank you very much; Mr. Gardiner. ThrLt was ~
an excellent. stat.ement. I just have one or two questions. .1
I wonder if you could describe the re.lationship bet.ween your finns: I'
operating profits or losses and your capital structure?
Mr. GARDINER. I will go from Mr. Hn[\.ck's statement. that [1. very j.

small number of firms are presently under restriction. There is no

direct relationship between the firm's capit.al and profit or losses until
such time as the loss impairs its capit.al. At such a tin"le, restrictioll by a,·

an exchange orregi.llatory body wouJr1 come immediately int.o play~ ]

Therefore, I would say at the present moment the capita} structure ,J'

of our member finns is st.rong. It certa.inly has been-it is not. as st.rong

as it was 18 mont.hs I1go. l~T e as a trade f,ssociation do nO' have access ,.,1

to the. figures as the exchange dues, and cannot give you specific info1'- j
mat-ion as t.o exactly wha.t the st.andiug-s are. I think that. Bob Haack's 1
testimony will give.'you the best. indication ofthat.. J
Senator \VILLIAl\£S. If a· firm. fails. what funds and securities of its :1
custome.rs are subject to risk? The qllesti'on here is a.ren't tl1'6re certa.in ]
type.s of securities requ~recl to be· segregated ana: others tli,it 'are not? ,1
Mr. GAnDINER. Yes, SIr. The presenft regulat.ory rules are that free, )
fully paid secul1ities n1.11st be sUibject to segregrd:lion. -I'll short: they go -"J.,~
in a se.parate bank vault away from the general securities of the firm. ~
They are put aside. ]
Now the other securities, those in which customers may have bor- ~,:
rowed money on, which are part.ly owned by t.he firm and partly by 1
the cust.omer, are in the general securities of the firm. ' 9
There is t.hat dist.inction in the securities, yes. . ',~
Senator liVILLIAlIfS. Do you 'encourRbUe customers to leave funds or '"
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 sl1me. ),~ ,'
_The l~eason is that toclay to transfer and ship securities to a customer U
is more time consumitlg and more difficult. thail for us to keep tile, ,"~
securities for the customers themselves. Transfer agents are ba.cked uP. jj
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 theHi ,
he can sell t.hem immediately. 1£ he wants them, we put thein in trans<: '~'
fer and send them-for us it is easier and for our ease we encourage >;
retention by the firm. , ' ';

e
SElnator WILLIAMS. I thou ht I understood Senator Muskie to Sller:'
at une er 'lIS 1 t 1e1'e wou c e a areater ease in stock trans~." H
',!
ers t rough the encoura mo' 0 customers to eave t Jell' se u,' ' " , ,~
s reB> names WIlt le ro -ers. Did t lat come out? Did I understal1cl ':"'~
that correcEly ~_oJ
----nn. "f'ETER'RLOC". That js correct
Senator 'VILLIP.US. Could you comment on that ~ You are suggest~ j
",,'J

ing that you encourage-- 'f

Mr. GARDINER. That we do now. , ,f
Senator WILLIAMS. Senator Muskie said there. would be greater': j
encouragement. under the bill. Again, a1'e-- !
Mr. GARDINER. Again, I can only give you our own firm's experience !
in this regard. Over the past 2 years we have not seen any grea.ter
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·U:NDER
SECRETARY FOR MONETARY AFFAIRS

.--.liecretal:-:v. KENNEDY. Thank you, 1I,·fr. Chairman and members of

the committee. -, .
I appreciate thisopp0l'tunity to present the views of the adminis-
·tmtiOLl on the proposed le.gislation to provide protection and illSlll'-
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 wheri. 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, Economic Pohcy ·anclProducti vity last mOllth, specir:-
.~ ~ically e:nclQrSmi Lire ~ulicept ~~ il1_~su~an~e pl"otecl1o~for investors iil
seqmtlE,s: He saId: .' . . . , .: . ~-:--,:-,-~,-.-.-----:-:-~---,.:------'~
,~o.furtheL ·,protect·th~ 's'mallinvestor, -I'·supportthe. estabHshtlleq.t'.·of: ,Hi inc
_ surauce corpol'ahon WIth a Federal !lac~stop to guarantee i:tr'e: i!1vesto[" 'llga;ins't;-
'L~hatcoUlC( lie caus~d by' finanCIal llitl'klItties: Of brokemge no-uses, Wblle-
-.tIlIS WOUld' not affect· the' eqlilty rtslrtlTIit-i13-atwa:yi-presenETIl-stocli::<'"'marKe"t
: lIlvestment;· it ·ivUt-irssutt5· the· investor th~TIrbtlttY-rrf--i;lr~Ues:-in---
':(iUStry ItseLf does not Become: cause tor .coucern: "" ' . . .. '.' . ,.
For obvious reasons, the SEC and' its able' staff have car~iecl tlli:\
burden for the aelminist.r:ation·'in:ref;ining,;the ideas that have b~en
presented.-over the past year or so' ill,this area. . . :
During the pn.st month, the SEOand the' a:dministratiQH hn. 'Ire been
working intensively with represent[1;tives of the induo;try to develop
a COlllmon position_ The results of these efforts· are incorpomtecl)n
the version of the bill which.·Chairinan Budge will present to you this
lllornilig .. ': '. .......' '. '. . . . '.
This committee is well 'aware. of . the· complexities in ul1Cling equit-
able and meaningful answers to the difficult problems raised by cus-
tome"!.i insurrtilCe for the securiti~.s· industry. I thip.k, hO\';CVT.f, that
the version of the, bill which will b~ presented by Chairnmn Budge
.toela y deals effecti vely with these com p lexities.
i)'ly 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 that can be createel for financial markets-a.nd for the economy
that depends on the functioning of those mn.rkets for its finallcial
needs-by an)' loss of eonficlence on the part of investors in the institu-
tinn'll arranQ:emellt.s in those ma,rkets_ 1Ve belie,ve tha't the 11rcsenc bill
i,-illitelp substalltially to preserve th8.t confidence.
S~condl'y. I shoulcllike to assure this subcommittee that the major
['oliey decisiolls incorpo~'ateel in tbis late;:;t Ire.esion of the bill have been
rel'iewed by the administra.tion and ha ~re its endorsement.
In I'iew -of the. ill1l)ortallce of this legisli1.tioll alld the t.ime element,
the Commission llf\.d been wOi'l;:illQ,' closely with other interested ag;ell-
cies 0 f the GOiTel'llment ill dei-clop ing its views.
,As r [uH-e ,tlreacly illdicated, that dose cooperaton has c.cmtillued
ill rC'cellt. "'eeb,, alld the pre.~e~,t d,',1 ft bill is truly a joillt. [It·i:>dl.l ..:t, i)0tll

\.Iv I- 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 seeks appointment
of a trustee, to make subordinated loans to .n, member in danger of
failing to meet its obligations to customers if the Corporation deter-
mines that it is in the interest of customers and that such loan is rea-
so113,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). .
Fina.lly, 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 submit.t.ed to your st.aff 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.
""Senator 'V ILLIAlIIS: -Mr. Chairman~dow-e- have a section by section
analysis of this elaft bill that bears the elate of July 16~ We have the
onesubmitted on July 9_
IVu:. BUDGE. I think: they are almost identical except for the change
Secretary Kennedy mentioned this morning.
Senator 'IV ILLIAlI1:S. One change ~
Mr. BUDGE. That is the only major change of which I am a ware.
~enator "yvILLIAMS. We had better be advised of the other changes,
ma]or or mInor.
Senator BENNETT. Could you submit a memo identifying and dB-
scribing the specific changes without submitting a complete--
Mr. BUDGE. Yes, sir; we will do that today, Senator.
Senator vV ILLIAlI'fS. We. will expect that very soon, the.n.
:Mr. BUDGE. Yes, sir.
(1:he memorandum referred to follows:)
MEMOR-'>.NDUM OF THE SECURITIES ANIi EXCHANGE COMMISSION REGA..RDIN8
. """1:'OSSffiLE AUENDMENT 0", THE B-ANERUPTCY ACT
------ . -~""~~"..,..--.,..,~-:=~-,,..---,--.-~-

At tbe hearings before the Suhcommittee on Securities of the Senate Com-

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 bankrnpt.cy law contained in the proposed Securitie5 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 bHI ~"bich is dated
July 16, 1970.'
The bill does not in fact amend tbe B~nkruptcy 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-
seotatives on July, 14, 1970, by Cba..irmnn Moss and otber members of Congress, as
ELK 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 ordii::i1li'jr:-i:nrn In uptcy pIDceeding i nit-iatetl-by-cre-clii:urs;-bl:rt-r.rtlrerwuutd::-
be'a special pl'ot:eedtrrg-inilia-t-e~be geeul'i-Hes-f11-vestor-Pro!:eeti~
·~r()"vi1:led"""furin-llie-bitJ.,--fti~i=1.ity-:f1)r....the-protection of all~
tamers of tbe broker-dealer iUljuesUon.
---"""2. To the extent necessary, tDel:.:orporation will advance funds to the'
trustee for the benefit of customers, III amounts up to the l!mlt of $5lJ,D\lO
o for each customer which 1S 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 the Corporation and other special
procedures provided in the bill for this purpose, tbus a voiding the lengthy
delays which may occur in ordinaTY bankruptcy proceedings.
4_ The trustee will normal'ly complete open contractual commitments of
the deb-tor' where customer's interests are involved. This would uot 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 tbe benefits of exist-
ing legislntiull and e:>:perienc£ in this 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 proceediugs. Subparagrapb (m)
.(8) provides that except to tbe extent inconsistent with the prOVisions of the bill
and except that no reorganization shall be attempted, proceedings shall be con-
ducted in accordance with the provisions of Chapter X of the Bankruptcy Act
?nd such other~provision.~~Qf the Bankruptcy Act as Section 102 of Chapter X
of tbe Act would make applicable_' . .
Subparagraph (m) (7) tOgethH with subparagraph (m) (11) of the bill contem-
plate that the trustee, to tbe extent practicable, will satisfy the ciaims of cus-
tomers who are entitled to securities by delivering such securities to them. In
ordinary 'bankruptcy proceedings the trustee would normally sell all securities
and distribute cash to customers. Subparagraph (m) (13) excludes from the class
of customers wbo may benefit from advances by th€ Corporation, customers who
are partners, officers, directors or substantial stockholders of a broker-dealer in
liqUidation.
Section 60(e) of the Bankruptcy Act (ll U.S.C. 96(e)) contains special defini-
tions and procedures applicable to the bankruptcy of a "stock broker."
Clause (a) of paragraph 10 of subsection (m) of the bill incorporates section
60 (e) of the Bankruptcy Act by reference nnd thus brings into play the proviSions
of section 60(e) dealing with the right of ~ustomers of a banlrrupt stock broker
to recover specifically identifiable property in the 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 or for the account of customers except
specifically identifiable property of a customer which would be recovered, by him.
Such single and separate fund is used to pay c·ln.ims of customers.
The remaining clauses of p-aragraph 10 of subsection (m) modify to some
degree the operation of tbe .pm'VisJollS o,f section 60 (e) o·f the Bankruptcy
Act as so incorporated by reference, in order to eliminate certain anomalies and
to accommodate tbe procecinres to changes in the practices of the securities indus-
try which have developed since 1935 when section BO(e) was enacted. Thus, the
first sentence of subparagraph (B) mal,es it clear that tbe term "stock broker"
inclucies a securities firm acting as a dealer as well as a firm acting as a broker.
Subparagraph (D) contemplates the completion of open contractual commitments.
Subpn.ragraph (E), together wi th other provisions of the bill, provides for tbe
recovery of certain advances by the Corporation, and subparagraph (F) includes
in the categul-Y of specifically identifiuble property whiclJ m:1y be recovered by
customers securities held in bulk segregatiou or as a part of any central certificate
sel-vice of u stock cle.Rring corporation or similar depository if tbe identity of tbe
customers entitled to these particular securities is established to tbe satisfaction
of the trustee. This subpal'ngraph also grants to tbe Commission certain rule-

12
 "provided that if such brol;:er-dealer bolds 100/0 (or 50/0) of an equity security
of a class registered pursuant to Section 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 infonnation on this subject
that might he helpful to you.
Sincerely yours,
CR.l.IG SEVERANCE.

INVESTMENT COMPANY INSTITUTE,

Ju./y 17, 1970.
Hon. HARRISON ..A.. WILLIAMS, Jr.,
Chainnan, Subcommittee on Se.curities, SenfLte Banking a.nd CWTenCy Com-
mittee, House of Repl'esentatives, Washington, D.C.
DE.A.R 11m CHAIRMAN: This letter is written on behalf of the Investment
Company Institute·.which is me na'tlOIiar ·a$SDctn:t~H"ttltd-imlustry:­
Its membe'f'fMt"re 322 mutual funds and their investment advisers and principal
underwriters. Our mutual fund members have over 10 million shareholder
accounts, with assets of about $40 billion, comprising over 90 percent of the
assets of all U.S. mutual funds.
We wish to express, for your Committee's consideration, our views on the
bills to establish ·a system of insurance for customers of broker-d~
Unable to meet theIr obligations to customers. -~~~-~------
I At tile outset It should be 'made clear :thai:' the Institute strongly endorses the
principle embodied in these proposals. We believe that reasonable insurance pro-
tection should be provided to protect investors against the insolvency of broker-
rleafers. ·Fui·therrii6i:e,·siriceultimate reliance-f6Ythe'ftiudirigof such an insur-
ance program is on tbe U.S. Treasury, we helieve that there should be reasonahle
controls over access to puhlic monies and affirmative governmental power and
responsibility to fashion rules designed to minimize the risks for which insurance
is provided. In accordance with this belief, we have no reservation concerning
the partticipation of all registered broker-dealers to the extent that the ·activities
of such brol;:er-dealers create the l;:ind of financial risks against which the bills
are directed.
We also believe in the principle that the cost of the insurance should he borne
hy those who create the risk For this reason we urge that the insurance proposal
uHimately adopted should contain a statutory exemption from mandatory par-
ticipation for those brol;:er-dealers who do not hold and utilize in their own
husiness operations customers' free credit 'balances and customers' securities.
The justification for this exemption would be that the exempted hroker-dealer's
business is noc tbe type that presents the risl;:s that the insurance proposal is
designed to guard against.
Broker-dealers whose type of business, by clear objective 8tamlards, does uot
involve the risks intended to he insured against should not, in fairness, be re-
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 and
should be written into the statute, rather than a requirement of universal par-
ticipation by all broker-dealers with exemptive powers given to the SEC perhaps
on a case by cases basis.
In this connection, it is important to summarize the position of a mutual fund
underwriter. .
The typical mutual fund organization is composed of three components; the
investment company, Le. the mutual fund itself, the principal underwriter 1 and
the investment adviser. The investment adviser contracts with the fund to 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 contracts with
the fund to arrange for the distribution of the shares of the fn]](1 to the public.
The nuderwriter receives its compensation hy retaining a portion of the sales
charge that an investor pays when he purchases such share8. Often the uuder-
writer a'nd the adviser are a siugle entity. Where they are separate companies,
they are 'usually, bnt not always, under common control. Because the underwriter

1 "No-load" lDufual funds Le. those sold without a sales charge, normally do not have
no underwriter. . '
 ~(ol
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 proceedino- initiated by the Securities Investor Protection COr-.
'pora lon, proVl ed for in· e ' . . lOn 0 a cus-
m r ~ l' In s lOn.
r 2. iN 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 provided in the bill for this purpose, thus avoiding the lengthy
delays which may occur in ordinary bankruptcy proceedings.
4. The trustee will normal'ly complete open contractual commitments of
the deb-tor· 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 shall be attempted, proceedings shall be con-
ducted in accordance with the provisions of Chapter X of the Bankruptcy Act
and such other .provisions _of the Bankruptcy Act as Section 102 of Chapter X
of the Act wouLd make applicable. .
Subparagraph (m) ('I) togethH with subparagraph (m) (ll) of the!J.ill contem-
plate that the trustee, to the extent practicable, "ill satisfy the ciaims of cus-
tomers who are eutitled to securities by delivering such securities to them. In
ordinary ·bankruptcy proceedings the 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 Baukruptcy Act (11 U.S.C. 96(e)) contains special defini-
tions aud procedures applicable to the bankrur;tcy of a "stock broker."
Clause (a) of paragraph 10 of subsection (m) of the bill incorporates section
60 (e) of the Bankruptcy Act by reference and thus brings into play the provisions
of section 60 (e) dealing with the right of c.ustomers of a bankrupt stock broker
to recover specifically identifiable property in the custody of the stock broker and
the concept of a "single and separate fund" cousisting 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 fuud is used to pay c·lrrims of customers.
The remaining clauses of paragraph 10 of subsection (m) modify to some
degree the operation of the .pwvisJons 0{ section 60 (e) of the Bankrl.lptcy
Act as so iucorporated by reference, in order to eliminate certain anomalies and
to accommoda te tbe procedures to changes in the practices of the securities indus-
try which have 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 tbe completion of open contractual commitments.
Subparagraph (E), togetber witb other provisions of the bill, provides for the
recovery of certain ad,unces by the Corporation, and subparagraph (F) includes
in the categury of specifically identifiable property wllicb may be recovered by
customers securities belel in bulk segregation or as a part of any central ('~rtifirate
sel-dee of a stock clearing corporatiGn or similar depository if the identity of the
customers entitled to these particular securities is establisbed to the satisfaction
of the trustee. This subparagrapb also grants to tbe Commission c~rtain rule-

!
J
\1\10:5 tl aw
H.R. REP. 91-1613 Page J

H.R. REP. 91-1613, H.R. Rep. No. 1613, 91ST Cong., 2ND Sess. 1970, 1970 U.S.C.C.A.N. 5254,1970 WL 5920
(Leg.Hist.)

*1 *5254 P.L. 91-598, SECURIT]ES INVESTOR PROTECT]ON ACT OF 1970

HOUSE REPORT (INTERSTATE AND FORE]GN COMMERCE COMMITTEE) NO. 91-1613,
OCT. 21,1970 (TO ACCOMPANY H.R. 19333)
SENATE REPORT (BANKING AND CURRENCY COMMITTEE) NO. 91-1218,
SEPT. 21,1970 (TO ACCOMPANY S. 2348)
CONFERENCE REPORT NO. 91-1788,
DEC. 18,1970 (TOACCOMPANYH.R. 19333)
CONGo RECORD VOL. 116 (1970)
DATES OF CONSIDERATION AND PASSAGE
HOUSE DECEMBER 1,21,1970
SENATE DECEMBER 10,22, 1970
THE HOUSE BILL WAS PASSED]N LIEU OF THE SENATE BILL. THE HOUSE REPORT AND THE CON-
FERENCE REPORT ARE SET OUT.

(CONSULT NOTE FOLLOWING TEXT FOR ]NFORMA-

T]ON ABOUT OMITTED MATERIAL. EACH COMMITTEE REPORT IS A SEPARATE DOCUMENT ON
WESTLAW.)

HOUSE REPORT NO.91-1613

OCT. 21,1970
THE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE, TO WHOM WAS REFER.lZED THE
BILL H.R. 19333) TO PROVIDE GREATER PROTECTION FOR CUSTOMERS OF REGISTERED BROKERS
AND DEALERS AND MEMBERS OF NATIONAL SECURIT]ES EXCHANGES, HAVING CONSIDERED
THE SAME, REPORT FAVORABLY THEREON WITH AN AMENDMENT AND RECOMMEND THAT THE
BILL AS AMENDED DO PASS.
THE AMEND11ENT IS AS FOLLOWS:
STRIKE OUT ALL AFTER THE ENACTING CLAUSE AND INSERT A NEW TEXT WHICH APPEARS IN
THE RECORDED BILL IN ITALIC TYPE.

*5255 PURPOSE OF LEGISLATION

THE PRIMARY PURPOSE OF THE REPORTED BILL IS TO PROVIDE PROTECTION FOR INVESTORS IF
THE BROKER-DEALER WITH WHOM THEY ARE DOING BUSINESS ENCOUNTERS FfNANCIAL TROU-
BLES. IN THESE CJRCUMSIANCES PUBLIC CUSfOMERSSDMETIMES ENCOUN'TElrD1FFICDLTY IN
'. OBTAJNING 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 ]S ENTITLED.
THE PROPOSED LEGISLATION WOULD PROVIDE 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 PROVIDED BY THE PROPOSED
FUND.
IN ADDITION, THE LEG]SLATION MANDATED A GENERAL UPGRADING OF FINANC]AL RESPON-

14
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 H.R. REP. 91-1613 Page 2

SlBILlTY REQUIREMENTS OF BROKERS AND DEALERS TO ELlM1NATE, TO THE MAXIMUM [XTENT

POSSIBLE, THE RJSKS WH1CH LEAD TO CUSTOMER LOSS.

BACKGROUND AND NEED FOR THlS LEGISLATION

THE SERlOUS AND PERSlSTENT FlNANClAL PROBLEMS BESETTING THE SECURlTlES INDUSTRY
IN RECENT MONTHS HA VE LED TO THE VOLUNTARY LIQUIDATIONS, MERGERS, RECEIVERSHIPS
OR, LESS FREQUENTLY, BANKRUPTC1ES OF A SUBSTANTIAL NUMBER OF BROKERAGE HOUSES.
SUCH FA1LURES MAY LEAD TO LOSS OF CUSTOMERS FUNDS AND SECURlTIES W1TH AN INEVI~
TABLE WS~G OF CONFIDE~CE'1N THE<U.S.,SECURlTIES IviARkET~-:-SUCHLFSSENED CONF1-
, DENCE HAS AN EFFECT ON THE ENT1RE ECONOMY. WHATEVER OTHER STEPS MUST BE TAKEN TO
'JMPROVE THESE COND1T10NS, ONE OBJECT1VE OF~HE BlLL, AS REPORTED,lS TO PROVIDE IN-
" VESTORS PROTECTION AGAINST LOSSES~CADSEITBY~JFrtlNSOLVENCy~'6FTHE1RBROKER':--~
• DEALER. THE NEED IS SIMILAR, 1N MANY ~CTS, TO THAT WH1CH PRO:MPTED THE ESTAB-
'. LlSHMENT OF THE FEDERAL DEPOS1T INSURANCE CORPORA TI01'fAND THEFEj)ERALSAVlNG-S--
AND LOAN INSURANCE CORPORA TlONS.
*2 AS THE CONGRESS RECQCJNlzE1Jn'ri933 WHEN 1T ENACTED THE FIRST FEDERAL SECURlTIES
ACT, ' ... SECURlTIES ARE INTRlCATE MERCHANDlZE.' (H.R. REP. NO. 85, 73D CONG., 1ST SESS.,
MAY 4,1933.) SO, TOO, 1T HAS COME TO BE RECOGNIZED THAT THE SECURlT1ES BUSINESS IS AN
INTRlCATE BUSINESS. IN SOME RESPECTS THE INDUSTRY lS UNlQUE, AND 1TS PROBLEMS AND
PRACTICES REQUlRE ORIGINAL SOLUTIONS. BROKER-DEALERS, AMONG THEIR MANY OBLIGA-
TIONS, ARE RESPONSIBLE FOR SAFEGUARDING BILLIONS OF DOLLARS IN CASH AND SECURlT1ES
WHICH BELONG TO INVESTORS. THERE ARE TODAY IN THJS COUNTRY OVER 26 MlLLION SHARE-
HOLDERS, MANY OF WHOM P..A VE E1THER CASH OR SECURlT1ES OR BOTH IN THE CUSTODY OF
BROKER-DEALER FIRMS.
FREE CREDlT BALANCES ARE FUNDS LEFT W1TH A BROKER-DEALER FIRM BY CUSTOMERS WHO
HA VE AN UNRESTRICTED RIGHT TO WlTHDRA W THEM ON DEMAND. THIS MONEY USUALLY
COMES FROM THE PROCEEDS OF THE SALE OF CUSTOMER'S SECURITIES OR FROM D1VIDENDS
PAID. IT IS LEFT ON DEPOS1T W1TH THE BROKER LARGELY AS A CONVENIENCE. THESE FUNDS
MAY BE AND ARE USED BY BROKER-DEALERS TO Jl.1All'lTAIN POS1TIONS IN SECURlTIES, TO FI-
NANCE MARGIN PURCHASES OF OTHER CUSTOMERS, AND TO OPERATE THEIR BUSINESS GENER-
ALL Y. ONLY RARELY, IS *5256 INTEREST ON THESE FUNDS PAlO BY THE BROKER TO THE CUS-
TOMER. AT THE PRESENT TlME 1T IS ESTIMATED THAT APPROXIMATELY $2 BILLION OF CUS-
TOMER MONEY IS ON DEPOSlT UNDER THESE ClRCUMSTANCES W1TH 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 BlLLION, AND HIE COMPARABLE ESTIMATE FOR EARLY 1969 WAS
$3.7 BlLLION.
BROKER-DEALERS ALSO HOLD SUBSTANTlAL AMOUNTS OF CUSTOMER SECURlTlES FOR SAFE-
KEEPING. \\-'BILE CUSTOMERS HAVE AN UNRESTRICTED RJGHT TO RECEIVE ON DEMAND THESE
SECURITIES WHICH BELONG TO THEM AND ARE FULLY PAlO FOR, THERE IS AN INEVlTABLE RISK
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 'SEGREGATION' ARE
NOT OBSERVED. MOREOVER, SECURITIES WHICH ARE NOT FULLY PAID FOR-- THAT IS, MARGIN
SECURlTlES-- ARE HELD BY THE BROKER-DEALER AND MAYBE PLEDGED BY THE BROKER AS
COLLA TERAL ON BANK LOANS. WHILE FIGURES ARE NOT AV AILABLE REGARDING THE TOTAL
VALUE OF SECURIT1ES SO HELD, THE LARGEST BROKERAGE FJR1vl IN THIS COUNTRY RECENTLY
HELD ABOUT $18 BlLLION IN CUSTOMER SECURITIES FOR SAFEKEEPING. BY CONTRAST, THE TO-
TAL ASSETS OF THE FIRM WERE ABOUT $1.8 BILLION.
THERE ARE SOME SAFEGUARDS, HOWEVER, ON BOTH THE STATE AND FEDERAL LEVELS AS
WELL AS IN INDUSTRY IMPOSED REGULA TlONS. AT THE FEDERAL LEVEL BROKERS AND DEAL-

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 H.R. REP. 91-1613 Page 3

ERS ARE REQUIRED TO REGISTER WlTH THE SECURJTIES AND EXCHANGE COMMISSION (THE
'COMMISSION') AND MAINTAlN CERTAIN MINIMUM CAPlTAl REQUIREMENTS. THEY MUST LIMn
THElR AGGREGATE INDEBTEDNESS IN RELATION TO THElR NET CAPITAL IN ORDER TO ENABLE
SUCH FIRMS TO MAINTAIN PRESCRIBED MlNIMUM STANDARDS OF LIQUIDITY AND FlNANCIAL
RESPONSlBILlTY. THEY MAY ALSO HYPOTHECATE OR LOAN A CUSTOMER'S SECURJTIES ONLY
UNDER CERTAIN PRESCRJBED CONDlTIONS, INCLUDING A LIMITATION OF HYPOTHECATION OF
CUSTOMERS SECURJTIES TO nlE AGGREGATE AMOUNT OWED THE BROKER BY CUSTOMERS.
THEY ARE REQUIRED TO MAINTAIN AND PRESERVE ACCURATE BOOKS AND RECORDS AND TO
REPORT TO THE CUSTOMER CONCERNING TRANSACTIONS IN HIS ACCOUNT.
*3 MEMBER FIRMS OF REGISTERED EXCHANGES ARE ALSO REQUIRED TO FURNISH TO THE
CUSTOMER WHOSE FREE CREDlT BALANCES ARE USED, STATEMENTS DISCLOSJNG THE AMOUNT
DUE TO THE CUSTOMER, THE FACT THAT SUCH FUNDS ARE NOT SEGREGATED AND MAY BE
USED BY THE FIRM IN ITS BUSJNESS, AND THAT SUCH FUNDS ARE PAYABLE TO THE CUSTOMER
ON DEMAND. IN ADDITION, CERTAIN EXCHANGES, AS WELL AS THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, REQUIRE SEGREGATION AND IDENTIFlCATION OF CUSTOMER SECURJTIES.
UNDER THE NEW YORK STOCK EXCHANGE'S RULES, FOR EXAMPLE, CUSTOMERS' EXCESS MAR-
GIN AND FULLY PAID SECURJTIES MUST BE PHYSICALLY SEPARATED FROM USABLE MARGIN
AND FIRM SECURITIES AND THElR OV/}.]ERSHIP SPECIFICALLY IDENTIFIED. THIS IS MOST FRE-
QUENTL Y ACCOMPLISHED BY THE BULK SEGREGATION METHOD.
WHILE THE TOTALITY OF THE RULES AND REGULATIONS NOTED ABOVE PROVIDE IMPORTANT
PROTECTJONS FOR INVESTORS, IT lS CLEAR THAT THESE RULES ARE NOT SUFFICIENT BY THEM-
SELVES TO PREVENT THE EXPOSURE OF CUSTOlviERS TO SUBSTANTIAL RISK OF LOSS AS A RE-
SULT OF FINANCIAL MISlvlANAGEMENT BY A FIRM OR ITS EMPLOYEES OR INSOLVENCY.
THE INDUSTRY ITSELF IS AWARE OF THE IMPLICATION OF THIS. IN THE WAKE OF THE COL-
LAPSE OF IRA HAUPT & CO., A NEW YORK STOCK EXCHANGE MEMBER FIruvl THAT EXCHANGE
ESTABLISHED IN ]964 A TRUST FUND TO PROTECT CUSTOMERS *5257 OF ITS MEMBER FlRMS.
OTHER EXCHANGES HAVE FOLLOWED THIS STEP. HOWEVER, FOR A NUMBER OF REASONS, SUCH
PROTECTION HAS NOT PROVED TO BE SUFFICIENTLY COMPREHENSIVE TO MAINTAIN INVESTOR
CONFIDENCE. FlRST, THE INSTRUMENTS ESTABLISHING THE TRUST FUNDS PROVIDE THAT THEIR
USE IS DISCRETIONARY AND THAT THE TRUSTEES HAVE NO LEGAL OBLIGATION TO THE CUS-
TOMERS OF MEMBER FIRMS. SECOND, THE TRUST FUND OF THE NEW YORK STOCK EXCHANGE IS
NOW VlRTUALLY EXHAUSTED, HAVJNG BEEN REQUIRED TO COMMIT APPROXIMATELY $55 M1L-
LION, WHICH INCLUDES $30 MILLION TRANSFERRED FROM THE EXCHANGE'S BUILDING FUND IN
THE SPRING OF THIS YEAR. FINALLY, NO TRUST FUND HAS BEEN ESTABLISHED TO PROTECT IN-
VESTORS WHO DEAL WITH A BROKER WHO IS NOT A MEMBER OF ANY EXCHANGE.
UNFORTUNATELY, SINCE AUGUST OF THIS YEAR, THREE MEMBERS OR FORMER MEMBERS OF
THE NEW YOR.,l( STOCK EXCHANGE HAVE BEEN FORCED TO GO INTO BANKRUPTCY OR TO COM-
lvIENCE LIQUIDATION PROCEEDINGS. AS OF THIS DATE, THE EXCHANGE HAS NOT UNDERTAKEN
TO PROTECT THE CUSTOMERS OF THE FIRMS 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 SECURJTIES, BUT ALSO THE POSSIBILITY OF NEVER RECEIVING ALL
TO WHICH THEY ARE ENTITLED.
THIS LEGISLATIONL.THEREFORE, IS DESIGNED TO EFFECT TWO AIMS. IT WILL ESTABLlSH IM-
MEDIATELY A SUBSTANTIAL RESERVE FUND WHICH WILLPROVID"E PROTECTION TO CUSTOM-
ERS OF BROKER-DEA.LERS SIMILAR TO THAT FOruv.i.ERi Y PROVIDED BY THE EXCHANGETRuSL
s..
·.JUNDS. T.HIS WIlL REINFORCE TfiE CONFIDE~HAT-INVESTORS HAVE IN THE U.. SECUBJTIES" .
MARKETS. IN ADDITION, mE REPORTED BILL WOULD PROVIDE FOR A STRENGTHENING OF THE
'"F"INANCIAL RESPONSIBILlTIES OF BROKER-DEALERS.

HISTORY OF BILL
'-' .~
16
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 H.R. REP. 9J-J613 Page 9

ENCY OF ANY BANKRUPTCY, RECE1VERSHIP OR OTHER SlMlLAR PROCEEDlNGS, AND ALL SUCH
PROCEEDlNGS ARE REQUIRED TO BE STAYED PENDING AND UPON APPOJNTMENT OF A TRUSTEE.
THE REPORTED BlLL DIRECTS THE TRUSTEE TO COMPLETE OPEN SECURlTIES TRANSACTIONS
FOR PUBLIC CUSTOMERS. IN THE OPJNION OF YOUR COMMlTTEE, THE COMPLETION OF SUCH
TRANSACTIONS \}.llLL BE IN THE lNTEREST OF THE PUBLlC AS WELL AS INVESTORS. IT IS DE-
SIGNED TO MINIMIZE THE DISRUPTION CAUSED BY A FAlLURE OF A BROKER-DEALER, PRECLUD-
ING THE 'DOMJNO EFFECT' OF SUCH FAILURE. ACCORDINGLY, THE BILL REQUIRES THE TRUSTEE
TO COMPLETE ALL THE DEBTOR'S OPEN CONTRACTUAL COMMJTMENTS RELATING TO SECURl-
TIES TRANSACTJONS IN WHICH A CUSTOMER HAD AN INTEREST. EXPERlENCE 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
COMMISSION IS, THEREFORE, GIVEN RULEMAKJNG AUTHORITY TO PROHIBlT 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 INSUFFICIENT TO COMPLETE TRANSACTIONS SIPC IS TO PRO-

----
VIDE THE FUNDS, WITH REIMBURSEMENT TO BE MADE TO IT ON A PRIORlTY 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-SS]:-
/ BLE IN ORDER TO MJ.N1M1ZET8B-Pj::R.1..Qb--DURlNG-WHICHTHEY AltE-tJNABLEfbTRADE AND
':-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 DISTRlBUTED, SECURlTIES 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 BILL MAKES IT CLEAR THAT SECURlTIES 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 BILL
GIVES THE SEC RULEMAKJNG AUTHORlTY 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 CARRJED
FORWARD IN THE BILL, EXCEPT THAT II IS INTENDED THAT, TO THE EXTENT POSSIBLE, THE
. TRUSTEE WILL DELIVER TO A CUSTOlYrnR AGAINST HIS CLAIM FOR SECURlIIES,.-IHE._S.AME-.SE=-__
'CuruTIES (THAT IS, SECURITIES OF THE sAivrn ISSUER~C[AsS~'ANi5'-SERIES) WHICH WERE HELD
FolfHrs ACCOUNT ON THE FILING DATE. FOR PORPOSES OF vALOll"TGL:[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~Rl:7;T::::::I=E=S"""-W-ILL
BE VALUED AS 0FTIm
FILING DATE. *5264 TO THE EXTENT THAT PROPERTY IN THE 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 ARlSE OUT OF TRANSACTIONS FOR CUS-
TOMERS OF SUCH BROKER-DEALER, IN WHICH EVENT, EACH SUCH CUSTOMER IS DEEMED A
SEPARA TE CUSTOMER OF THE DEBTOR.
THE BILL, 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
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H.R. REP. 91-1613 Page 19

MEET lTS OBLlGATIONS TO CUSTOMERS AND THAT THERE EXISTS ONE OR MORE OF THE CONDI-
TIONS SET FORTH m SUBSECTION S(B)(J)(A), SIPC, AFTER NOTICE TO SUCH MEMBER, MAY APPLY
TO A COURT FOR A DECREE ADJUDICATING THAT CUSTOMERS OF SUCH MEMBER ARE IN NEED
OF THE PROTECTIONS PROVIDED FOR BY THIS LEGISLATION. SUCH APPLICATIONS COULD (I) 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 PROCEEDJNGS AGAmST SUCH MEMBER.

*5274 SECTION S(B)-COURT ACTION

SECTION S(B) PROVIDES 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 LIQUIDATOR FOR SUCH MEMBER HAS BEEN
APPOlNTED; OR (4) IS NOT IN COMPLIANCE WITH APPLICABLE RULES WITH RESPECT TO FmAN-
CIAL RESPONSJBILITY OR HYPOTHECATION OF CUSTOMER SECURlTI~S; OR (5) IS UNABLE TO
MAKE THE NECESSARY COMPUTATIONS TO ESTABLISH COMPLIANCE WITH FINANCIAL RESPON·
SJBILITY OR HYPOTHECA TlON RULES. IF WITHm 3 BUSmESS DAYS AFTER THE FILING OF AN AP·
PLICATION 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 MATERIAL ALLEGATION OF SUCH APPLICATION, THE COURT
SHALL GRANT THE APPLICATION AND ISSUE THE DECREE. THE FILmG OF SUCH AN APPLICATlON
GIVES THE COURT EXCLUSIVE JURlSDJCTION OVER THE MEMBER mVOLVED AND ITS PROPERTY
WHEREVER LOCATED. THE COURT FURTHER HAS THE POWER TO STAY ANY PENDING BANK-
RUPTCY, MORTGAGE FORECLOSURE, EQUITY RECEIVERSHIP, OR PROCEEDmGS LOOKING TO THE
LIQUIDA TION OF THE MEMBER mVOL VED.
*20 ONCE THE COURT HAS GRANTED THE APPLICATlON 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 MEANmG 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 COrvITvllSSION MAY ON ITS OWN MOTION FILE A NOTICE OF
ITS APPEARANCE IN ANY PROCEEDmGS UNDER THIS ACT, AND THEREAFTER MAY PARTICIPATE
AS A PARTY.

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

SECTION 6(A) PROVIDES THAT THE TRUSTEE SHALL: (1) RETuRN SPECIFICALLY IDENTIFIABLE
PROPERlY, DISTPJBUTE THE smGLE AN~ATE FUND, AND-PAY THE CUSTOMERS MONEYS
ADVA;hlCED BY SIPC AS PROVIDED FOR m THE LEGISLATlON; (2) OPERATE THE BUSINESS OF THE
MEMBER INVOLVED IN ORDER TO COMPLETE THOSE CONTRACTUAL COMMITMENTS SPECIFIED
IN THE SECTlON; (3) ENFORCE RlGHTS OF SUBROGATION; AND (4) LIQUIDATE THE BUSINESS OF
THE MEMBER INVOLVED.

SECTION 6(B)-RULES APPLICABLE TO LIQUIDATION PROCEEDINGS

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

H.R. REP. 91-1613 Page 20

SECTION 6(B) INCORPORATES THE TERMS USED AND DEFINED IN SECTION 60(E) OF THE BANK-
RUPTCY ACT WITH CERTAIN EXCEPTIONS SPECIFIED IN THE LEGISLATION. IT FURTHER PRO-
VIDES THAT CUSTOMERS AND THEIR SUBROGEES WILL HAVE ALL OF TI-lE RIGHTS TO RECLAIM
SPECIFICALLY IDENTIFIABLE PROPERTY AND ALL OTHER RIGHTS AND PRIORITIES PROVIDED
FOR IN SECTION 60(E) OF THE BANKRUPTCY ACT AS WELL AS THE ADDITIONAL RIGHTS PRO-
VIDED BY THIS LEGISLATION.
THE TRUSTEE MAY USE ANY PROPERTY (EXCEPT CASH OR SECURITIES SPECIFICALLY IDENTI-
FIABLE AS THE PROPERTY OF PARTICULAR CUSTOMERS) OF THE DEBTOR TO COMPLETE CON-
TRACTUAL COMMITMENTS. IN DISTRIBUTING THE SINGLE AND SEPARATE FUND PROPERTY IS
VALUED AS OF THE FILING DATE AND ADVANCES BY SIPC TO THE TRUSTEE *5275 FOR COMPLE-
TION OF OPEN CONTRACTS AND CERTAIN PRIORITY CLAIMS SPECIFIED IN SECTION 64(A) OF THE
BANKRUPTCY ACT ARE PAID FIRST FROM THE SINGLE AND SEPARATE FUND.
TO THE EXTENT POSSIBLE, SECURITIES ARE TO BE DELIVERED TO CUSTOMERS IN KIND. TO THE
EXTENT THAT SECURJTIES ARE IN BULK OR INDIVIDUAL SEGREGATION OR IN A CENTRAL DE-
POSITORY THEY ARE CONSIDERED SPECIFICALLY IDENTIFIED AND THEREFORE DIRECTLY RE-
COVERABLE BY THE CUSTOMER. IN ADDITION, THE COMMISSION MA Y DEFINE OTHER METHODS
OF HOLDING PROPERTY AS CONSTITUTING SPECIFIC IDENTIFICATION. CUSTOMERS SHARE
RATABLY IN THESE SECURlTIES IF THEY ARE INSUFFICIENT TO PAY ALL CLAIMS. EACH CUS-
TOMER HOWEVER, SHARES RATABL Y ONLY IN THE POOL OF SECURITIES OF THE ISSUER AND
CLASS W'rUCH HE OWNED.

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

SECTION 6(C) PROVIDES THAT THE TRUSTEE SHALL BE VESTED WITH THE SAME POWERS AND
TITLE AS A TRUSTEE IN BANKRUPTCY AND A TRUSTEE UNDER CHAPTER X PROVIDED THAT THE
TRUSTEE SHALL HAVE THE RlGHT (l) TO HIRE AND FIX THE COMPENSATION OF ALL PERSONNEL
NECESSARY TO LIQUIDATE 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 COMMITMENTS AS PROVIDED FOR IN SECTION 6(A). EXCEPT AS
INCONSISTENT WITH T.tIE 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, WITH CERTAIN EXCEPTIONS, PROCEEDINGS UNDER LEGIS-
LA TION SHALL BE CONDUCTED AS IF THEY WERE UNDER CHAPTER X OF THE BANKRUPTCY ACT.

SECTION 6(D)-NOTICE OF PROCEEDINGS

*21 SECTION 6(D) PROVIDES 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) PROVIDES T IN ORDER TO PROVIDE FOR PROMPT PAYMENT AND SATISFAC-
TION OF THE NET EQUITIES OF CUSTOMERS, SIPC SHALL E SUCH MON-
...?YS AS MAYBE REQUIRED TO SATISFY THE CLAIMS IRFULL OF E~H COS I O}..1ER;1nJTNOl'10~­
E~CEED $50,000 FOR ANY ONE CUSTOMER. THE SECTION FURTHE PROVIDES lRAI (1) A'CUS-
TOMER WHO HOLDS ACCOUNTS IN SEPARATE CAPACITIES SHALL BE A DIFFERENT CUSTOMER TN
EACH CAPACITY; (2) NO SUCH ADVANCE SHALL BE MADE TO SATISFY ANY CLAIMS OF A CUS-
TOMER WHO IS A GENERAL PARTNER, OFFICER, OR DIRECTOR OF THE MEMBER INVOLVED, THE

19
© 2010 Thomson Reuters. No Claim to Orig. US Gov. Works.
I-LR. REP. 91-1613 Page 26

OFFICE OF THE GENERAL COUNSEL,

WASHINGTON, D.L OCTOBER 21,1970.
HON. HARLEY O. STAGGERS,
CHAIRMAN, COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,
HOUSE OF REPRESENTATIVES, WASHINGTON, D.C.
DEAR MR. CHAIRMAN: THE DEPARTMENT WOULD LlKE TO TAKE THIS OPPORTUNITY TO COM-
MENT ON H.R. 19333, TO PROVIDE GREATER PROTECTION FOR CUSTOMERS OF REGISTERED BRO-
KERS AND DEALERS AND MEMBERS OF NATIONAL SECURITIES EXCHANGES.
A REPRESENTATIVE OF THIS DEPARTMENT TESTIFIED BEFORE THE SUBCOMMITTEE ON COM-
MERCE AND FINANCE OF YOUR COMMITTEE IN SUPPORT OF A JOINT ADMINISTRA TION-SEC-
INDUSTRY BILL ON JULY 9,1970. THIS BILL WAS SUBSEQUENTLY INTRODUCED BY THE CHAIR-
MAN OF THAT SUBCOMMITTEE AS H.R. 18458. H.R. 18458 WAS THE PRODUCT OF EFFORTS TO RE-
SOLVE DlFFERENCES AMONG VARJOUS BILLS AND APPROACHES SUGGESTED AND PRESENTED
TO YOUR COMMITTEE OVER THE PAST YEAR.
ON JUNE 17, 1970, PRESIDENT NIXON, IN HIS ADDRESS TO THE NATION ON ECONOMIC POLICY
AND PRODIJCTIVITY, SPECIFICALLY ENDORSED THE CONCEPT OF INSURANCE PROTECTION FOR
INVESTORS IN SECURITIES. H.R. 18458 WOULD HAVE ESTABLISHED A PRIVATE, NONPROFIT IN-
SURANCE CORPORATION, WITH A FEDERAL BACKSTOP OF LOANS UP TO $1 BILLION TO GUARAN-
TEE THE INDlVlDUAL INVESTOR AGAINST LOSSES UP TO $50,000 THAT COULD BE CAUSED BY FI-
NANCIAL DlFFICULTIES 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 SUBCOMMITTEE AND THE FULL COMMITTEE. 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 CORPORA TlON HAS BORROWING
OUTSTANDING. THIS RATE OF ASSESSMENT WOULD BE REIMPOSED AT ANY TIME THE FUND
FALLS BELOW $100 MILLION, EXCLUSIVE OF CONFIRMED LINES OF CREDlT. A ONE-FOURTH OF 1
PERCENT ASSESSMENT WOULD BE IMPOSED WHEN THE FUND AGGREGATES BETWEEN $100 MIL-
LION AND $150 MILLION, EXCLUSIVE OF CONFIRMED LINES OF CREDIT, WHICH WILL ALLOW A
GRADUAL PHASE OUT OF CONFIRMED LINES OF CREDlT.
TWO OTHER MAJOR CHANGES WERE MADE IN H.R. 19333. THE FIRST CHANGED THE COMPOSI-
TION OF THE BOARD FROM FIVE MEMBERS APPOINTED BY THE PRESlDENT FROM THE GENERAL
PUBLIC AND 10 BY THE INDUSTRY, TO TWO MEMBERS APPOINTED BY THE PRESlDENT FROM THE
GENERAL PUBLIC AND FIVE FROM THE INDDSTRY. FURTHER, AT THE TIME OF ANY APPLICATION
BY THE CORPORATION TO BORROW FEDERAL FUNDS, THE PRESlDENT WOULD APPOINT FOUR
ADDITIONAL MEMBERS FROM THE GENERAL PUBLIC TO SERVE FOR SUCH TIME AS THE FEDERAL
LOAN IS OUTSTANDING. THUS, THE PUBLIC MEMBERS WOULD HAVE A SIX TO FIVE MAJORITY ON
THE BOARD DURING THIS PERIOD.
*26 SECONDLY, H.R. 19333 WOULD EXEMPT CERTAIN TYPES OF BROKER/DEALERS FROM MEM-
BERSHIP IN THE CORPORA TlON, WHICH WE UNDERSTAND IS BASED ON THE MINIMAL OCCUR-
RENCE OF RJSK TO CUSTOMERS OF THOSE BUSINESSES. THE JOINT BILL CONTAINED NO EXEMP-
TIONS AND THE DEPARTMENT CONTINUES TO FEEL ANY EXEMPTIONS OF ANY CLASS OF OR IN-
DIVlDUAL BROKERIDEALERS, IN WHOLE *5281 OR IN PART, SHOULD BE DETERMINED ADMINIS-
TRA TIVEL Y BY THE SEC THROUGH RULES AND REGULATIONS.
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 SECURITIES INDUSTRY.
IN VIEW OF THE FOREGOING, THE DEPARTMENT RECOMMENDS ENACTMENT OF THE PROPOSED
LEGISLA TION.
THE DEPARTMENT HAS BEEN ADVISED BY THE OFFICE OF MANAGEMENT AND BUDGET THAT

11ftlA
.:!.j".,;:J

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

[iecc mber 1, 197'0 CONGRESSIONAL RECORD -HOUSE 39340
h tatement of tlle managers on ihe such as [: "b0:13 tidE security holdel',N The Clerk caiied thE 1:011, 2.l1d ti,e fol.
j!l1~e ~ ula be lI1serted after lwe 17 on and requiling "clear and convincing" IO'v.ing Members failed to anSWEr t.o their
\eJl ce st~e House, The following sen- evidence, The cGnference accepted the names:
J1;u't go
of the eonference repQrt: simpler SenatE 12.ngue"e, Ti1is of course fRo11 No, 372]
;:.tJlfc n..fe.- a"TeemeTIt tc1)OTVE thE- js .one of tte t.ig differences bEtWeen the Abbitt F2110ll Nedzf
_;;~ ,.~;:!O; ence 0 House and Senate bills. If we are 1villing Adr.ir AJCXfi.1JdEl'
?arbstein
Fascell
C'P-UlFE
O'KonskJ
"c.," on page 30 in lines 19 and 28, to rely on the gener-al fairness and tbe A s.bl ey Pord, Ottinger
r.,,~o, 32(a) shouJd be changed to read, ability of OUT cocrts, this should be Ben"y Aspl::a1i. WilHs.mD. PeUy
""etlon adequate protection to fund managers Elanton Porem.s.u Pike
Frelingbl.lysen Pollock
sew
• -tlou 36(a).
speaker, I yield such time as he
> 'onsurn e to the ge.'1tleman from
and security holders as well.
Sixth, performancE fees are extra fees Eolling
BJatnik GaJ1agber
Gilbert
PoweI1
Pryor. j:.J'k.
Wlf .c (M!' SP=GER). given to fund managers who bring in Brad: Brown, Cali!.
Green. Oreg.
Halpern
PurCEll
Rees
ml~GlSSPRINGER. Mr. Spe~ker, I Ulink better than usual returns. BUl"tqn, Utah Hanna Reifel
1.~'llre seven substantial parts of this Both bills recognize that while peI'- Button Holifield REuss
Cabell Jarman Rivers
Lb nferCDce report that ought to be caDed formance fees may be fin incentive, they Carney Johnson. Pa. Robison
00 the attention of the House. should not be a one·way street and de- ChamberlaIn Karth Saylor
lDone of the most import.ant of these creases in fees are in order when ~r­ Chisholm Kazen Sc!:leuer
Clark King Shrivel"
'9.5 the question of how much the sales fOfmance slips. ClaJ' Kuykendall Sikes
11 ild shouJd be. This conference report The differences are somewhat compli- Collins, Tex. Landrum SuDivan
iiliuts 'tbe funds to 11i2 percent of the cated. but in the opinion of the House Corman L.ang. La.
Lujan
Teag\ie. Calif.
Tunney
'load,beginnlng January 1, IS71. conferees, this compromise was as fair Crame1 Davis. Ga. McKneally Waldie
"'ls a little more like the Senate a one as we couJd get. deja Garza Madden Watson
House version, but the cutoff Seventh, there was a question in the Dennis MaUliaTd Weicker
Dickinson Mann Whalley
subcommittee as to whether or not oil Diggs Meskill Wiggins
and gas tunds should be included. The Darn Minish \Vil.son,B~b
conferees accepted that with some report Dowdy h100rbead Wold
Downing J\:iorton
language in the same vein as the lan- Ed wards. La. lviurphy. N.Y. Wyatt Wrigbt
guage included in the original commit-
tee report exhorting the indust:ry to work The SPEAKER pro tempore (IvII'.
out a proposed statute with the SEC for BOLAND). On this rollcall, 341 Members
the Congress to consider. ' have answered to tileir names, a quorum.
I wouJd assume that that wouJdcome By unanimous consent, further pro·
before our committee at a later date. At ceedings under the call were dispensed
least I think that is a reasonable expecta- with.
tion.
Mr. Speaker, those are the important

-
SECURITIES INVESTOR PROTEC-
differences in this compromise that we TION ACt' 01' ill70
arrived at between the House and the
Senate conferees, and I believe consider- Mr. STAGGERS. 1vIl'. Speaker, I move
ing eve:rything that they were abotit as tFiat the House' resolve itself into the
good as we could expect ro get. Committee of the Whole, House on the
'Tllere are still some differences be- State of the Union for the consideration
cause this was a very hotly contested bill of the bill (H.R. 193:33). to prOVine g:r:e-a:eeF
in the subcommittee, and it was .only protection for customers of registereif
after weeks and months of consideration grOkers and dealers and memBers o'f1'i"R=
that we were even able to get it out of tiona) securities exchanges
the subcommittee and up to the,com1n.it- The motion was agreed to.
tee. But we finally did get it '.Ip arid over = THE COMMITTEE OF THE WHOLE
here and got it to the other body. Accordingly the House resolved it.self
I believe this is a lnatter in which there into the Committee of the Whole Rouse
has been a great deal of public intereSt on the State of the Union for the consid-
involved and even though everybodyinay eration of the bill HeR. 19333, with Mr.
not, agree with all of tpe comproiilises CHARLES H. WILsoNirdhe chair,
that have been made with the'.other ,The Cle~k . read the title of the bill.
body"';'Ibelieve we did the 'b.est wecouJd. . ;:sy.UlliI.Ilimous consent, the first read-
For that reason, I reconuiJend the pa!5- ing of the bill was dispensed with. ,
sage .of .the conference report. " Tbe.:CHAIRMAN. Under:the ruJe, the
, Mr. STAGGER-S. Mr. Speaker, I thank. gentleman from West Virgil1ia (Mr.
the 'gentleman from Illinois' (Mr. STAGGERS) will be recognized for 30 .min-
SPRINGER) for his remarks. utes, and the gentleman from Illinois
I move the· previous question on the (Mr; SPRINGER) .will be recognized for 30
conference report. minutes.
The previous question was ordered. .,The .Chair .re~o~es the gentleman
The Conference report was agreed ro. from'West Vrr/Rllla <Mr. ST~GGERS). .
Amotion to reconsider was laid on the, Mr. STAGGERS.;-~, .ChaIrman, this
tabi.'.. .. . '15 a olIT1hat we conslderverYllI1pol'tant
e. .., to I America. : It is -designed, to provide·
greater protectIon for'. customers of
CALL OF THE ROUSE broker-dea.lers, iJY"" creatilig a Becurlties
Mr. ASHBROOK. Mr. Speaker. I ~~~.~. ~P~tive .CD~a nonprofit;'"
. membership corporation· which . would
the point of order that a qtiorumis,not' not be an agency·or establishment of the
present. .. U.s. Goveinmen,t:' , ...... "
. The SPEAKER pro tempore: Evidently .. l\oiembership in the corporation ,;would
a quorum is not present: "':';: ,·r ',,' cOnslst .of: aiJ.b:t:"okei-deaJers. regLstered'
.,JlIIT. WAOOONNER. Mr, Speiil!;er/:r: tinder" theSe.::Urij;jes,Exchiuige,Act', of:
~*i:~~~:e~~!~~~k~;~~r~:\~ .c.~ ~~~;~:J~e~~~~: ~f6~~g:~1ie#/jf.
:-,:
 3934G
The recent extended decline in the se-
curi(jes marl{et has focused 8 tLention on
problems wJ1ich occur when a broker-
dealer encounters financial difficulties
",llich result. in the closing and Jiqujda-
tion of the firm. 1n this circumstance,
the investor sometimes has:; 11ard Ume
geLLing 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-
''Phasize at the outset oj tl1ls dlscussJOn
. ,J1a:t-el1EPro]Jlffiect-reg,-s:11rt:imri5Ll~d
.-to-pl'crtRLCTIstomers;-the-more-than-26
milli on AIDerrc-a:!1SVJI'lO-111l,re-tIfV-ested
Part oj theIr savmgs 111 shares 01 Amen-
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 into business with their
eyes open. But this is intended to pro-
tect the consulm!Ts1Ind-!rlw&e-WM-in=
"vest. It woWd protect them 0:9 1l"qUlr-
iIlg the Dew SeCUlJtles InvestOJ Plote-c-
dioll Col POl ation LO est-a-bmh-a-fumMnto
~Cll m,sessments Imposed upon m~.­
bers 01 the secuntIes busmess woWa be
J:lB..ld. l~e lUn~ wODWbe DSed to protl'!ct
t1ie pu IC cus orners in the event of fi-
nanClaI insolvencIes of broker-dealers:
WItlllil1ml tatiUlI of $~elIc'hln­
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.
1 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. . to oversee all the broker-dealers of the
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 'from the exchanges and two
from the piiblic.~·:rf they llave to borrow
from the Federal Governinent, then the
President has to appoint·four more pub-
lic· members'· to'make a majority of public
members on
rOWmgcan be'made;
'ihe)3o"ar!'i before· any' bor-
. .. . . .'
The Corporation unlst siltisfY the Fed-
eral Government that they have a plan
CONGRESSIONAL RECORD - I-mUSE
under wl1icl1 repayment will be made and
that plan wi]] have to satisfy the SEC,
the Treasury, and the Federal Govern-
ment before any lending is donE.
Mr. GROSS. Mr. Cllairman, will the
gentleman yield?
Mr. STAGGERS. I am happy to yield
to the gentleman from Iowa.
Mr. GROSS. 1f this bill is designed to
protect Mr. and Mrs. John Q. Public in
their investment.s and dealings in the
stock marl(et, WIlY are there only two
public members on this Board o.f seven
to administer SIPC, the Securities In-
vestment Protectio;l 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 t1lemselves. They are only using
their own money that they 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 called 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 mit 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 IJn 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
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. SPRrnGER. Mr. Chairman, will
the gentleman yield? . The stock exchange is under.
Mr. STAGGERS. I yield to the gentle-
man from TIlipois.
Mr. SPRrnGER. 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 iniblic 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,
- (J-i I)
under t.his bill that they can bar .. --
Ole Treasury. At that paint t~O\·. ._'lu'r,
dent then appoints " fOllr.. ~"ll'lCEl 1 "'":·:"i.
,-
1113 J.:'ES 1. h e. pU tl
i lC In t.he nlnjOl'i\".. )',:Y:
when publIC funds are used, t.h~;l· .~-";'
Government itself, representing t.Jl; 1'-",':
IIC, sre ll1 the majonty and h-;.-.···,-
majorlty on the C0l11nljs~jon and ca~·i.~f.;'il
ulate, as t1le gentleman Hom IOwa I- .'.
nlind. lG!'" :!1
Jt is not assumed they will bon ... -
money from tIle Federal Government h'~'
the minute they do, then the makeu' ,\,t
the Commission changes. )l ~I
Mr. GRO~S_ Mr. Chairman, will t:,.
gentleman YIeld so I may ask a quest; .:;
I will be brief. .0.,_
Mr. STAGGERS. I yield to the gent'
n,an from Iowa. .~-.
Mr. GROSS. But all the financing \':iil
eventually come out of the public poeke
There WIll be added costs, and the . t .
tJeman well knows it.
Mr. SPRINGER. Let me say this
are 110ping that this industry can .
late itself. We have noted in m
stances that tIle attempts at self
lation have been very good. We
point to many instances where
tional Association of Securities·
has done a good job. In fact, sOlnetirile~;
they wanted to go beyond wha
gress or this committee or the
posed, so I do not say they are
sponsible. I just say there are
firms which are not strong. For
pIe reason that we do have a
rate when we have what I
a recession in the stock m
thing had to be done about it.
would like to regulate themselves
sessing then:iselves. But if they d
to the Federal Goven1ment for
pose, then there must be four
bers appointed, which does
funds. I will explain this further
get a chance.
Mr. CELLER. Mr. Chairman,
gentleman yield?
Mr. STAGGERS. ! yield to the
man from New York.
Mr. CELLER. Mr. Chairman, I,
concerned, as is the
Iowa, that there is an In,smDC:leIllt
sentation on the part of the
the first stages of this matter
five members, all profession
familiar with the' stock
we have only .two members of
There is a vast public, interest
beyond the second stage, where
ment may be called upon to lend:
a billion dollars. There are some -3
liOn investors in secill·ities in this
try.
Most of those tradings with
to t,hose securities go through
chil.nges. If that is not the public
est, I do 'not know what is the.
interest. .
criticism now. because of its
has been conducting itself
club 'and not in the public mlr."rp.~L,_ .. .L
high tiine· that direction
upon the stock exchange to
it is no longer conducted as m lellJ,U"',t1.l
1\ 'pri'irateclub but .that. the' jJ.~--:",.-:C:_,.'.,
est also must be· considered.
When" we .. ha've' this group of,
seven directors, only two of whom
21
 December 1. J 1970 CONGRESSIONAL :!lECORD - HOUSE 33,:147
" f the public and five 01 wl10m wiLll this lOG llE-l' by clarifying the rule- h~r. GR,QSS. 1\.)r. r':haii'lTlan, 'will the
',:('lllbEIS b~rs of the induslry. determin- making 2.ull1CJj·j·iy of the Securities >'.n6 genUe111an yield?
: "e n;emoperations of this corpora lion, Exchange Commission Witll respect to IVlr. STAGGERS. I would rather not.
.1§'. ~;le'n we also l'ememt,er tha t every- tlle fin:tnciaJ responsibility and reJater] yield right now; I wi11 in a. fE,V nlinutes.
:.,-,?",,~e embraced in. this picturE-the practices 01 brokers and dEalers. In ad- 1 Sllould like to have the other side USe
. ~~~ the bad, the inOlffel'ent, the solvent dition, tht bill would give t.he Commis- a little time.
o-::''''tl1e insolventr-then we can reall"ze sion subsLanl.ial oversight authority ,]Ver Mr. SPRINGER. Mr. Chairman, I yield
'. "':'0 must be someLhmg more than the ope!'aLions of tlle proposed corpora- mysell 'Sucn rime as I may consume.
~,,!~;:;i" two members of the public as Lion. Ti;e Commission would have au- 1111'. Chairman, I know the questions
'::,::in~t five members Of. the stock ex' thority to disapprove the initial bylaws in that have been asked by l1i2ny Members
',:~:;'"<Te, even in tlle first ll1stance. whole or in part. Further it would have of this body. Wha.t is being done about
"';:,ir~ STAGGERS. I thank the gentle- tIle power, by rule or regulation, to re- the so-called failures of the various
'~l' for his comment. ouire the adoption, amendment, or recis- brokerage houses around tlle conntry?
--'I -do want to say this in reply: Since ;ion of any bylaw of the corporation There have been two or three major ones
" r.;~ the broker-dealers have set up a whenever adopted. It is the expectation and eight or nine others.
i';:~;t fund of their own: In that fund they cf your committee that the Commission One company, Goodbody & Co., has
hove acquired $55 mllllOn. They .have and the self-regulatory organizations in- combined with Merrill Lynch. It is my
i:;,n able to take care of practically valved wii] be alert and vigorous in the understa!lding that all investors will be
~,,'~rY broker-dealer who llas failed. exercise of the authority granted to them paid in full, that there will be no losses.
We are in a depresElOn now, and we by this bill. Only with strength from That is my understanding as of tItis time.
h~ve been in a time when things looked these organizations can this legislation However, we did have at least two large
. ;d on the stock market. They are be- see its fullest effectiveness. failures and we also had some smaller
~g to pick up now. We are hopeful During OUT committee deliberations on failures: inland and away from Wall
theY will come out all nght.. this bilL much has come to our attention street.
It is our duty as l'l':presentatlves of which raises substantial questions about Now, why did we get to that kind of a
t.l1e public to do wh~t we can now, 2:nd the effectiveness of the regulatory struc- position today? Simply because there has
llot to let somethmg happen whIch ture of the securities industrY with par- been no regulation, no regulation of
would frighten America and hurt every- ticular attention upon the effectiveness o,f funds with regard to investor :Jl"otectiol1.
self-regulation in this industry. We all
~ogat is the reason why this legisla- recognize that t·he securities bUSllless has There has been no adequate regulation of
tion is brought here. gone through a period of strain because
how customers' funds may be used. There
is and was no segregation of your money
The reason why five members of the of a declining market and its attendant if you deposited it with a broker or
Industry and two from the public are factors. 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-
:'sight by the SEC. tem as it is presently structured, to an- tomers' money put into one account.
"Tstated when I started, and I will state ticipate' and deal effectively with the Everybody's funds were merged in one
" ihls 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 turbed and perplexed that the present separate on the books, but the money was
. the: structure of the regulatory pattErn situE-tion on Wall street has occurred un- merged. The cost of the operation was
in 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 will 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 compani-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
bonow up to $] billion indirectly and Exchange Commission. It is also evi- about because when you took money
the UB. Treasury. Such loans would dent to me that such a study must be down to a brokerage house he amal-
. gamated these funds all into one fund
cally effected through the Se- undertaken by the elected representa-
and paid his expenses therefrom. The
Exchange Commission and ·tives of the American people. Accord-
result of that was about what you
granted only aiter the Com-. ingly, as chairman of the Interstate and
would envision when you invest in a
had made necessary statutory Foreign Commerce Committee; I propose
baruc I take it if the same situation had
Your committee has set the that very early in the 92d Congress the occurred in a bank, and the bank failed,
.....nn··.. -'''·borrowing authority at $1 bil- Committee on Interstate and Foreign you would be in exactly the same posi-
.. a figUre unlikely to be required Commerce undertake such a careful tion there that you are here.
situation except one of extreme study and evaluation. The study must be
stress. How~ver, for protection thorough and it must be comprehen- Now, what did we try to do to r~edY
. : contemplated by this bill, sive. In order for future Congresses' to this situation insofar as the publIc was
;;',"if'Iix·oYisiIJns for the most extreme situa- legislate effectively in this area; it is nec- concerned? By the public I mean the
matter how remote, must be . essary that we now examine whether or individual investor. What have we done
under this legislation to' remedy this
not the regulatory system, which was
situation?
created in the 1930's and refined in the
First of all, we created what I would
i940's, 1950's, and 1960's, is adequate to
iill:e to term the POle of the securities
meet the challenges of the 1970's and
illvestors. T~ry of FDIC, which IS
beyond. tlTeJ'i'm:\Trrat-I'Tepus:ir.Insurance Corpor a-
Mr. Chairman, HR. 19333 has the tilll'l,'Wltlnh--governs mostJJanli:s ill trus
unanimous support of your committee, 'countrY, 15 to create a fund ti'lreimb1ll'Se
the Securities Rnd Exchange Commis- iiePositors of defunct banKs.'Tlletemper
sion, the Department of the Treasury., Qf-i;hiS""ll:g'iSlll:ti'On"'::!ncrt1ITf1n:tlmtof"tl'fiS
and the Joint Securities IndUstry 'Task }egISIiil1oii;nowever,lsexactly'iJ1e-same:-
Force. The bill will not only protect pub- What do we-dorTnls:res~mJj]esFDIC
lic customers of brokerage nnns 'and re- in 'tllatwe-fotmeCi-a-Corporat~T1fe'
enforce investor confidence iilour Na- funds-in--thiS""corpo:Fation-will~come
tion's· securities markets; but it Will also from brokers ami exchange memiJe:rB"bY
mandate a general upgrading of finan- assessment. ... ..
ci81 responsibility requirements of brok- , Secoud, five of the seven-man Board
ers. and dealers. I urge favorable 'action of Directors is appointed by the members
on RR. 19333. putting up the money. So you have five

22
 39:548 CONGRESSIONAL RECORD - HOUSE
of L!lt seven appoint.ed by the people who
]Jut up t.he monel', The ot.her two mem-
bers arc appointed by t.he President.
The distinguislled gentleman from
]o','a IMr. GRossi raised n question, as
did t]ie distinguished cllairman of the
Judiciary Committee. here a few mo-
ments ago. Tlle commitLee llad the feel-
ing that as long as they had their funds
involved in this in the form of an assess-
ment they ought to be able to regulate
and should regulate themselves.
Now let me say this: They do not form
this 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 think that
here is a corporaUon 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 this
problem enUrely 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
i ' that point the public interest was So
great and there was of necessity Govern-
;'i ment funds involved and the· President
then appoints four more members, giv-
ing the public a majority on this board .
. Mr. GELLER. Mr. Chairman, will the
gentleman yield?
Mr. SPRINGER. I shall yield to the
dtStingmshed 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
runIling to the exchange to see about
getting your money back, or' you do not
go and ask the company with which you
invested for it. You come directly to
this corporation Just liKe you would do
vIitilreference to a barik under the.FDIC.
.:You-make your ap:plicatlQIL~JJy::::tO
tile corporation wfiIclliS formed. The
fllIl'tlls made up of assessm-e-n-1is-!tg-ainst
thevaIioas hnestur houses, and you get
uP""t;lr-$-59,990_ It is my l'eeol:1eclJern: trrat
under the opeiatiolls of tlTI! '£D10 yOu
are9ilsurea, I believe, up to' $20,000. It
may be more than that but 1 thifik tilat
is WEant has been fill SOIhe tIme. You
ar.tt·insw:ed up to a denmte amount mrt
not beyond tn:J.t. ,Under thIS bill you are
insureq UP to $50,000.
":-Mi'. CELLER,. Now, 1\1r.' Chairman, will
the gentleinan yield? ' "
'Mr. SP~G1!R. Yes, I yield to the
!iiBtiIJg:il.ished ',chairman of.the, Commit-
tee on cthe~~,uillci;:tr.y. : . . . . , . , ..
Mr;, CEI.LER. ·Ido not think it: Is 'fair
to ,make. the. Coinparison between the
, setup, as -contained in this bill and the
operation ()f.tl:!e FDIC!. i' .' , tinguished gentleman from Pennsylvania
In the case.ofJ;he FDIC ab :ii:Ji.tio every-
one is not" adnlltte¢l into the scheme. Un-
der this bill everyone, ,the good, and ·the
,bad"aIld the. indiil'erent are embraced
, . ~."
under its protection. No questions are
aslted. Under the FDIC there are regu-
lations which determine whether a banlt
or a savings institut.ion is qu&lified to be-
come a member of the FDIC. There are
examiners who periodically examine
their books. There is nothing Jiate this
contained ill this bill. Therefore, tile
analogy which the gentleman from Ii-
linois has drawn is not perfect. When
YOU have a situation wllere everyone
~omes in, whether they are bankrupt or
insolvent or whetller tlley are vicious, or
sain!.s, or Sin!lerS, 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 tlle public's
money involved. In the first stage yciu
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 these irregularities.
Mr. SPRINGER. I thank the distin-
guished gentleman from New York for
his c{)mments, 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. SPRiNGER. I will yield to the
.gentleman from P~ylvania.
N'a. FULTON of Pennsylvania. Why
must we have this 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 this 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. ciicumstances that
we cannot tell at ,this time what t'Pey
might be~ wpy not put that oil' until
later? . Mr. FULTON of Pennsylvania. If.
Mr. SPRINGER. May I say to the dis-
that ~ order to assur.e, this. should. be
cove~ed very similarly to ,the FDIC. The
gentleman has mentioned $1 billion .. That
~;aot the way th~ .bill reacis.It ,says up
to $1 billion. I do not anticipatr- ..
WIll be any borrowing of that 11a'. t." .
. But may I ,say i.n reply tD t~~l_",.
tlllgUlshedgent.!eman from Penns\'l"~o:·
that the bIll prOVlOes additional -a;;:""
ments to 1l13ke that up, a.nd that m;,~~"c"
done under the statute so that tber .;::.'
question of borrowing without ~::,::,
ances to the Treasury that it \-·il....,'-
repaid. .j f.'
Mr. MOSS. Mr. Chairman, will .
gentleman yield? li .
MI'. SPRINGER. I yield to the gelr'r
man from Cahfornia '-.-
Mr. MOSS: Is it not a fact that, rat h ,_
than an e~Idence of failure, We ~;:,
merely pro\'Idmg a, means of CUShionil;-"-
to prevent failure in the event th;;:,:
should be a collapse of one or two mai~:
houses, but not exceedi~lg the size of i.!~,:
f':ll1d plus the pnva te 1me of credit, a!!,~
gIve access to tJle Treasury line of ered"
precisely as was provided in the oricrLlJ":
FDIC? b Col
Mr. SPR:INGER. I think the gentlema;l
has explamed It. There are-I donG"
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 hundreds (,r::",
banks all over the country fail_ We ha\'e .
not had too many failures in this indu~"·:,.'':'',;·''':
try, and we are trying to preventthnt:'
from happening. It is too bad that'>n! .. '.
have had two, that is enough, but of
hundreds of investment houses '
have' we have only had two
ures. What would have happened
had had 50 such failures?· 1<~'pT'rrh",.;";,,~.
would have been outraged.
trying to do in this bill is to
responsibility into the industry
they have been willing to
sponsibility, and by forming
ration and assessing themselves
trying to meet the reSplJl11lihilit;y
see it. But we are leaving them
supervision of -the Securities and"
cbange Commission to be sure by the '
ulations of the Commission that' '
carry out exactly what tbeintent is
this bill so that we get.some
Now, if it came to the
we had, as the gentleman
nia has mentioned, a whole
failures, they certainly, would
go the Treasury with
would have to be
under the FDIC. It is true that
provision of this, if there are
over a period of years you WULU'. . . ."''''.''!c
late a lot of money, and
the assessment. I think that is
But I think you will see a lot closer
vision by the industry itself of this·
ter .by virtue of the fact that we are
ing up with this kind of legisllLticm
you would have had had
Mr. FULTON of P"'TlTlovlV~,TliA._
Chairman, if the. gentleman
for one more question-'-
Mr. SPRINGER. I yield to the
man from Pennsylvania.' . .
is so similar to the FDIC in. policY!
administration, but in an allied field;
establish a new separate ,agency? ,
not have the' FDIC broaden its
and do it? '
Th'f'!Ie is one' thing ida not ,mde:rstan,f'<
 ]1, ,,-;r,uer 1, 18?'O CONGRESSIONAL RECORD -HOUSE
• ,;. ," f.< that whEn people own stock.
":'~ \;'~!~;ght be in a st.reet name, but.
:,.,,1 .:.~:.dess the ownershlP lS clearly m
r":'::\;;di~idual investor or theeus!.omer of
:~~" i;;okerag e house, J:ow 15 It t.hat thos.e
":'-' ":2 cannct get theli stock nght back,
;.,(."!,, 'i~klY? What is the trouble now?
["d:,n, fllIS-PRINGER.. The mere bookkeep-
... ~".~iOl1e-and I am talking about be-
~":;,:'rhe computer system-tl1ere were
-'-:':'\'~ of from 30 days to 3 or 4 months,
.. !l~~'~;;j~ from tbe paperwork involved but
. n,cl,. ,'onable practices have aggravated
ll.tJC~t-
. C[,_C ,jtuation- . here to the House and that YOU could who would control this corporation. in-
. ",,~\I' l.l1ey have be:n trymg to remedy
..: t by coming up wlth a computer sys-
U.rl.·tJ·l~t would make this more rapid.
lenlTIle ~ criticism a f tl1e gen tl eman lS . We certainly had no trouble and no dis- to it that they enforce it?
. ~.;l1iidi may I say.
. MJ.'.MOSS. Mr. Chairman, will the
yield?
cjJ'l'>.lrNc3E:R. I yield to the gentle-
Mr. Chairman, I think we
::.::.:"§::~i;'f,nfT.fll1iing level on 'the combined
about 25 to 30 million
several years in advance
stUdies. This load did,
i~~;o;;;,;;,• .,.I:<lV the abilities of the brok-
to effect a transfer. There
much lag and, as the gen-
the committee has indi-
strong concern and its in-
this matter be overcome;
is being made. It is not
problems will continue for
. But we are keeping a very
on the activities both of
exchanges.
;""''''"r·.",-n Mr. 'Chairman, may
and then I will
may be built up to $150 mil-
more if "the SEC under its
so fit to do. This would
'li;,s:seSSIIleIJlt of one-half of 1 per-
reveilUe,,-,one-half of
.the gross revenue. Of this
$50 million may be credit
be gradually phased out.
may drop, but they must
fund dwindles s'o there
of the fund going down al-
in here this borrowing
Gover=ent only on
if we had. an unusual
then of course we would,
come to the Federal Gov-
assistance. But may I say
they borrow from l.l1e Fed-
C>Q·vel:milent, l.l1en· the assessments
arrangeme..."lt must be
Treasury and it must be
with the Treasury, that the
. and other charges must be
,I:epay whatever is borrowed.
. I think, the essential parts .
. UUI.;W'''.Tlto to give to the House how
. situation where we are on
1, :1970, and why we arrived
3'9'349
at this situation and, third, what we are sian to make I.hese brokerage firms walk
attempt.ing to do about it. the chalk line.
There may be disagreemen!. here as to Mr. SPRINGER.. The genl.leman is mis-
wl1etller 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 subcommiLtee wrestled with is an effort t.o try 1.0 do something about
this tJ-Jing for weeks and for 2 or 3 it. The SEC did not have that autho1"ity.
months before they tinally worked out Mr. GROSS. Instead of creating a cor-
something here that they thought was poration with two public members and
responsible and that we could bring over five members of the brokerage industr"
.:r
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? .
But this situation in 1970 is tIle situ- Mr. SPRINGER. I yield to the gentle-
ation we had to meet. Perhaps it should man from Califomia.
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 con.siderably 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 111 two dealers and of the security houses in this
banks ana how happy 1 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 tilmg m tfilS bm that we our colleague from Iowa read so thor-
'ella then. oughly. One pages 13 and 14 the follov;'ing
Mr. GROSs:J.\m'". Chairman, .will the statement appears:
gentleman yield? Because of theSe events the Commission ;s
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 so'und- 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 Securl·ties business practices of broker-dealers includ-
ing, but not Jimited 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 have a' bill of this or credit balances. In addition the amend~
nature without leaving with the Secur- ment to section 15(c) (3) would give the
ities and Exchange Commission its own Commission such ru1emaking. 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 clar1Jl.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 Commission and, I f necessary,
gation by the FDIC as to soundness. I the Congress, will have to insure n. .
find 110 such provision in' the legislation Mr. CELLER. Mr. Chainnan, 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 eaIll10t yield to the
done .. But 1 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 thegentlenian.
of the failure; somewhere along the line, Mr. Chairman.- the gentlenienfrom
of the Securities and ExchangeCommis- Iowa' and New York have raised ques~
24
 CONGRESSIONAL RECORD - HOUSE
,i,-c, .. t fail bEiore e1Jact.n~e~lL .. 01 tJ:e have a reinvestment credit Wl1ich Mr. SPRINGER. 1',Q1'. ChainTJ811, I yje!c
Jl;i,C--;i~tQ law, I"Je early aOllClpaLed tlllS amoU11ts to a payment for tlle use of suell time as he lTIay consume to the gen.
b,.~ db'lit.V but we have 5peciiicDlly de- the customer's funds. tleman from Nortll Caroljn~ 11\1)'
1':. \0·
..0._. _ make the bill retroactlve m lts Am I correct that under this bj]] it BROYBlLL).
n!llC'C: .. _ The bill is prospecii1'e from is not intended tllat this new insurance My. BROYHILL of North Carolina
"'.r.. er~~~~.l~f its enactment. be used to tostel' a new form of savings Mr. Cllairman, I urge the p&.ssage Gf
\.l',~T1jj..1.
l(!~·;'ilUl'e
Gl ,
in recent months, of the account? Is it not our purpose to protect. H.R. 19333, which represents a balanced
_"""~Devonsbire Corp., Plolll1 &> Co., and the public against loss from insolvencJ' judgment reached by the House Inter-
r '~'~inSon & Co. has recelved a great deal rather tllan permit a type of deposit tllat state aDd Foreign Commerce Committee
R,,~ .'eution from the press and from might compete Witll banks, savings and (·0 provide greater protection to smail
?.~nli.~~mmittee because the ~ew York loan associ a lions and credit unions? investors in th e securiLies market. Our
s;':ck Exchange bas declmEa to make Mr. MOSS. Let me say to the gentle- conmlittee l1as, I believe, pl'epared legis-
:'~':.ilii.ble from its trust fund moneys men, tllis bill adds in no manner to, nor laUon tllat meets a current and future
~ ~1Jrotect the customers of these tllree does it in any manner diminish, the need in the establishment of tlleSecuri-
tifUlS. .
present authority of broker dealers La ties Investor Protection Corporation.
. 'The committee bas been 111 close COl1- llandle free credit balances. It ha.s no The New York stOck Exchange has
Eult.2.tian with the officer~ of. the Ne~ effect whatsoever upon tllat. Tllat will be maintained tllat no public customer l1as
vork . stock Exchal;ge-wlth l:-S preSl- a subject for the rule making by tlle suffered losses because of the ipsolvency
(ient. Mr. Haa.ck, WIth tlle cllamnal1 of Commission. of a member firm. Such a record has
jts board of governors and with tlle vic~ Mr. McCLORY. Mr. Cllairman, will the been possible because of the "trust fund"
I oirnlan of its board of governors-ana gentleman yield? establislled by the exchange to advance
~:~" have received firm and unequivocal Mr. MOSS. I yield to the gentleman money to liquidators or receivers or
. =urUIlces that they will recommend to from illinois. broker-dealers in' liquidation.
:the.- board of I!'0v~rnors. that they take Mr. McCLORY. I tllank the gentleman Recent declines in the market have
':i;ycrY action WIthin then' power to pro- for yielding. seen difficulties develop where losses by
, le.ct\,the' customers of tl1ese three firms I am very interested, in behalf of the investors have occurred and their inter-
·llgrdrist,loss. customers of First Devonshire Corp., esLs llave not been protected.
:W,{iully.expect that that commitment many of wllom reside in my congiessional The stock exchange regulations and
. conimittee will be met by the district .in lllinois, in this subject. Do I tlle requirements of the Sectrritles and
.. U.UW"""'.v~ the New York Stock Excllange correctly understand tllat from assur- Exchange Coinmission assure many
':board of governors. We are ances received from officers of tlJe New safeguards for the investor. However.
move mtller promptly to York Stock Exclla.nge 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-
'cg~;~trsn~;ceSsaLlji because we would regard these customers will be indemnified agement by a broker-dealer or tlle insol-
move as a selious breach of against loss? vency of such a finn.
·,.ith·":mith·.the conunjttee 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 tlle board of governors members would consist of all brokers
seems to be in tlle past, and urge that the board make use of and dealers registered under tbe Securi-
caution my colleagues, every power it has te protect the cus- ties Exchange Act. Contributions' by the
tllem at the time of the tomers of tllese firms against loss. members would create a fund to protect
mutual fund bill in Sep- Mr. McCLORY. I thank tlle gentleman. customers-wbm'l-a-b-l'elfei'~de1l::rerflillSto
think that this bill will Mr. MOSS. As I said earlier, Mr. Chair- meet-hl.s-.Fi'l'.ljj;J1eif!J-€lb1igatie~NirFed-
l1··" .. ··.""·npnlhla.~ of the securities man, weare reactiDg today to a crisis. Ienrl-:f1joos-wttl:lfd'-b1rffi'V'(tlVed in this
time. This bill is useful believe this illustrates the need for the fund.
it· is good legislation. committees of the Congress to maintain I believe this legislation will restore
·however, to a wide-rang- far closer oversight and to act in antici- some of Ule puElic· coiifiCience lli the 111 ~­
of the structure of the pation of problems which can· be seen .vestITIe!fit market which has 6een ~
the next Congress. I down the .road several years in the fu- 'turned by recent events and that it will
are many problems ture. . also strengthen the financial responsibil-
Il'ien:lailn, J:.roilJlems that may well Frequently .when we discuss legisla- ities of broker-dealers in the securities
si€:rllfic!lllt' ·updating ·01 otrr tion in committee and on tbe floor of market. .
laws, which are now this House we are asked "Where is the Mr. STAGGERS. Mr. Chairman, I
. old and have.scarcelY demand for it?" Well, you always have yield 2 riiiritites. to the gentleman from
the interim. I had hoped demand when you have crisis. We need Texas eMr, ECxHARn:r).
sig:nitilca'lat guldancem more planning to meet problems, to an- Mr. ECKHARDT.' Mr. Chairman, I
SEC completes its ticipate them, and· to see that they do served on the sUbco:illi:nittee ill which this
institutional impact not unnecessarily jolt the economy of bill was di-31ted. 1mu.st 'he frank to say
markets and submits it this country. .. , that I am as concermid about the public
on Januaiy: l-"-but .in The great significance of this legisla- interest a::; my friend from Iowa, Mr.
. .te a sense of dis- bon lS the role t'lTItNt""W:i1~ choss, who.1 think is one oJ the finest
value o.f· that study-'-at restoratIOn of Cmmaen(5e ill me se1liIlity guardians of that interest in the House,
rumors now coming to '"fi'laflrets of th:iS' Natiol1. TEe SllrVlVaI Or- and as my good friend from New York,
with or without it the thOSe mMkets is of vital importance to the chairman of the Committee on the
tHe sul'Vlval of our System of tree ent'e'r- Judiciary, w1::\o has brought up some
pnse.VVe .caun?t, . however, leav~such questions bere.
~ entirely m the .?ands of mdus- I believe the questions that have been
trIes that expect they Wlll always be able raised have been answered in this act.
Chairman, I rise te step forward and say,':Tl:li.s is wh~t Originally the act ·included a provision
. overdue ·bill. I we need to take care of thlSproblem m for subordinated loans .to the brokers
CUJI1ll111L1Gee shoujd be com-
the future,". . . ,.. ..... themselves. If that provision had re-
. Qur.
the bill out at t,l},is role lS to antlclpate s~chprob-' mained, 1 wouid gO with my esteemed
lems!IDd yvehave not,m my Judgment, colleagUe from New York and favor a
exerClsed It as· fully as we should. I as- . . ... .
sure you that to the extent ·that I have pub~c.board fro~ the begmnmg~ut that
~''':~~W'~'':''~.d.!.~'''''''''' the power, in the futiJ.re.'we ai-egoing to proVlslOn was strIcken out: There IS noth-
':'rijf;;~~;:;::;;;':;;i~;:;;~:5~:--loOk more carefUlly' as we move along at ing in this bill that JlrOVlde~ the use.of
the piacticesofall of the personS who funds for any otherjji.Jrpose than to pay
engage
• •
iii. this irripoi-tiini
", .,',
".~.'''_: '~'.-
business:
• -. . . -'. • '
.1' . back • the cUStomers ,of- the
..
broker.
•
dealers

25
 39352 COI'..JGRESSIONAL RECORD - HOUSE DecembeT 1, j- D'C' r
vlU
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 this bill. massIve expanSlon of the nUd·] 9GO's thE;
J"nce 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. NatlOn s largest brokerage, for eX3ln 1
wit.hout approval of the SEC, and the Again, J want to recommend passage holds $18 billion in customer credit ~,e:
self -regulatory organizations are subject because J have every conti d ence in t h e can cI 31m . Je·
corpora t e assets of only ' $18
to investigation by extended autl10rity in subcommittee and in tl1e full committee bJlllon. 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 bill with be clalmed by ItS own creditors. '\\Then .
]ation of its rules and regulations or the the two amendments to be offered by the c.omp,a:1Y'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 a.s strongly as I can. If you set up a _ Mr. BOLAND. Mr. Chairman....l..ris~~n ~eim.bursed. This p:oblp.m was not so Crit:
board in the beginning to protect the sUEJ:lort of this legislation to protect the Ical m the happy tImes of the mid-1960'.
public interest, who do you get on it? 'small invesE~W1ienpTiikeragefiOuse's~ wben the industry flourished along With
Persons who are not of much conse-' fall and, in the tl~af everyone else. Now, however, tbe Prob-
quence. They are persons upon wll0m the toaay's Wall Street, they fall 6'ft-en=the" aJ:lility of brokerage firms failing is mUch
PrEsident wants to confer an honor. You small' investor IS the prmclpaJ"'Victitn:J!. hIgher.
put a number of persons on the board 'ventable l':rbYi'l11LlrLi:tlltigatiuIl awaits Most of the cotmtry's large exchanges
and you expect them to watch the public him should he seek redress in the courts. have taken steps to prevent them. In
interest. Indeed, he is lucky to recover a fraction 1964 the New. York Stock Exchange
The CHAIRMAN . .T11e time of the of his losses in most cases. created a $25 million trust fund to meet
gentleman has expired. 'TI1e R.gl now before us would create a claiD?s arising from broken dealer insol-
Mr. STAGGERS. Mr. Chairman, I Securities Investor ProtectThn Corp., vencles. Already, however, they have had
yield the gentleman 1 additional minute. eventually lund.ed at $150 million, to aJ-=--to augment this with another $30 miJ-
Mr. ECKHARDT. On the other hand, IdW-"t11e small investor recovery 01lrjJi;0 lion from their building ftmd. This year, .
i what we have done in this act Is to pro- $5],000 of hIS losses when his orokerage with the collapse of 10 member firms "
/.
I·"
Ii
vide that the board may be enlarged by houSe fails. TIm-bilT; stl'llfIT1"tner, would and the imminent failure of l:wo more.
four members at a time when public at~ gIve the SIPC authority to seek courtc there exists a real possibility that th~
1
tention is directed toward the board, be- room redress if any member firm fails trust fund will be exhausted. If the public'
f ca use public ftmds are to flow in through to meet its obligations to its customers. is to retain confidence in the securities.
',ji. loans from the Treasury. This will give A nonprofit corporation whose mem- industry and if individual customers
."'! an enlargement that can really change bership would consist of all registered to be guaranteed their cash or

I the decisionmalking power in the board. brokers and all members of the national credits, a larger trust ftmd must. be,
Unless you have an industry-dominated securities exchanges, the SIPC would crtated for the entire industry, not just
board in the beginning, with a relatively protect the small investor and encourage for one exchange.

I
small number and a margin of as many new confidence in the stock market The Securities. Investor Protection
as four' to add, you really do not sufii- among such investors. of 1970 would establish a
ciently change the tenor of the board. This is a g-ood bill, Mr. Chairman, and profit industry insurance
I think the triggering device is an ex- I urge its immediate passage. by $1 billion in U.S. Treasury
cellent method of protecting the public Mr. BROOMFIELD. Mr. Chainnan in protect investors from U1U"-"1<'"''
interest, far better than attempting to the past 2 years the. stock. market has insolvencies. The basic fund
anticipate by appointing persons of no steadily declined from the record levels financed by assesslnents of th
,;./" particular stature prior to the events of the mid-1960's. While oversized prof- brokerage firms. Initial as:seE;snIelIti/.,
which cause dipping into public funds. its dividends and volumes have largely would be 0.125 percent until
Mr. STAGGERS. Mr. Chairman, I be~n left behind several of the proce- amotmts to $150 miIIion; when

II,
yieid mysel! such time ~ I may consuD?e. dures adopted by'the securities industry ments will drop to 0.25 perc
Mr. ChaJrman, I thmk we have dlS- to cope with the unprecedented activity customers of member brokerage
cussed the bilI rather thoroughly. The of that boom remain. Amidst the general would be guaranteed a return up
subcommittee held extensive hearings. bearishness of the 1968-70 period. these 000 on their cash or seQUIities
Certainly, it took along time in its mark- procedures once.s-o vital to.the continued fund would be administered
~'I'I'
up in executive session. When it got strength of the brokerage- houses· have curities Investor Protection r.r,rnon,tilOI
through it tmanimously reported this bill revealed a more dangerous side: they which in t1ln1 will be. fUlVF'rn,prl
to the. full comi:nittee. When it was threaten now to undermine· the entire man Board composed of
brougJ;1t to the' ~ull committee, the. full industry-investor and broke!: alike. ment -officials-the
co:rumttee unarumously· reported It to The major problem involves the use Treasury Se~retary, and
thIS House.. . . by brokerage houses of customer credits Board Ch::llrman'-~d t,,:,o
Mr. Chalr~an, this IS not a bilI that and securities, When investors build up representatIves. It will remam

II
was reported ill a ;hurry: The~e was lo:r;g funds from the sale of their securities, control of the Securities and E]:ch.aIlig
and . careful conslder~tlOn gwen. to. It. they frequently leave them on deposit Commission.
Many other, ;:LlternatIve~ were studied: with their brokers. Although the cus- Mr. Chairman, the Interstate
A:t:te~ we wert:: through WIth all the study, tomer may withdraw his balance on de- Foreign Commerce Committee has'
thIS IS0 e bIll that we brough~ to the mand, the ftmds are usually left with' the problem of brokerage house
~f~ !louse :m th . every recommendation that the brokerage houses as a convenience, head-on. It has produced a
It passm thIS form, . . in anticipation of future purchases. Like almost everyone concerned has cnnnOrlr.-

II
IHi
I know. th:.:ptlJere IS probably gOIIl g to a bank's investment of customer deposits, ed enthusiastically: the broker,
be an obJectir,m .made to the effect that the ·house is free to use this cash for its dividual investor the exchanges
the Se~ate'isgoing to pass a.bilI som~- own purposes. The same applies to se- the Government 'agree .on the n~ed ..
what difIerept. Well, they mIght do It. curHies which the' investor leaves with this measure. I do not think it can
I caunotsay :vhat will ultimately hap- the house for safekeeping .or to securities postponed any longer. This bilI ..
r'
1~
pen, but thf!-t Will have to be a matter to which have been'only partially' paid for.,...- immediate:passage.
be resQlv.e¢!.lIl, cf)llference. In.oth.er wt;>rds,' those held on margin. These, too, can be ~M~r::,. ..)~B:J:';Em~¥I.mq,~~~$l~j~i
these differences .Willbave to be ironed trad.ed loaned or used as collateral on
out:n c.D'nfer.enqiC _ .... ........... loans. They are freely transferable, ena-
!0
f"rl Mr. Chairman, tl1e Committee. on In~ blingbrokers to :fill cmiwn:;ers' orders
[f:~
tersta te and Foreign' Commei:ce, not Dilly proinptly and easily but also: rirea ting the
the'subcorniillttee, bilt the full commit~ risk of incorrect. transfer." .

28
 r
Dccei1loer 'Q"'O
1 ,1" / CONGRESSIONAL RECORD - HOUSE 38353
0'" r. of the fallU1"c ot broker-dea!.er.
is tlle prompt paymen t feature which establishing the Corpol'ation as a private
t:~;;..~-~uld--a!ro-grl!;nt-pro"tectiOfi' to a voidS the lengthy delay which 111igh t, club, dominated by people from t.he same
tl!'~rt'. ~'iC clk«i;omers of broker-dealers otherwise result if customers had to wait sect.or who, it is urged, we are trying to
,d . ~:r.~k clea.Ting corporations throng-x: lIDtiJ the completion of the liquidation protect the investing public from, In
:\~':: ~~ of ~ fund which could be usea p]"Qceeding, many respects, tIlls crea lion bea,rs the
: '~-'2cover losses in the event of the ii- l\!iJ'. Chairman, I am happy and proud control earmarks of another FederaJ Re-
':·-,:.o;a! inSOlvency of these brokers, to support this iegislation because it will serve type operation, and since the Fed-
I ,~t_!_· ~'ould be a limita tlOn 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 abJe Lo in-
,. 'Til ere haVE beEn same who have SaIQ will recall that President Nixon sup- vade the private investment market.
."" t 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. The taxpayers are again being
itlS is not the case. H.R: 19333 15 a ve- ductivity in June of this year. The bill called upon to make good although not
;,; 'Ie that speaks to the II?~:lOrt~nt con- is especially timely and crucial at this all taxpayers are stock investors.
,.. :~ of, the entire secuntIes illduslry. juncture given the financial problems The comparison of the new SIPC to
CE,US
TiLisbill .
is just as illlpo~ta?
t to th e smalJ plaguing the securi ties industry in re- the FIDC is meritorious but there is a
'J;wstor in Chicago as It lS.tO th~ s~an c.."11t months. I am convinced that this considerable variation between the as-
lnrestur in New York. This legISlat!0n legislation will help to restore confidence surance of $50,000 per investor UDder this
\;:;JI 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 tlle SIPC when-
;'tEotlon that they prEsently do not this mEasure. ever ;t appears that the Corporation
h~~-e.~IWisb to congratulate ~y co!- Mr. VAl-ITK. Mr. Chairman, although does not have SUfficient funds to pay any
leagUES on the Commerce CommIttee, ill this legislation is essemlal ill oraer to incurred liabilities.
orticillar Chairman STAGGERS and Sub- PUlVlde a, greater degree 01 secunty lor Most unique is the authority granted
~~mlnittee,Cbairman Moss, for their ex- the investor, I regret that this legislation in section 3 (h) to authorize the SEC to
~~l1ent workw~ch brought forth this includes coverage for 'all registered deal- issue to the Secretary of the Treasurv
, 'veif:necessary·· bill. ers. It is like issuing a policy of health in- notES or other obliga.tions n0t to exceed
. , , of minois. Mr. Chair- surance without an examination. Al- $1 billion for use as a. public debt trans-
of H.R. 19333, the though most dealers are men of integrity action in obtaIning funds for loans to the
Protection Act of and responslbility, some effort should SIPC. No matter how laudable in intent
this put have been made to qualify covered deal- this is creating more credit and is in-
ers and to exclude those who deserve ex- fiationary.
elusion by either prior conduct or other Nowhere in the bill is there any re-
lack of qualification. quirement or provision for pOiicing the
It seems to me that the laws relating real cause of the problem, that is, the
to the handling of securities should pro- fleecing of investors by commingling pri-
l1~~!:~:~:~~~all
;~ brokers
vide for a complete segregation in escrow vate and trust funds.
under the Se- of the funds paid to a dealer by the pur- We have been led to believe this biII
chaser of a security. These funds shoilld is tbe answer to the problem, but I dare
9'.~~c~~~~~!~te;~~ 1934 and all per- be sequestered and held in escrow· and to suggest jt will prove ';0 be nothing more
" of a national se-
ex~31111nlge. Assessments woilld be perhaps under bond to insure that they than a subterfuge under which invest-
fund would· be admin- are not used by the securities dealer as ment brokers, dealers, and bankers wm
formed nonprofit, security for his own debt or for the pur- be able to now manipulate taxpayers
Securities Investor chase of securities other than those de- dollars to cover up their own shortages
L;Ulrn,-~-jjr'c, Under the pro-' sired by the purchaser who advanced the
and mismanagement. It appears to me
bill, SIPC woilld assess purchase money. that this is just another means of estab-
cash from its members It is my hope that this legislation will lishing Federal control over prtvate en-
,of enactment. Another be accompanied by more detailed legisla- terprise.
'",'"",n'w,mln make for an tion outlining the responsibility and in- I do not feel that this is good legisla-
fund of $75 suring the integrity of the security dealer tion and plan to cast my people's vote
fund will grow who is provided the benefits of this against it.
and will be main- legislation. , . ,:
Mr. RARICK. Mr. Chairman, as I un- Mr. BIAGG!. Mr. Chairman, H.R.
derstand . it, three security investment 19333, the Securities Investors Protection
brokers have gone under, supposedly be- Act of 1970 will belp'secure the small in-
cause of mismanagement, with threat- vestor from financial disaster. due to the
ened loss to their stock 'customers, and fallure of an investment house.
we in Congress are being asked to inter- The bill itself is an excellent eX!l.lnple
vene in the business coinmunity by pass- of Government working with industry for
ingHR.19333, to establish a Securities the benefit of all': concerned. 'WIth a cor-
Investor Protection Corporation lp pro- 'poration as the 'vehic]efor protection~
tect stock inv,estors. '.'. ... '., . similar to ,the Federal Depos{t Insui-ance
One wonders why the Securities Ex- Corporation for bank depOSitors-public
Br'Pl'jfj,••' criteria under wNch change Commission-:;SEC-has, 'toler- and private interests will join tOgether
in '. determiiling ateci. the commingling (jf custOmer trUSt, to protect ,the customers' of registered
""':LUIJ"JL" bas failed or funds with the moneys of the broker,
brokers and dealers and members of na-
SO'. At. that: point dealer, and banker'so as to. allow such
tiQnal securities exchanges.
a 'court of compec inCidents to occur. Certainly, it seems The funds for the corporation will
11 decree adjudiCat- that if these brokers defrauded their come entirely from the indUStry with
le-':tJrustome'rs of the member customers they wOilld' be criminally standby credit available from the Fed-
, to "the protec- l~able. Yet, nothing lias been said about eral Government. Representatives of the
this JetiiSlafJqri: criminal proceedings nor of any such in'"· public will serve· on the board of di-
':~"C',~~o;,""L1ll, the. court woilld tenqed actio)1S to be ..used .a:,.;; a deterrent rectors as well' as representatives from
the' purpose . of to mism,anllgement, of: trUst funds by, the Wall Stree:;.:!irms., ..
~)~]lSin~~s of the member.' other stock brokers, dealers, and bankers. The recent collapse of several Wall
The only concern appears to be who Street inl'estm(,!nt:firms cleai-lyerripha-
11LI e~:~~'~~~C: to the prompt trustee
will dominate on the Corporation Board. sizes the urgent need for this lel;islation.
:C::111' t!J,e' I:Clli;tOlne:rs! "Chl!n:i's, not IIi 'retaIning five 'members frci'm 'the sEicu-' In the recent cases, other firms on the
as
ctIstc)Jner. rity exchange business, agains'ttWo· Street were able to take up the obliga-
, t:W:s'P:F°vlsioii f~9ITi'thegerieralpublic;·we· appeartb be tions of the financially mned dealers.
 :r
I~
'0
gO .,t does not ;-;'lEEn I have to tflke e':c;:y
I- •
~~·:;\·i~iiOi1 of t Jle bllJ . 1 t!link the bj1J hns
se ~~:e or two iJ3\\'S a;~d jt i:: our d1..1ty-it i!!
I-~e
l"'~V dlit::-to POil?t theril out: ~ .
,j ~~]e diffi('uHy 15. as I .5EE it, 3ilO wl1;c11
et 10 ~l1Y 1111l1d is as jTrH2ti~}g as ~ hangZ?ajJ,
I :5 the fRet tl1a 1- tller~ ]5 an :].)~ufflcjcnt
1- !"'q::nber of pubHc 1Jle1l10ers en ~!11S Baal'd.
\;\j~ l1a'·;e heard it said t~at the n::oney
j] :/l\"clved in first stage the !1Joney of
tl1e lS
n ~he broker-the resl!jt ,cf assesane,l1ts ~f
)1 t'le t;·d:e:·s. That IS Lrue--but tnat jS
., 0;11, half of the story. There is grea t.
~utliC interest invcived in LFiIS matter.
e TI\eJ e 31 e 3D 11lilntJn Investors In ::::ecun-
'-r\l'S:-t1""i6st Oi wlucl1 pass tnrilugh the
iW:n~-ur-tlre members 01 the vancus
·E..·\:!i.Q~nges. Il thai iact is not of pull.Jjc
intere:srldonot Know ,,:hat. is of p·.1blic
. interest.
''""Wl'rnThas l1ap!Jened heretofore? There
11a\'e been great derelictions on the part
of the members of the New York Stock
Exchange and other exchanges. They
have conducted their operf.t:ons as a pri-
vale club. "WlJat is good for the New
York Stock Exchange members," ~ara-
pill'asing the language of Chariie Wilson
of General Motors, "was good for the
country." Well, it has not been good for
the countTJ'. Tl1c results we know of.
Some concerns have gone into banl;:-
]'uptcy.
. It is time to call a halt. The responsi-
bl'e 'members of the New York Stock Ex-
~l)ange want to call a halt. It is time tl1e
e:,:change cleansed its Augean stables.
.To· change tl1e simile, the boil has been
-'la:ilced and lots of bad stuff is coming
out. But not enough. We do not know
llOW many more firms may be approach-
'lug bankruptcy. We do not know how
rilany more are teetering on the brink
'hi. how many may be insolvent. Vve are
:ll'Ot toid.
.....This·is .'very strange. The members of
exchahge . and tl1e boards of gov-
of the two exchanges are lill-
silent. They do not tell us. And
committee, which I commend
their bringing forth this bill.
know the exact state of facts.
does the SEC know. 'And the
E3iiculTit;ieE and Excl1ange COJ1l..mission
.. . have known long since about
. operations. But the SEC has been
,apathetic. Self-regulation has not
the New York Stock Exchange
. . American. Exchange put their
in order, there will be no recrea-
confidence in those exchanges.
to those g'entlemen on the high
importance involved in these
beginning of 1970 New York Stock
.members held approximately $3
'. customers' free balances. funds
on demand. These free credit
by member firms to main-
in securities. t-o finance mar-
a! other customers, and for
the total of cash and
held in the custody of brokers for
.. ~.,.,_,,"ll<'~ of customers is approximately
These assets, in many cases, can
!oy creditors of brokerage firms
.segregation practices have
+K";"'C~., •... w
... a.s nosegregation. And when
houses got into trouble,
COl'·)GR:::SSIONAL RECORD - HOOSE
the c,'Edj~ors seized l.he secL'rities and ihe
'-,1GnC\'s Lha L bciongeci to the cusLomers.
Th~ CH};IRMAN. The time of the gen-
t.lerr:"" frem New York l1as expire~.
Cay U11EJ1irncDs cC]1sent, I\'1r. C£L:"ER
was ~JJo,,:ed to proceed fc·r 5 fldd;ticna)
H1inu~es.)
r"lj". CELLER. The Pre:3iOE11t of the
New York SLock Exchange, 1I1r. Huack,
speaks, and this ]5 his e:-~act 1angu5ge:
111irj2ue5 :ind n19Chi!lations, bjatar:,t I?inl-
m:ckrr ~ all EClTt.S (·f cadges 2.110 plays iJctt'\"·.e.en
orake::s a;;d their customers ~o aveid pr!)pEr
regulation and CC·Duol.
Ralph Saul, p!e.sj~ent of the AnlericRl1
Ex~ha.l1ge, speaks of tl1e "exch~nge's
.. "flimsy capital struct.ure."
Brokerage houses use their custom-
ers' money freely to condEct business,
r2a!!y to specl21ate, with no segregation.
They use also their capital reserves,
supposed to protect customers' asset.s
against loss, for their own speculation.
Thus two heads of the exchanges. the
American and the l"ew York Stock Ex-
changes, show exactly what the prac-
tices are of !Dany of these brokers.
I want to say this. I ail not want to
bring an indictment against all broke:'s
and all brokerage hOUSES, because of the
derelictions of the few. It is these bad
ones that taint the atmosphere and
cre2.te t.hese bad impressions. We have to
have criminal jaws not for the good pcO-
pIe, but against the bad people. We must
forfend against bad operators. There-
fore, we must be sure that the laws we
pass wEI be errective.
We hear tell much about the SEC,
as fu as the law is concerned-that law
has iJeen more honored in the breach
than in the observance. We seem to have
lost confidence in the SEC. and when
we say the SEC will do this and tl1at,
I wonder what indeed the SEC has been
doing aU this while. If the SEC had been
doing its duty, we would not have had
this sorry state of affairs. Therefore,
because of the machinations and the in-
trigues of tl1ese brokers. I want more
public members on this board.
There is more involved here than the
nl0ney. There are 30 million investors
who have their money riding here. They
must have protection against these in-
trigues, against these maneuverings of
some of these brokers, and I think we
will get some protection if we l1ave the
substitute amendment offered by the
gentleman from Iowa. I intended to of-
fer a similar amendment, but he beat me
to the punch. I welcome it, of course. I
am siding with the gentleman. I do not
always agree \Vith him, but certainly I
am in agreement with him now. If we
do not have more public directors, it
would be very much like setting a cat to
watch a bird in a cage.
We just cannot have implicit faith in
many of these brokerage houses in New
York because of our sorry exPeriences
v.ith them. I want to forfend all these
excesses and all these difficulties. What
is wrong with having more public mem-
bers? Why should we not have more
public members, since this is a 'public
corporation? . regulation of the' licensing of security
IVfr. MOSS. Mr. Chairman, if the gen-
tlema...>1'11>iJ.l yield, when has the appoint-
ment of a public member ever guaran-
3S3GI
teed Ihat the Dier:.lccr ,,'ouJd be r~:-j!!l:njLv
concerned with tl1e !Jub~ic jr11 ej'eE l? .
Mr. CELLER. I think lle '.yowd be
n}Ol"E'. !E~e]y to be con":::~2'jied than the
selfi!:!l p€:r~Qn \"'-])0 h::;~ 2 ~c~f-.!::1tert:,;_
who l!3S 2n ax to g:d!ld. \\"~Jo Y~'~!1t= tc
protect hj:nseH and his feEe)'.'::-_ I ~j;h:;-:
j\, is :s.r l:t:°tter to lJ.~=i1:E E. r:. i..!;:'1 i·:" '':1;":::' Ie:"
than to l,ave a director \\'bo he5 a fi:IEI1-
ciEil ~nterest in tl1e prOCeeGiJlgE.
}\1" STAGGERS. Mr. Cl1airm211, \"ill
the geDUeman yield?
lVlr. CELLER. I yield tv tl1e §Ent1<:iT:f!.l
frGm West Virginia.
Mr. STAGGERS. M1'. Chairman, tJlc
gentlem::.n said t!':lat the public membeT
would l1ave a greater intereEL in 1h:5
than the man on the stock exchsnge. I
disagree with the gEntleman wll0leh"Ht-
ed:!y. The men who pay tl1e money into
the fund are going to wa tcll over that
fund. They will be people who know what
they are doing. They will say to otb2]'s,
"You will not take any mOTe money." It
t.akes a cTOok to catch a crook. If they
have somebody who does net know 1\'h"t
is going on, the wool wii] be pulled OYer
his eyes. A.ed 'l.~e must re!ilelnber, jt is
t.hei.r n-!oney. Let us Jet theTIl watch Dyer
it.
M'r. CELLER. Ml'. Cl1airman, I am
af:-aid I c:;.nnot be F.S naive as the gentle-
man fro!n West Virginia.
1\1'T. STAGGERS. lVir. Chairman, I am
not as naive as the gentleman frilm New
York about the'se matters.
MT. CELLER. While tl1e gentleman
from West Virginia may trust them,
thEre are some members of t.he New York
Stock Exchange that I do not like to
truGt.
Mr. MOSS. Mr. Chairman, I riSe in
opposition to the substitute amendment.
Mr. Chairman, tl1e easiest thing in the
wOTld is to step into tl1e well of the
House and level an indictment against
the securities industry. particularly at
this moment when it is caught in a
rather tight squeeze. Of course, if we ]oo]e
for thE reasons for the difTIculties of the
indllstry, it is easy to point the finger
at the Securities and Excl1ange Commis-
sion and say, "You gentlemen are re-
sponsible because you have not done your
job."
But let us look a little beyond that. The
Securities and Exchange Commission
is an arm of this Congress. It has on
numerous occasions asked for more au-
thority and more power th,,"n the Con-
gress has been willing to give it. H:;.d we
given it at the time it was rEquested, and
had we permitted them to exercise it. I
doubt if we would have the problems
here as serious as they aI'e at this mo-
ment .
I happen to believe that the commit-
t:oe showed a great deal of care and a
great deal of responsibility in fashion-
ing a rather uniaue Board of Directors.
I believe it is a better Board of Directors
than the substitute would create, because
we have representatives of the ex-
changes, of the National Associati-on of
Security Dealers, which is.a quasi-gov-
ernment agency, already engaged in tbe
dealers, and then we ha:ve two public
members. . ' '. .... . . . .'
If there is any in::Iucemel~t in.the in-
2'0
.'. V
 ]0, 1970 OeCembeT 10, 1970 CONGRESSIONAL RECORD - SENATE 408G7
~(j '-r.r.t~f.ltr b 'TRAINING OP PAMILY PHYSI- Illfnt to geL t.he programs underway, we minimum rate of royally to be charged
~f:'C~lJ~tJf:S he:Jti c CIANS-CONPERENCE REPORT agreed on 58 million. under geothermal leases. The Senate ap-
la tIOI);,J StCUt_ I ccnsider this program one of the
ry 1, 1910, 10: :' 1>1r. YARBOROUGH. Mr. President, I major 11ealth bills of this session. It ex- proved 5 perc en l. The House insists thaL
the raLe be 10 PErcent. This change is
Hance- to cU!o_ ':. t a report of the committee of con- presses the policy of Congress that we
xchange, Sbe.,!1 e on the disagreeing votes of the are not going Lo let Lhe health of the accepLable to me. and has been cleared
to .!;lJch tr-U(: on both sides of the aisle.
on the amendments of the people 01 the Nation be negle{:Led from
ncorne to ~; to the bill IS. 31 J 8) to amend the inaction in the area of health manpower. I have jillt finished a long discussion
nder any pre:
, COde 01 1G5, Health Service Act to provide for We must develop the necessary doctors on the question with the Senator from
g of grants to medical schools Colorado I My. A LLOTT), the ranking
ontrjbutlon Gt" to see tha t beLter health care is possible minority member of the Committee on
n a sS-essrnen t! tals to assist them in establish- in both the rural and urban areas.
Interior and ]nsuJar Affairs. The change
If) (4) 01 to" al departments and programs in
The PRESIDING OFF'lCER TIle
~ta t us, as Ord!~ eld of family practice, and other- question is on agreeing to the conference meets with his approval, as does the en-
tire bill.
UDder secnr" l encourage and promote the train- report.
e Code 01 195!- medical and paramedical person- The time has come to complete con-
Lions IDiide t~ The report WdS agreed to. gressional action and send the bill to the
, at any t16
the field of family medicine, and
the effects of malnutrition, While House for the President's approval,
disso)utlon ~.; so that the potentially enormous geo-
lEt assets EbEli provide for .the establishment of
ORDER OF BUSINESS thermal power resources underlying our
fits IDembers. ' onal Information and Resource
rUlly absL'1lC~ for the Handicapped. I ask unan- Mr. MUSKlE. I suggest the absence of public lands can be developed and used
,rts to •.
t for the present consider- a quorum. in the public interest.
the report. The PRESIDING OFFICER The 1 move that the Senate concur in the
PRESIDING OFFICER (Mr. clerk will call the roll. amendment of the House of Representa-
tives.
there objection to the pres- The assistant legislative clerk pro-
tion of the report? ceeded to call the roll. The PRESIDING OFFICER. The ques-
no objection, the Senate Mr. BIBLE. Mr. President, I ask unan- tion is on agreeing to the motion of the
enndtrle'r the report. imous consent that the order for the Senator from Nevada.
report, see House pro- quorum call be rescinded. The motion was agreed to.
Decemter 3, 1970, pages The PRESIDING OFFICER. Without Mr. BYRD of West Virginia. Mr. Presi-
CONGRESS10NAL RECORD.) objection, it is so ordered. dent, I suggest the absence of a quorum.
GH. I urge Senators The PRESIDING OFFICER. The clerk
this conference report on S. will call the roll.
.Family Practice of Medic,ine DISPOSITION The legislative clerk proceeded to call
OF GEOTHERMAL the roll.
70.' Stated simply, the purpose STEAM AND ASSOCIATED GEO-
ation is to encourage and Mr. MUSKIE. Mr. PreSident, I ask
THERMAL RESOURCES
training of doctors in the unanimous consent that the order for the
medicine, where there is Mr. BIBLE. Mr. President, I ask the quorum call be rescinded.
shortage of doctors. Chair to lay before the Senate a message The PRESIDING OFFICER. Without
Wrangell Island, in the from the House of Representatives on S. objection, it is so ordered.
the distinguished Senator 368.
(Mr. GRAVEL) has 3,000 peo- The PRESIDING OFFICER (Mr.
without the services of a 'BIBLE) laid before the'Senate the mes-
In areas in the eastern sage from the House of Representatives,
and Washington, 3,000 as follows: .
.' f The
the aSSIstance of a amendmentsResolved, That the House concur In the h bSenateresumed.the consideration
.
of the. Senate to the amend- 0 t e ill (S. 2348) .to establishlli.Federal
ments of the 'House 'numbered 4 and 5. to Broker-Dealer Insurance Corporation.
75 percent of the physi- the bill (S. 368) entitled ';An Act to au- _ Mr. MUSKIE. Mr. President, every
were engaged in thorlze the Secretary of the Interior to make Amencan has a stake in guaranteeing
; by 1949 less than 50 disposition of geothermal steam' and asso- the healthy and efficient functiOning of
. general practice; and ciated geotbermal resources; and for other the American securities markets. '.
onJy 20 percent in gen- purposes.". ..'. ' . ,:(,oda3r, more. than 30 __million .people
.The ngure promises to Resolved, That the House- recede from Its partiCipate directly as investors' in securi-
. since less than 15 percent ~~:~s~~t~;~J. numbere:J ,I, 2, and. 3 to the ties of oneelass or anotl1er. Perhaps an-
school graduates have Resolved, That the House recede fipm Its . other,.J 00 iriilJion' partiGipat~ illi:lirectly,
'hi ten tion of going in to gen- amendment numbered 6 to' the aforesaid bllJ through IT)utual funds, 'pem,ion funds,
..Ill other words, while there ·and- agree to a further' amendment, as and the like: Moreover., every : sector of
doctor for every 1,000 follows: ..' . OUI: ecpnomy is heavily dependent on the
.ngure is now one for . In section 5(a) of the Senate ·engrossed -strength and viability :ot" ouI"Nation's
bill, strike out "5per.cen~um"ru;>d .iIl sert securities· industries·" " .'.' ... --' ::'.. .
compounded by the "IO'per centum".. " • The CongreSS has' l~ng recognized the
shortage of 50,000 The PRESIDING OFFICER. Without' ,great . impact of the, securIties markets
and the induce- objection, the Senate wiIJproceed.to the On o:urnabonal__ ecopomy~and the crIU-
"jJt~I,;Ja',lz."u practice are immediate consideration of the"message. ~e that publiC confidence'pl1:i'Y5-in
family practice of . Mr. BIBLE. Mr. PreSident, I shall make ),h}:! ~trength' 01 . theSe _ma:i-Jt~ts.· 'To ::en-
and stimUlation it a short explanation. ," , . r': '.. _.hance public .. confid~nce, the· Securfties
ting' separate de- S. 368 is my bill to authorize:the Sec- - Act of 1933 was enacfea so ·that, the-ill-.
medicine. in . our retary of the Interior to issue leases on 'v~stor would have the necessary fuforma-
may be able to re- the public lands for· the--dev.elopment oftron to e,xerclse sound·judgmentin mak-
Already 15 medical the Nation's geothermal energy' re- 'ing securities purchases. ADd the. Securi-
departments in the sourceii. The Senate passed this ,bill Sep- ties Exchange A~tqf 19?4. i::I:o:;.1des
.20 ,other schools have tember 16. The House sent it back with safeguards.to assure :thatthe '--mvestoi-
certain amendments .. ,Last Friday, ,the Will. not. be yidi!:riized ... by' .:tra1,ldlllfmt,
hope of getting badly Senate accepted a number of the House manipulative or ·ae~eptive. :,;";-s'elling
into our . rural and amendments, concurred in, .others with schemes. ' .. ,' ·.;i,,,
·be by giving em- amendments, .insisted on certain Senate These two statutes are largely succ~ss­
the family prac- proviSiOns, and sent the bill back to the ful·in accomplishing.their .piIrposes. But,
this bill does .. House. The House acted again today, and as recent experienc!'!_l1as' shown, tbere
',,,,,,J"Lll,'''''-J schools and ho~­ has accepte'd aU. but one of.-the provi- stilI exists a serious. gap in 'oUJ"secp.iities
.'<"~~~""6"' on' authori- sions agreedupo:r:Lby the.Stat~.:DJe only laws which neith!,!r,o;C ~he.<;e;stl>tut~s cov-
the 'next. 3 remaining- di:tIerence .I;>etween .th.e Sen- ers. An investor..'··may _:exercise ..sound
!-"'''''-!-,Jlll,e; and ~evelo.p- ate and House ve!sioJLS deals ··with the judgment in his choice of stock .. and he
 40.s6fJ CONGRESS10NAL RECORD -
mny plr;ce his arder with R reputable
brob'r Nevertheless. he fIlay still lase
11is entire investment ij the broker :oub'
sequently fails lJecause af operational or
finaJlcial dJfficuJty.
M:. Pre.sidenl., sincE J934, 1.l1e United
St.al.c,!;'-has JILSured lJ3l1K('!ep1JslLs under
t.heJ"pl:J'enrl-13!C]:lUStHTISTITal1ee--eoT)JOra-
tiol'aTlcli.111:Fel:teYaJ'SllViITgsa,rd·':Coa n
lnsuTan~orpamTIfff:'J-ht::5e-m"tlTa-fle-l:
, p-rOgY:D'iiSj'l[orecroank~'epusitel'S-i-Fem
-lliSSoJ1~ngsDecause-of-' bank
Ja1Jures. And thT1i3'Si'St1l:JJn-ut-tlTIrde"
----posiTTriSlTj.-ance·na:s·beCBTIi'e --a'soUrce'of
cDnnae.fJcein-Che-s6iIn-dness''Of--aur-sav~
ing;H-nst:it-ntiDft5':------- -- ------'" ....
S~le Securit.y Invest.or Pro tee-
tioJT7'H:rolT9/0-;-would-aec-olTI)511Sh-a-si'm-
ilirljJurjXlse j or secuneres'iri'\;eslors' by
proLectmg them ]rom losses-because--of
-me lalTITi"eo:n:J1'eiTbTiiKers. Th1S bllJIfifs
bf'en reported unan1mOllSly by t.he Com-
mffree on Ban~=y-rdll{)w­
lng 4 days of hearings. That there ls
.'an urgent need lor this legislation, I
think, is clear.
The stockbroker is not a simple pass-
t.hrough agent. for the p.iuchase and sale
of securities, CUstomer accounts with
brokerage firms in credit balances, cash,
and securities are maintained on a con-
· tinuing-basis. These balances provide the
· investor with liquidity for future t.rans-
actians. And as is the case wHh banks,
tbese balances are used by the broker to'
.finance the operat.ions of his business.
· Recent estimates indicate that the liabil-
ities af brokers to' their custamers-in
credit balances, cash, and securities ex-
ceed $50 billion. . 'million in firm lines ot' credit negotiated
The willingness af investors to entrust
aSsets 'cif' this ma,gnitude to' brokerage
firms attests to, 'the great. canildence of
: the Ameiic:in puJ:iiic has had in 0)lT secu-
'rities'indtistTYin the past.But toqay that
conftdebee)sjl;opardized. .
·C5ver'thepast year, insolvencies'in the
. securities indUstr,Yhave been maunting
sharply: 's'everaf maJor firms have 'suf-
fered serious Dliancial difljculties. Some
have· faijeil :completery: br have, beep
iorceil·to merge with bealthier :firms., In
the pa..st18mapths, a lar!;e num):>er·.~of
brokerage lirfus';'inclucling 12 major ones,
have failed. 'ADd,' since A~gust:alane,
tlU:ee members oi·foriner meinbers of the
New, Yoik'sto{;li;' EXchange have been
fore'eno 'g,j irito 'banlO-uptcyor to com-
menceliquidation proceediligs. '. , ,
. 'The'indusirY jtSeU'bits attempted to
.·stem the' tide ,'of: faiillre and to proVide
someprmection fbT'the':cifutOhiers'offan-
'mg·firi:rlS.Iii 1964, tbe'NewYork.Swck
Exc11ange/'Jor . exii.rijIpie; es~abiiShed ':a
trust" fUnd:toprotect 'iriv.es~6i-s' from
. loSses due to· insolvenCies,·But .that trust
'fimd alreadY ha.scoriiniit¢entstO trou-
bled firnis ·totaling $55. mill)pn'.BeYDnd
. this"iJJe''Exchange recently made .acom-
·irut~ent lor an' additional aSsessmeri'tto
indemnifY·Olle ]arge:fi:nn il.g:iiifu;t losSES
it may mcurbecause of itsa'egUisitioff of
another firin' which was clo8e'.tci'·baiik-
r u p t c y . . . " .:. .
'.':-Mr: ,President, tbe'·custom.ers ·:of . tbe
firms which the' stOck exchange~.· have
·managed ·:to P'I'citect are fortuhiite., )3ut
wE'h:ave now reaclled tbe',Poibtwpere tl:le
·aliillty:'of'themdilstf.y' to' hai:J.dJ~ :\Ujdj.-
"'tional'losses on a significant scale is, 'iiP-
: 'certainii beSt.' . . . ."., .
SENATE DecernbeT ] 0 , ] 0 ' ..
..... ,iJ
TIlere is uncertajn ly about wha t new available __ onJy . in the event indu .
emergencies, wh3, new losses, may bnckerJ---nTITlllC'lTTg-----ls--e.x.hauS'ted stC).
emerge in the near or d!stant future. transa:t1Jons c-J'l1:!J]fe:;--'t.-O-in'VPstors· }\-11c
There is uncertaint)' about haw much be impo~ed only to repay funds waUlc
relief t.he industry ilself can pravide rawed irom 11le Treasury. 1 belieVe t b o:,
against such em,"rgencies if they should mecJ1311lSmS Jor establishing and tn b~>E
arise. And there is cause lar concern taining an insurance fund to' prote tau:.-
about. t.he cust.amers af 11lase braker- cUTities invesLors are both realisti~ s~~
dealers whO' are nat members of an ex- equitable. ana
change with trust fund pratection. These Secand, in order to minimize del .
customers are fully exposed and have no meeting tlle legitimate claims of ay,~'1
pratection a tall.
In my judgment, it is clear that the
tomers msured by the insolvency
braker, dealer, S. 2348 introdUces 0 a
C?_
Congress must a.ct now to' prat.ect the in- tain procedUres for prompt liqUid ~el'­
vestor and to restore public conildence of 31PC mem bers when required a l~ll
in the securities industry. 'd th e t'1me,consummg
Sl e
.
machinery , OUl_
of •
S. 2318 is a oajor step toward accom- bankruptcy proceeding. The· bilJls "'
plishing these goals. 11. does so in three would establish procedures far mahln°
ways: prampt dlstnbutlOn and payment. 'o~
First, S. 2348 praposes the creatian of clalms under certam conditions, wfth_
Lhe Secuntres InvesLOr -P.!litecLlOn Cor- out. the need for formal proof of cl!l.inl
~er.-a."']ITiva:te'11ID'l}Jj'(j'fj'f cor- as lS naw reqlJJr.e? by the bankniPtct'
pora hon wITicrr-wo1Ilu-atiministeran-in- laws. These provlslOns, 1 believe' .-
surance fund coJllpcsed Of ind'l1s-try-fl:IDds highly desirable adjunct to the'
~fl\i'SedlJY annual assessmen t, tffi.1':Yetl"'Up bankruptcy laws in minimizing
by lreasury oorro,VJng authority. Tllls ficulties and delays that investors
oinsUll'lllce fwnl'C'Wotdd P1 utech" investors otherwise experience in having
from the serious hardships that can claims sa tisfied under existing
follow the failure af a brokerage finn. the establishment of
Customers of cm'ered broker-dealers
would be insured against. financial losses \;i,;im~lfTi:m:~:mm;~-Pjrr=u;m~~~~~.• .
up to $50,000 caused py the insolvency af :tional carrective measures
the 'broker-dealer, in a manner broadly some of the problems which
parallel' to th'e operation of the Federal broker failures. S. 2348
Depasit Insurance Corporation. Securities and Exchange
"Thidundwoiild be finanted initially by greater ability and authority
the'iridustn" itself ill the amount of $75 these prablems. It does so by
million: This fund wauld be composed of 'uying certain powers of th
$10 million.in.cash ass-essments and'$65 and Exchange CommiSSion
rules to safeguard customer
· with commer<Jal banks. And to provide is done by afljrming the rUlernalUltlJ
addltional protection for lnve'stors,' cus- thority of the Commission wi
tomers would have the assurance that all practices of brokers tha
,$1 billion oC'Preasury borrawing author- nancial responsibility, PV'~~",od;,
ity would: be ivaii~ble to coyer losses in ing the custody and use
'case tlle" ih(ju5tiY~financed fund.is .ex- securities, cash depOSits,
· hauBtea.~ i. ",. .' .... . ances .
. The bin also provides that the initial The bill also provides that
industry-financed assessment fund will mission'S authority' in these
be enlarged over ~ 5-year period to $1~.0 wciilJd extend to broker-dealers
million,cthtisreiluclng further' the possi- business only on an excb
bility 6f'ha;ving to draw upon Treasury them on an identical
funds, ,Adciitionally, the balllr line' of 'firins which are not Tn,ornhp'ro
'c,re4iLwhic'h wouJdprovide $65 million change. Thus, the
,. in initial funding; will be replaced over 'arectly with member
period of 7 years by cash raised through intermediary of a ~plf_r·pp'nl",t.m
'annual aSsessments against the ilidustry. Mr. P:i-esident, i be.Ii
Initial. a.ssessment 'rates' for )n'emb~rs go a long way toward n··,.,n"iiniln'p'
of the Ccirporation would be maximum of . of publlc confidence
, one.:.hruf ..(jf·Y perceritof' gross revenuessar,iito 'a l1ealthy securities
':£.01' the,precediIig 12"month. period. This· I recognize there remain
.:rate 'of .ass~sinentmay .be lowered as tbe . proqlems 'withincertam
· tOtal furid'reacbes$150 million; or raised 'curities: industry. There
again to repay any ,Treasury borrowing bbsolete management t.Pleh:n.icJU!~S
that.·maY-"becoine necessary; . : ....." . less busrness"
.. :Finally., to 'assist In'the 'repayment ¢f regulation, and
· anyTre~tiiY .-funds. bori-owed tinder the '. a.~.t~irities.Al1. of these
· a'uthontyestablished in tbe' bill, S. 2348 part for the industry's'
also . provides" an ~ 'additional finai:iCial . cilltie,s today.
: safegUard 'in·'the 'form" ofii' transa'dio:ils 'j' 'am'byno
· charge .. This charge ";wDrudbe iri1pos~d
·.'in adclitibil to' eXisting coinmissioniates,
·but the .'aggregate :~iriai not>exceed 20
centS per :$l,OOOof.'~ecUr:ities t,r'ii:isac-
tions. Thisiiharge may be levied by·'oe-
terminatiori'oithe.SJi;C,ohly in'the'event vir.tu ally .
oLa TreasUr.y .borrowiirg by· SIP-C.' . ..,. . :fi-6m· capital .
,':' Thus,Mi".'President; 'S,:'2348 ~alls inl- for entry:
'tiaily . loran mdustry-Maticed illsii'r- ··say 'seems .
'aIuce' fund.'Publib: Junds woUld PeCoD'ie . faCt, it is '.
970 December 10, 1970 CONGRESSIONAL RECORD - SENATE
mendalions of that 1963 study had been changes set up tru:'t lunds to which LJleir
Islry_
implemented, we would not now need La mEmbers contributed. UnLil recenlly,
And be herE considering Ulis insurance legis- these truot funds l1ave been adequate to
RoUld 1atJOl1 because the mdustry abllses that take care of tile needs 01 llle industry
bor- glVe floe to the need for l11surance prob- and, as a result, there have been a few
thCSE ably v:ould not have occurred. actual losses. However, due to a variety
oaiu- 1.thinf~.jJs-J.f.ar.J,baUJl£ in~1J):'?1Jff.JJJ:.m~" of reasons, some which could be foreseen
~t se-
eStablished bj' S. 23qa is .:i__necessity. And and some wbich could not, tbe securi-
: a"tld ·lJjeOlJier provisions of the bill will ties industry is now in a financial crisis.
.. strengthen the powers of the Securities During the last 2 years, the New York
a1' in Exchange Commission in the public Stock Exchange has been required to
ct:~­
of:!
t. fully commit its trust fund of some $55
t it is equally clear that this legis- million in order to meet possible de-
ceT- an should be only the beginning of a manos. In addition, New York Stock Ex-
stiCg
program of reform \vithin the se- change firms now face a jJ{Jtential as-
es industry. And this, 1 think, im- sessment of up to an additional $30 mi1-
responsibilities upon the SEC and lion in connection with a recent takeover
Congress, as well as upon the in- of· Goodbody & Co. by Merrill Lynch.
I think that for its part, Con- This burden on securities firms comes
~""--".JJd the Senate specifically- at a time when their volume is much
dertake broad and thorougl1 lower ilian that which they had to plan
in depth into the operations of for oniy a relatively few months ago,
urities industry, with a view to and when profits have been squeezed in
the additional reforms that many firms and eliminated in many
indicated and necessary in the others. The failure of broker-dealer firms
in recent months has shaken the confi-
are proposing here today is dence of cilstomerswho earlier were
first step, and it must not be assured thaC the industry trust fUlJds
become the last step, in deal- were adequate to meet any foreseeable
the prqblem which it is intended contingency. It is important hot onJy for
the secUrities industry but for our en-
tire economy that the previous confi-
dence in our. securities markets and the
· firms involved in those markets be re-
stored. Since the industry is in no posi-
· tion at this time to restore that confi-
· dence ·without assistance, it has become
necessary for Us to enact legislation
which will remove present uncertainties
,concerning possible losses of cash and
securities belonging to customers_
This" proposed legislation would pro-
iide for. tbeestablishment of a fund to
beu.sed to make it possible for cuStom-
ers, "in the event of the firlancial insol-
vency of their broker, to recover that to
which iliey'are entitled, with a limita-
tion of $50,000 for each customer on
the amoUlJts to be provided by the fund.
In addition;· tlils··legisla tion requires a
~~~~~¥:~~'C:~~~ general Upgradmg· of financial respon-
?:''--:-''~;''t~~~~¥t::~~~~ sibility requirerI;lents Of brokers and deal-
ers, to eiiminaie to., the maximum ex-
!WlE...illWi.LOlL.C:onp.Q.eJlJ::!L..JJ::J;;" tent .possible: the risks which lead to
customer losses such as have occurred.
.I believe it· is· iinportant to poil;Jt out
that thiS leg'islation does not provide
proteetionto bi6ker· or. dealerfums
therriseiYes, nci{,does iiin- any way pro-
tect individuals ·.who purchase securi-
ties from mcurring losses which mayre-
sult Jromdecreases·in the market value
of those securities, It bnly assures a cus-
tomer 'that :heWlll r:eceive seci:tr:rt:res-he
has 'iJiiICll:asedor i!ll:gh he has left mtl1.'tl.
firinciii· the e~eri-t-that :fnlll flrCes bnlJ:ll-
cial insolvency. 1 wotiJdallltnikTIo aM
~~~~~~~@~~~~~~tl:l"~;a~t thls·protec1JOn is provided by a pri-
;;; fUlJd made ·up of .assessmen~ on
the industry 'itse1f;·:Only if..that ·J~d
should .pibv'e'iniideqUli.te ina·i:Q~jcir
crIsis woUld Fecje":rhl fUlJdsbe loaried to
the insui'iirite ;·corporationto pay:t:us-
tomer' los'~~s: ·Mii:~hinej-yiS providectun-
der whiCh :iJinds to repay the Federal
Govetriinent· "c·an be developed within
theiD:dusiry ,.:; .,,::.:.. ": .; " . " , ..._ ,; ."."~
·no
, ·While one··can predict"the future, it
: is not-expected· that, ··tillS IDSUTl!-llCe ·.Will
re'sult in any permanent cost to me F'ed-
40869
er8l Government or to Laxpayers. ]n the
event-of-a-m·ajoY-·crisis·-jf tJle fund is ex-
hausted' the inSurance corporation mav
borrow on appjica tion tJuough the Secu--
rilies and Exchange Commission up to
$1 billion from the U.S. Tre:lSury. While
some have argued that this Treasurv
backup is not appropriate, theTe is no
doubt that it is necessary to assure the
proper operation of the insurance fund .
In adcUtion, while $] billion may seem
like a tremendous contribution to be
made by taxpayers, we must remember
that any such borrowing must include a
reasonable plan for repayment and must
be approved by a Government agency be-
.fore it is made. Purthermore, the serious-
ness of a collapse of our securities mar-
kets and the effect it would have on
the financial system and economy of this
country is such that it would warrant the
expencUture of many billions of dollars of
taxpayers' funds to save it if necessary,
and such an expenditure would be far less
than the loss wouJd occur as the result
of unemployment, lack of production,
and wasted resources if the funds were
needed and were·not made available.
My. President, I do not intend to dis-
cuss the details of this bill; since Senator
MUSKIE already has outlined them, and
I feel it is unnecessar·y to repeat all he
his said. I do feel that it is iffiportant for
us to enact legislation without delay. I
must admit that I do not approve n~r
support all of the prov1sions of. this bill.
This is no time, however, to qillbble about
. items which are not absOlutely neces-
sary for the restoration of investor con-
fidence. The importB.I;lt'thing is to get
on with the job; and if changes .are dis-
. covered to be necessary, in the light of
experience, certainJy we.can·make them_
Mr. President,·as I close, I want to pay
my respects to the in:dustTy itself, which
has already taxed itself very heavily to
assume .. as an industry, the bUrdens
created by the failure.of individual.mem-
bers, New York StoCk Exchange' inembers
alone have alreadyco:inmitted $55 mil-
·lion for· that purpose ·and are prepared
now to commit an additioiui,1$30 inillion_
· ThiS is evidence of its acceptance of re-
· ·sponsibility and of its good faith. I,thiTIk
this kind of eVidence demonstrates tbat
the industry is entitled to the additional
proteCtIon that this bill would make
available to it.ii·necessary. through the
a
TreaSury and after. proce~s ·which win
carefully safeguard· the ·safety of. this
loariby the Treasury to thfi"-taxpayer.
Mr:· PTesident,ihoi:ie·.tb.at the Senate
will approve this bili tOday" so that we
can get it to conference and get it·passed
in the· remaining days· of tbe ·session,
Mr: MUSKIE, Mr. Presid~ht,' I aSk
unanimous .consent. to hll:vep~ted·at
· this point iIi ~tbe .R:i;;coRi> fiiJetkr.l~Oln
Chairman Hamer. H. Budge; Ghainnan
, bfthe SEC,- datedOctob~r"2;,j~70,·With
respect to.the ad~cp~·~C::j<9i:tpe'N~9~.~~t
would.be ·ere·ated ,unC!er·. ~h~·;:.pepdirtg
measure,aletteT.ofrqrp ,Cp~rl~·:'.:ii!~ ~w.~!'ir,
Acting Secretary o(:tJie:iI1:e~llr1r; urging
the paSsag~·'o:( ·thepenilingfr\ea:sure;: aDd
i·le"tter·froiri· Robett;·W, Haack, presi-
· d~nt _of the New 'YoJ;"k. St.o"t!kExchange,
dated October 1, l!i76_r-l.~
4.#_L
I ,IF; 0 DetembeT ] iJ, ] 'Ff U CONGRESSIOT'.)AL RECOHD - SENATE ·10871
PULLed
P[RctN1AGI [II Ilkl,'.: 1,\'1111 tUSSIS against IT;-~ J-bupt L\.' Co .. [or example. ( .. u~td brink of financiai i11S0lVl'I1CV, While
FI J05~ cd ~/.tJnf: :i2'7 million which could In many smaller firn15 have fllher 'dis.solved
IUlf::: :::: lin Jd Itt 101]
110 wny bE: :1lHIClprlted in advance.
,0 V!O_
Mr Halpl'i DeNunzIo reached lhj~ s::.mE
or merged with their compEtitors. Only
conclu!:Jon In Its.pondlng to a question plJl 10 large infusions of capital have saved P. J.
Secutily
JE:ct \0 Commi,!;~jon him by Senator ELlmund Muskle in a lEtter Dupont and HaYden-Stone Jrom finan-
'or HbJ~ bU5ine5S cial run. Goodbody iY Co., OUr Na lion's
01 AugUEI ~ jn \\.'hich Senator Muskle asl-:E-d
e tH-:En Monlh ending losses
"The t};U-nt 01 financial eXp05UJf, In fifth largest stockbroker, has been ab-
'S WerE
e werE
dGllar tern)s, which firms. . might cre~ sorbed b'y Merri]] Lynch, contingent up-
66
ate either to the Exchange or the new S]PC." on and mdeml1lfi ea tion payment of $30
list on ,:plil __ •••. &9
6\ 47 To which 1\1r. DeNunzio repJied in a let- mllllon from New York Stock Exchange
'pteIn· raJ'------ .----- .. 51 ter 01 Augun ] J:
17 member firms.
~atlo!J!: 'J)!L-----------
73
33 "1 am sntisned that nobody can make 8
'::;~;;r.::" '5 75 realistic or usefuJ evaluation of dollar terms
The insolvency of a Goodbody or Du-
7 firtr,.o pont could create havoc in the securiLies
:ed la- ------------------------------- of expos.ure, whEther upon ~he basis of cus-
tomer protectlon without ]lrn1t as to amLunt industry due to the inter-relationship
)ID arE 'J'bE security conunisE.JOn business was
,il5olutely dreadful in the man lh of August (as in an Exchange Special Trust Fund between broker-dealers. The real losers
'17=
~b]eID.3. ;.5 ~51fjj of all reporting firm!! had security liquidaUon) or protection of a customer to WOUld, of course, be OUT i'ra1JOi1'ssmall
the extent 01 a ~50,000 limit." i~1TIlJ':iyur-WrrOlJTha-ve-'jrrvt'st"ed
e fi...-n-J.5
primarlly s:erv- OUI expErience in connection with CUr- a "slgnmcant portrmJlJr-their savings in
lette:-,
ic customErs WErE even worSE. A rent liquidations jnvolving the Exchange's
six 21"02
Specj~] TruEt Fund bears out the accuracy
securities. It lS lmJ'feJ'll·nre-thartnese In-
tbe J3 ., •.-.ou~.. -o 92.5% of the rElail firms lost money . v-estors, who are lJ~tr;rcKOoTIeor a
leT ac- seeur] ty con1nlHElon business in of tIllS EtaterDent, as estimates of possible
liability made in advance of or after the h€a}tny economy, ----oe--runy-pfOCecLed
r firlJ1~.
gmg po liquidation was commenced, have been sub- agamst brokerage firm failure5. They
13 bEn'"
'should not be forced to Sear the brunt
ject to subEtantial variation during the early
thE!:P. part of a liquidation and until an audit canof this administration's disastrous eco-
be completed. nomic policies with which this Nation is
The Exchange did, bow ever, make a de- now forced to live.
tailed study earlier this year of possible fu-
ture trust Jund size. We concluded at that Recognizing the precarious position
time that a program for the availability offacing the, securities industry and our
a $BO to $100 million customer protection Nation's small investors, Senator M.USKIE.
fund would be SUfficient for tbe needs of in June of 1969, introduced the bill be-
the foreseeable future. . fore the Sel1E.te today-a bill to insure
This determination was reached by anaJyz-
investor accounts held by brokerage
ing items relating to member organizations firms in an amount up to $50,000. During
number of firms on the spe- such as the gross income of member ar~
ganizations dealing witb the public, a cal-
hearings held before the Securities Sub-
list, as explained previously committee: of which I am chairman, it
and the magnitude of culation of those firms' mean net expenses.
n·~,,"c.n+"" by the firms. as a group,
was suggested that a securities industry
. and comparisons of liabilities, capital, si.~e of
has been the case during .firms and thejr gross income over a four- task force working with the SEC 'the
s.
year period. Treasury Department, and our sub~om­
a response to the second Based on these analys·es. we concluded that
mittee give further consideration to this
opinion on tbe adequacy a program as proposed in tbe SlPC hlll, lead_
problem, This bill before the Senate to-
ing to a $150 mill10n fund sbould be suf-
million} and suhsequent day is a result of these deliberations. Mr.
ficient for the foreseeable future. This con-
. '. ted fundJng of the Ralph DeNunzio, Chairman of the Task
·""'''''Ttt.tp,< Investor Protection COT-
clusion, in our opinion, continues valid today
and in tbe future. Force, should be commended for his
tb moo.ure the possible
to SIPC is to review wbat Recent events in connection witb litiga-leadership' in this' area .. The proposed
ents might bave been re- tion surrounding liquidations wbicb are legislation not only. creates lasting' in-
heing handled under the Excbange's Special vestor protection' from il1501vency but
. the legislation h·ad been
d-July, 1970 wben th e pro-
Trust Fund procedure bave hrougbt into also, for the first
sharp focus tbe need for tbe liquidation pro-
time,
gives the SEC the
was first filed in the House power to regwate the use o{'free credit
cedures wbicb are included in tbe SIPC bills.
Tbe appOintment of a liqUidator pursuantbalanc~s and to prohibit the hypothecli-
effect since July 15, tion' of' cusl;omer'·securities. By ali6wmg
ator would prob- to tbe procedure in tbe SlP bills stays. any
'o"n"jr,+prl in tb e case Of only
the SEC to correct any· abuses which
proceedJngs under .,th.e banJr:ruptcy laws so
of . tbese firms ,are tbat customer accounts can be deJlvered outmay' have occurred in the:Se"are·a.s~ s,
promptly wbiJe a llquidatioil using Special~34.8 COUPles investor insurance withse-
even If SlP.C funds had
Trust Funds is voluritary and is dependent curities industrY ref6f'm.. ..
tctal amoUnt involy;;d
upcn the voluntary forbearance of credi- . AlthOligh the cotporation adminiSter-
been limited tc a' few
tors of tbe firm. .
I bope ·tbat we have· answered tb~' twoing the' insurance progtarn--will be able
the most' finandally' ad- to borrow up to $1 billion from the US.
questlon.s raised by tbe .Commlssjon stalL As
e 'history of ·tbe securities ':TieasUrY,an'occui-rence which' we ~ll
you bave expressed on ·,.a .. !lumber of. pc~a­
'period from JuJy' 15
sions, public confidelli:e 'In tbe Nation'shope: will
n.ever·Qcci.Jr, ·thefirst $150 mil-
IS, about 109' NYSE
to
securities markets Is important 'lion will:be:iaised'so)ely: from 'assess-
tb'e: econ-
omy of. tbe Nation: The' SIPC bJll will go
a long way to impr6vlng and restoring the
'rnent-s
fnad~ uponmeinbers of the secu-
rities indu;st.r:y.In addition, the DireCtors
publiC'S confidence in our markets, 'Jf tbe
of the. Corporation will consist of ·the
SlPC bl11 is not passed QY tbe Congr~~s, this
Chairman oJ. tJ,ie'SEC, the Chainnan of
:will serVe ·to diminish public. confidence .and,
.the Federal Reserve Board, the Secretary
tbereby, Intensify the finanCial problems of
broker-dealers: ...... , .of the Treasury, and two members of the
Sincerely, :securities industry. This preponderance
ROBERT W. BAACK.
of public direCtors will, in my OPlmon,
Mr. WILLIAMS of New Jersey. Mr, insure against. any abuses in Treasury
. presldent,S. 2348 would establish a'Fed- 'borrowing. . .
eral Broker~Dealer' Insuranc Cor ora- The 'neetl for S:2348 is obvious, Srriall
investors must be protected. Public con-
fidence must be restored in our Nation's
. securities' mark1:ts. .
While I, for one, am not satisfied with
each and every section 'of this proposal
especially in thear·ea.s·of free credit bal-
ance regulation, 'capital requirementS
and assessments based upon" risk, ' thi~
bill certainly moves in the right direction.
' ..
 CONGRESSIONAL RECORD - SENA TE
"leW])' created they ~re ~Ul1 far lrom
- lully funded €:\'en where on adequate
oJlunding }13.!: been underLokE"n. 1n
t t.ax regulations preclude the
of past sErvice liablliUes in jL'~S
gbout twelve years
n result t.ErmineLlon 01 a penslon plan
w eaD that the Junds accumulated are
to pay luJ1 pensions even to those
ement age, let alone to protect
of other workers who may find
security lhey thougbt lbey had
for .their older years, through the
01 pension credits, has dJs-
ighl.
ance proposal would insure t.o
"at the pensjon security which he
come to expect; and because of its
g feature would nol result in
of 1 cent of public funds. It
a worker's inVEstment in a
just as hlS savings are insured
a s~.vings bank or a savings
tion by insurance through a
tion. It would also in-
of the fund to make
to bim Just as a mortgagee's
ve' future mortage. payments
Federal Housing Administra-
jmportant, jt would recogp.1ze
by protecting wage workers
'fortunate enough to have
jn··stocks. . under the direction of the 'Secretary of Labor
R1GHTS PROTECTED
coms,ervat.ive actuarial study of
avallable, tbe maximum
. set ~jjy' the .bill Is adequate to
CT.edjt;s earned under private pen-
-against tbe .risk of termination.
ar~ concerned about the adequacy
sbould be furtber reassured
. it is bigher. than tbat set
otber proposed legislatIon
If tbe premium proves to be
. ~r.e prpvisi9nS to. red~ce jt.
·tbe premium' sbould
In,'''"'"!p;nt...· tbe bJll establishes
protectIon.'
. would' go to those
retired and· who are re-
to those who are ellgi-
tbe terms of tbeir plan
. normal retirement
for consIderation would .be
. to retire by virtu of e fmided liabilitIes.
specified in tbe plan
':Tf,tl:relTle,nt,:· If early retirement is
sixty, ·the .usual age for
would be used.
reinsurancewo1,lld .be prpvided for
·.in .an order to. be
tb e .$!,cret(l.ry. of
. c.e ... "
'provide tbe
penSion
earlier as' e ultimate goal
Tbe desirabill(y··ol. such ex-
if at all feaSible, need not
the .degree 'to whIch pen-
·are .to be covered is·;not made
" iiesting prp171sions of the
_d'~'='V~ ,tllPqs;. ili.eguestIon .of
any, 'should 'be taken to
.vestIng ·of. pensICiri'''Hgbts
'~lJ"'~""~". jJiiins need not be 'con-
~ ". "! • -"
der the ]ntE'Tnal R.tVenue Code ;:snd which
have befn in operation and h&v(, paid pre-
miuITLS Jor 2. specll1ed number 01 Yfan be-
lore t.he in~urancE became EflecUve. The pTO-
gram wOlJld exclude "pay ns you go" plan!:
but would include a]] funded plans whether
the lunding payments are deposited wHh nn
insurance company or in a trust lund, The
program would cover those plans which pro-
vide Jor terminal lunding. those wbich pro-
vide for the Junding of ell future servj-ce ]ja-
bilitles but only pay interest on unlunded
liability, and those which provide for the
funding of both past and future servj-ce Jia-
b1l1Ues. Jt is recognized, 01 course, that since
these different types of plans bave signifi·
cantly different levelS of fundtog, that the
unfunded liabUities will vary from plan to
plan. Since it Is this unfunded liability that
wi]] be jnsured, the amount of the jndi-
vidual p],an's premiums will be computed on
the baSis of the amount of unfunded
liability.
The bill does not propose "ny funding re·
quirements beyond tbose already imposed by
the Internal Revenue Code. Bowever its ad-
ministration will lea'd to the accumulation
of experIence which will allow an Informed
JUdgment on whetber any additi{lDal fund·
ing legislation is necessary. Such legislation
might be desirable if It Is determined that
the reinsurance ~cheme would progrEssively
become more expensive because -of the large
unfunded liabilities of agin'g firms.
E. ruSKS AGAINST WHICH '.fEE SYSTEM SHOULD
INSURE
A pension reinsurance system must ta~ e
intD account all risks to earned pension
cr'edits if it is to.provjde a meaningful sense
of securlty tc tbe employee. These rIsks fall
Into two categories: (1) 'risks 'to' th~ plan
wbicb depend on the degree to wblcb It Is
funded, and (2) risks to tbe plan which'de-
pend on forces outside of it an'd whicb op-
erate irrespective of the extent to w:qlch)t
is funded. .
A clear example of 'a risk 10' the . .first cate-
gory wD.uld b~ tbe case 01 a partially funded
plan terminated because of tbe bUsIness fail-
ure of tbe employ·er. In sucb a case tbe risk
Insured against wou'ld be its illlfu'ilcied !la-
bility whicb is attributable' to tbe rlgbts
whicl,1.are -insured. As previQusJy"po1.pted out,
the p!.emium for. insurance of· tbj~ rlsk
would be determined by tbe 'amount of un-
SInce the t.einsuranc~ plan is basi~alJy u'n-
derwr'Itlng tb'e beriefit ievels set f{}rtb 'In tbe
plan, tbe amount cif tbE unfmided llablllty,
both for tbe purpose cif tletermillJrig the lia-
bility' insured and tbe premium charged,
would be determined on the ·basis. of a. set
of standard .actuarial assumptions and .pro-
, cedures. These· aCtuarial .. aSsuInptions and
, pr<icectures ,,'auld be detehnlned 'by tlj'e Sec-
· ret~rYoi:i .tbeb~LsOf mEetfugs''';';;tb the.e x -
pert· Advisory Council esrnb!lsbed' speclfi-
: 'cally f?T the purpose 'bf i:onsultation on the
: ·proposed.'program.
· .'·;.Wben ,tbe employer. has 'not ··gone out of
·.:busines:s, but ]:las closed ·a plant'.or reduced
· tbe; :.WOI-Jr·: .force, .cpntInu.ed funding of:·the
· {j~t~i~~Nd:~~~~~tt~~:~e :~;t::Ji:i~ihth: tionnot,qnly
renlBYning ope:r:ation.:Toprorect"the rights of
botJi' termiillitiiig and contInui:D.g employees, American.workers.is . equally clear ...:: .
·tbebm·prii{;lqes srillfcl.ent tiexlbilltY'so.tbat
· where tl;ler'e'is a 'partial termination as deter-
niIned iin. accordance ,with Internal Revenue When i P.resident ·Nixon spoke to ·,this
Sernce Reguiatlons (CDde, sec. 401 (a) (7),
•.ap appr.9PJ:Ii'ta.p!jrtion of ;th.!' -!,ssetsgpll.!i1 be probleiTI i.n his.ecpnp,mic speech o{Jurje
· !i.l19.catr!i ~o }.I:ie: te~,:,tinr,:".emjJ!9y,~~~:: The 17, imd::called·.it one··of the measures
relruurance would··then 'pick up any addl- needed to ;'he)p..the.people who need'h~lp
· 'tfc":!"l :u.abhity':Qh oohaJ! of·those·employees. ·.most ina periOd. of economic transition,"
· The':;employer' .v.ould "contlnue operation. of .I :qillckly.,indicat"ed . my support, ..Alld it
..~is 'plan, v;:ltb;:tbe.:.rerpa.1p:.ing< B.9sets. g~ ,b!,- .,h~ ~eep ll};}; pje"~si.Ir-eto support the' pre-
N!!i,?f.J:p~:,co.~~in~'i'.g~P'B!f!Y,~r.~···, ., ,:.<
.. Where there 'is no :,te1;tD.inlitJon; .the .]lro-
:gfiuri ;~F)u~d:n'cif~o~'~llj 'Qi, :ap~!ICabi~but _Ship
· If tbere'· 1s,·a severepeductlon' in :the work ,-i.ro.m :.Main.e·. (Mr ..".MusKm) .. Senator
.. ::fnr.r.A· 9:ue..,td~b?Ss·B:tI6n .pi :So;rne .operations; 'It " MUSKIE :was .:the .priginal sponsor: of .this
, :.
~: :'.~ i " ' • .:.,. I : •~:;: ..
40879
j~ contemplated the progran) wuuld include
TeguJ3tory provIsions pfnnjtLlng B.s.5umption
01 a pllrt oj the ]jabilltie!:. T11e Eeverilv of 3.
redueUon in work force would be mea-Elued
by whether the per capita) past service amor-
tization payment on a plan exceeds some
specifled percenta.ge (lor exaD1ple, 200 per-
cent) 01 the initial per capH&J past ::E.rvicE
amortizaUon payment. The re~nsurance
would assume any past service I\ab1l1Ly
financing required wJuch is in e:Kcess 01 the
::pecified perc en tage.
A second type of risk different from tbose
discussed above and WhIch should be indJ-
rectly insured against, Is the rIsk of de·
preciatlon of the funded assets. The overall
degree of rIsk involved In such situations Is
probably very slight. However, the bll] would
allow thE establisbment of formulas and
st&ndards concerning the assets which CBn
be deducted from gross ]jablll ties to estab-
llsh the unfunded liabilltles. Assets of dubI-
ous value or beld without adequate guaran-
tees of fiduciary responsibility could be
wholly or partially excluded from calcula-
tions witb tbe result that the.fnsurance pre-
mium would Increase. The bill would tbere-
fore do its part In promottog hIgh stand-
ards of adm.inistration and Investment.
F. ESTAELISHMENT A'ND ADMIN1STRATION OF
REINSURANCE'·' SYSTEM
Tbe reInsurance program should be placed
6ince his department 'is responsible for tbe
protection of workers and already collects
detailed annual jnfOTInation on assets, ·costs
and actuarIal Jlabllitles under the PensIon
and Welfare Plans· Disclosure Act and dupll-
catIon .of repDrting can thus be aVOided. Clbse
cooperation wllJbe 'reg'uired witb the Inteic
nal Revenue Service Which :wouldlmpose the
sanction bf disqualification ·on plans which
do not partIcIpate in the program 'and wblcb
could make a plan ineligible for the program
if it .failed to satisfy its minimum funding
standards. CDoperation' woUld .also be desIT-
able wltb tbe Social Security Ad.m.lnistra tlon
wbicb has' the machinery to notify bene-
ficiaries of rigbts. Further. tbese two agencies
also bave usefu1 techri..lcal expertise. . .
'The 1egLslatlon...·!iutb oI-izes the Secretary to
borrow moneys . from . tbe Treasury for ·the
establishment. of' a rein.surance fund. This
money would be .repaid by tbe premlums
wbicb th"fund would receIve and tbe.legis-
lation would thereby achieve a self-financ-
ing status at no cost '.to the ·publiC. .
- ." . . . ' . ' : .- ' . . . ,. ,',
. Mr. HARTKE. Mr'. Pre.sident, the ·leg-
islabon the:Sena:tor ... from. Maine (Mr.
MUSKl.E) would establish....-S.· 2348-is a
fed erally .chartere.d· . corporation to pro-
tect securitiesiny.e.'stors against losses re:'
·sUltmg nom nfianqlru.,llj,ilure of broker-
'aeaJer fiJIllii ..:,J;'l'ie,·:a)!lenament. I ·eifef ~
woUJdpJDtet!L . the . private .pensions of
millions ·of··Am.~.rjc!'Ul workers. through
;Federal insur.anc~ of t~eir·pension plans.
I,.~believe the;,n~\!d :for iJ1surance. plans
~l\ich .would. pro~ct. both, the .s!'curitiEis
investor agd the average wage earner.is
Obvious. :·The ,justice of .0ifeIing pro tec-
to' ·iityes"t"ors, bVt also. to
. itgoeswithotifsaYing tha't'l applai.id
the basic intent and purpose of S.· :;1348.
.·vious ;initi!Ltive· anCi·imaginative .1eader-
Pi.: ·.the':d.iStulgUlshed.:jJ.1T!or.Senator
: -:0;.':':' -:~ •••• :: 1 .' ~ .J
 ."I,eember ] 0, ] 970 CONGRESS10NAl RECORD - SENATE 40885
./-,
. ,could ag3in like to pay tribute tu the program as the Pick-SJo3n MissourI Basin the investing public the lype oj prolec·
program; tion it needs,
,,:'Bt.or from Texas IMr. YARBORO[)GH), S. ]£)99. An act to nllme the .3uthoriz.ed lock
~.-! fWjJreSEnLallves BUSH D.! Texa.s llJ?d and dam No. )7 on Ll1E Verdigris River
J commend Senator MUSH1E JOT origi·
>,0 f,1JER of New York for thelr le"dersl1Jp in Oklahoma J07 the Chout-eau JamHy; nally introduclJ1g this legisi3tion ~nd Jar
~'~eCUJing passage of this biD. The bill S. 1500. An act to name the authorized Jock the excellent job he has done on its be·
.~',;, 1.l1e Congress Qf the Uruled Sta tes !'tnLl dam No. 18 on the Verdigris River hajj,
. .-t·- eCo rd in the bellef that all mothers, in Oklahoma end the lake created thereby As 3 member of the Senate Bank.ing
:,c1 ~illter h ow poor, should 11a ve the jor Newt Graham; and and Currency Commlttee, J wi); continue
.' to determine t.he spacing and num· S. 3]92. An act to desJgnate the navigaUon to work with Senator MUSK1E and the
lock on the Sacramento deepwat.er ship chaD-
of their children, a right that the nel in the State of CalifornJa as the William
other members vf Lha t commi tt.ee to seek
a]ld aflluent mothers already have, G. St,Qne navigation lock. ways to make sure tha t the investing
tbat further researcD should be car· publIC lS gIven maximum protection,
on in t.he field of basic reproduction, The message also announced that the Just as I favor legislation to !=)rotect
biological, gynecological, and con· House had agreed to the amendment of the investor in the securities markeL, so
e technology, just as such re- the Senate to the amendments of the do I believe it fair, just, and essential
should be pursued in the other House to the bill (S. 3431) to amend sec- that we have legisJa tion to protect the
fields, The importance of this leg- lions 13(d), J3(e), 14(d), and H(e) of worker whose investment is in the form
can not be minimized, It rep- the Securities Exchange Act of J934 LTJ of his contribUtion to his company pen.
a much needed step forward, order to provioe additional protection sion fund,
ARBOROUGH, Mr, President, I f or investors. Currently there is no legislation that
teful to the distinguished Sena- will protect a worker's penSion in the
Maryland for his kindness event a company's pension plan Jails.
SECURITIES INVESTOR PROTEC-
I hapepn to be chairman of Senator HARTKE stated that his stUdies
TION ACT OF 1970
tee and was in a position show that between 1954 and 1969, more
the progress of the bill. The Senate resumed the consideration than J 0,000 company pension plans have
d go to the Senator from of the bill (S. 2348) to establish a Fed- failed, resulting in "100,000 workers with
's persistence and willingness eral Broker-Dealer Insurance Corpora- reduced or no pensions at all.
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 will gO under,leaving thousands of work-
VITS. Mr. President, I just wish tDe last 2 years' the general economic ers out in the cold.
I introduced the administra- situation in the country has steadily de- On September 29, J 970, Senator
which contained many of the teriorated. Interest rates are at a near HARTKE introduced amendment No. 967
in the bill now before us to record high level, unemployment has to S, 2348. Senator.HARTKE'S amendment
and expand theJam.Uy planning soared to 5.8 percent and tl;1e latest cost provides,for Federal reinsurance of 'pri-
. of the Federal Government .. I of living figures show an annualized in- vate pension plans. The Hartke amend-
Senator from· Maryland (Mr. crease of 7.2 percen t. ment is designed to afford to the work-
has rendered a signal service All segments of the economy have been ing man-".who does not have the funds
cNmrn.r'V.in the way he'has worked severely jolted by the economic down- to invest in the stock market--the same
to 'get the concept of family turn. Needless to say, the, securities in- type· of protection that is extended by
accepted. I joined the Senator dustry is no exception. Wall.St'r"et is in- S. 2348 .to ,the securities investor.
(Mr. YARllOROUGH) in work- deed in a crisis, as the cover story on one The only form of investment that the
out in conference. I am very of the national news magazines declared average working man makes is his con-
suCcessful. a couple of weeks ago. ' tribution to his company's pension plan.
GS, Mr. President, I have Over the past several months, approxi- I agree' with' Senator HARTKE, 'that we
mately.150 brokerage firms throu'ghout should act now to protect the American
Senator -from New the country have been forced to liqui- workers investment. J support. the
was the ranking mi- dat'e. In my home State of California be- Hartke amendment and I urge my col-
both of the Health Sub- twe,en July 1968 and July 1970, eight leagues to give it their support. .
of the full committee. It brokerage firms became insolvent, result- Mr. HART. Mr. President: I shall be
t,of'many that,if.it had ing in a lossto California investors in the very brief. I simply rise to commend the
the ieadershp of Senator neighborhood of $2 million: " Senator 'from Indiana for bringing' to,
. administration might not The failure of one of the. country's the floor .-today this amendment" which
its initial position and sup- largest brokerage . firms w'as narrowly provides an opportunity, as J see it, to do
legislation" Senator JAVITS' avoided by a inerger arranged at the lIth something for the man about whom so
eadership .,in this particular hour. many speeches have been matle-'-theblue
crucial to the successful en-. :All these failures and nearfaiiures add collar, "honest; hard-working American.
this Jegislatlon.'I think his up to:bne thing: a.1oss ofcbnfidence by 'The .right of a'family breadwinner'to
. be', recognized and com- the mvestiilg p:1b1ic in the securities in- have an' adequate pension is now rooted
dustrY.. . deeply'jri 'our tradition. Social security
'1 am deeply concerned .over the plight benefits are accepted 'parts of thesys-
of these investors. Many' of them' 'are tem.' Private pensions as a supplement
small investors who, have been literany to social security are ,today strong un~
wip,ed (lut 'because .there.IS 'Db Govern- derpinning, for the. retirement needs of
mentor industrif;unq ,to'protect them. millions of our fellow citizens.·. In fact,
Investors who have not been wiped ol!t some 2J. ,million workers are covered by
are unable .to get 'their cash"orsecurities private pensions on file W:ith the U.S,
back because theii 'assets' are 'frcizeri in Department of Labor.
from the House of Rep- bankruptcy proceedings which might The issue before us is how we can 'best
by:1i1:r., :J:?erry, one: of its take years to resolve .. ' protect the private pension plan from
8.ru:iouDced that .the House sudden, unexpected collapse, This ianot
witho:Ut,ameridinent, the f01- S. 234,8, is designed to protect investors
f thS t ' , . ' , againstlosses ,ct1.1e to tM nmilfl'! (JI brojrt:!: an imaginai'y fear-It'happens; ina,pe-
0 . . ,e" ena.e,.. 'CIealer'firms. Under lt, a nonprofit corpo- riod :of eMn'omic recession it happens
act"tp ,provide ,tJ1atthe reservoir §tion woUld be sef~p to mamblill ~d increasingly. Plants shut down,' a cbm~
F~;:'yk l~~ .~~ 1~r;:'1,ntotb": ad,minister ,an insurance ftind ,to Hrotect., pany goes bankrupt, 'a' corporate take-
. River; Ala.;'" shall herealter be ~stomer s losses llP to $50,000 result- over, closes down ,an oldline operation,
J,he W!ll1am ,~';rull",Dannelly Res- !?g from a broker ~v- There are' dozens of, economic, reasons
;t. ... ........ ency., , . why: a: particular 'operation can "cease
to designate the compre- 1- SUpport this legislation and' believe operation' 'in good times and" bad. ',What
River Basin development that it is a good firlt 'step toward giving h'appens to·the pension' plans 'for the
 40.s~O
10 Cll1111113te those unsafe 01 un~U\1nri prac-
lICt5
.~1JCOAJIilillJ;;. Mr. President, before
expl2.ining the amendment, 1 commend
t.he fine leadership exercised by t.he Sen-
at.or from Maine (M.L MUSE1E) in bring-
ing this important and vital legislation
to t.he floor.
This bill is of crucial importance to the
21 million Americans who own common
stock and to the additional millions of
Americans who own stock indirectly
tllrough pension funds or mutual funds.
TIle recent wave of failures on Wall
Street has sent shock waves throughout
the financial community and threat.ens
to weaken the public's confidence in our
capital markets.
The legislation reported by the com-
mittee will provide the custom'ers of
-brokeTage firms with proteCiToi1-ii11he~
CONGRESSlONAL RECORD - SENATE DecenLbeT ] 0, ] 9'10
male]y responsible For lhat reason, \ve a"eept this amendm en t. 1 L is b&Sed u
11ave a particul3J obl!gation to provide a,s the sClw1d preceden Ls Whleh haVe :or.
much protection 8S possible. eSLabll.shed in other Federal ll1l'Ur eeU
Moreover, the SlPC has no authorily programs. 1 see no reason to deparL fan Ce
to revoke the insur8nce of a broker- t.hose precedents in this legislation ror.,
dealer ii it engages JJ1 unsafe or unsound do c·therwise would open t.he insur~1'o
practices. By way oj contrast, the POlC, Jund to potentially heavy losses and eE
the FSLlC, and the National CrediL the fWlds provided by the U.S. Trea.s~k
Union Administra lion can revoke the As long as the Federal taxpayers ":
deposit insurance of a commercial bank, standing in back of the SJPC, he is
a savings and loan association, or a credit tJtled to reasonable safeguards. In
::;0
-
union if it engages in unsafe or unsound view, it would be unsound and un~S
practices. While this authority is rarely to establish an insurance program Withe
used, it does strengthen the effectiveness out. at the same time providing for sp -
of the Federal government's supervision cific standards of eligibility and for E-
over insured bank.s, sa vings and loan as- vo"mg ~. tlle msurance
. where necessar~
sociations, or credit. unions· Thus, the and in the public interests. :ry
potential losses 1.0 the insurance fund Th.ird, my amendment would TeqUir
and 1.0 the public are minimized· SITC to compile a list of unsafe or un e
DUring the committee's executive ses- sound practices by brokerage firms and
sion on the leg isla Lion, I offered an report on what actions it is t.aking to c

'--evenrtne-bTOkera:gen:ffif-ran:s-:-custom::~ amendment whiCh would have required eliminate those practices under the au ".
-eTS who rnamtam crean oalances or se- the SIPC to screen all broker-dealers thority of existing law. The SJTC lIiuS~'
curi lies with their broker would be in- and reject thost Wll0 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 legisJ.ation which may<
brokerage firm failed .. This, of course, has This is the same procedure which was be added to curb unsafe or unsound prac:,:'
been modified by the McIntyre amend- established when deposit insurance was tices. This report would be due in', :(;':':
ment. The legislation is similar in con- set up for commercial banks and other months. ., c.-,
cept t.o Fe.deral deposit insurance pro- financial institutions. However, in the The Senator from Maine (My. Mus~,:'
vided to the customers of commercial case of broker-dealers, there are certain E1E) has indicated there are a numbehif':""
banks, savings and loan associations, or practical difficulties. Given the present questionable practices engaged in.bY:::;
credit unions. It insures that the invest- climate of uncertainty on Wall street, bmkerage finns. Now that the U.S. Gbv~'
ing public will not be calJed upon to pay if a broker-dealer were to be denied Fed- ernment is making a direct financii(·
for the financillJ troubles of brokerage eral insurance, such denial.could easily commitment to the. securities industry".
firms which overextend themselves. trigger a 'run upon the brokerage firm. I believe it is essential to eJim.inate 'ant;;':
In most respects, th.e bill reported by If the firm were forced to liquidate, !ts unsafe or unsound praCtices as sOOJi"-ii:S";i'
the committee is a fair and . workable customers could suffer a severe financlal possible. -.'::::f:"i
bill. Howev~r in ·my view there is one hardship, which is directly contrary to My. BENNETT. My. PreSident, willt1~K~:
serious defici~ricy: This is ·the lack of the objectives sought by the legislation. Senator y i e l d ? ' ,i,":"
membersh·ip. requirements. For this reason I withdrew the amend- Mr. PROXMIRE. I am happy to yhlla'.';'
As presently 'drafted, all broker-deal- ment. However, I believe it is possible to the dIstinguished Senator from utiilli,:';'
ers or members of national securities ex- to establish membership requirements to . Mr. BENNETT. Mr. President, the seM9
changes \vould-automatically be entitled prote-ct the solvency. of the insurance ator from Wisconsin knows of the cotr:i:';:i
to membership in the Securities Inves- fund without creating the psychological cern of the Senator from Utah that iriicii:}:
tors ProteCtion Corp'oration--':'SIPC-'-and problems entailed by an iInD1ediate rejec- vertently his amendment might transflf7f
wouJd thus have their customer accounts tion. I therefore have sent to the desk some of·the authority and responsibill't:r:.":
Lnsured .. ,This lS'iL substantial departure an amendment desIgned to achieve these of the SEC to this new private corporii!:;:
from the procedures established by the ends. tion. It is my understanding this:ha:~)fi
Federal Deposit Insurance Corporation, First of all, the amendment would pro- been corrected. . "Wi',c
the Federaj Savings and Loan Insuninc.e vide that all brokers or dealers or mem- .. Mr. PROXN.IJRE. As I understand'iP'n
Corporation, and the National Credit bers of riational securities exchanges who the amendment specifically provides h:ii:l-tf:'
Union Administration. Commercial were in operation prior to the effective SEC can reject any action in thisTegafd':;;i
banks, savings and loan aSSOCiations, and date of the 'legislationwould b~ auto- by SIPC. . ,,«~"j.;'f
credit unions are'not automatically"en- matic'ally entitled to insunince as pro- . Mr. ,BENN:ETT.· So SIPC cannottii'ie1¥i'I
titled to.deposlt insurance'. They '~ii:l1:ist vided ill the·reported·legisiation. . an~action with. respec~ to anyone it isi#~~~
apply for insurance and . meet certain.SecondlY, new iJ.rms which 'were es- sunng or refusmg to' msure, which SE.e;;\
stand aids . hefQre .they 'can .be insured.. tablished after the effective da:te of the cannot review····:: '. . ' :. ''-' "{',,;
The'reai;ohis to protect the assets of tl:ie' leglslationwould berequiredtoapplyfor Mr. PROxMIRE. The Senator is c6~Zl
ir.lliuia~ce hind. If deposit insurance were insi.irance and meetcertaLn standards 'of reet. .,.;. :~:;.:I.:::. ,< ..:', :... ... -:<".1 ;'::?~~!~:'i
extended to.,ahy.financial institution re~ financIal eligibility before '.. they' were Mr.· ·BENNETT ... I thank the Senator'::;;"

se~:~rl~~~.:IPo:::.en~;.'Wi¥ _~~~~
gardless of its solvencY'or managerial ca~' 'givenlTIsurance ..These standardswoiild
pacity;·the,.losses·cQuld increase substan-be similar to those contained in the Fed- •.
tia]];\,. 'The#.~lbsses would; .ofcoUrs·e,'"be eral Deposit Insurance Act and the Na-
borri'e by the ,nicire soundIyni.an.igeei'fi- tionalCredit Union Share Insurance Act Mr,MUSK;:r:E, :1 :havediscu.ss·ed tw#,M
napciali:riStltu't,ioris. Th~y woUld. be pay.,- which. :was reeentlyapproved by the Con- amendll,lent at :~6ilSi~ei-able Ieng.i.h ,:w1Alf'!~
Ln'g' tnejjr.emi'ums to support the insirr" . gress. The SIPC would be . dIrected .to the' Senator frpm .Wisconsin. The amer.n:l,/·i:
ancili:ir.ogi-~!n; ; . . ; . ' '.. , consider thehlstqry, financial c9ndjtion, ment unaertakes' 'to' Implement . arrierii'iS;":~
tn.the· case' of the :.broker-dealer ;'Ln- and. mallli.gement policies of the appli- m'ents th:ifv.,erEi;: added to the bill :~i;l,',\
suran~e' bill, .there .. is noway the SIPC cant, the economic adVlsabilitYof InsUT- coniniittee thatiiislire or St;ipplementtl11t','e
can reject 'QTokeragerums whO~preseht i1).g tfie applicapt without undue risk of insurance' program. 'I;he .senator .frQilt:.:~
an :undue" risk:tothe-msurance :filiid. It the fund,' and the general 'character and Wi~conl>ill:si.nce~·the bili was repci:i-t~p.;;{
is'som'ewh8:t ap,rucigoils to a,·.Jifi:!:-fnsur-. fitness cif the' applicant's manag·ement. has de'velppect this'mechanisrri to iIDiM7::;\
ance compan'y'ii;greeing .to insur(i'ail ap'~: These' are the same' standards' which ment that6bJect.ive.. ..... ' . <:',.;.\
~li~;:tritSwi,~Ij6u'fc-orj9:uc~iig:ln ex~ili.~.,., have peen applied foX. 37 years .by.;.the I recbrt@end that the Senate agree; 0>
~~9;n.~.PP',def. tJ;:ie~e;cU:~Ulll~tances,.:.tJ:t.e .l;i:fe., F~dera). DeposIt. Insur:lDce . Corporation tI;e.,~in~i:!!flen1;, . . . , . ' . ' .. " :~::,;j)
illS;urance..c,ompany wO)ll.d. soon ,go ..Qroke.. · WIth r,espect to commercial banks. I .be-· ··;t\\ir,PROXMIRE. I wish to say .torthel~
A.;.~ii):ljJar;;~~p~;n-Gial .thieaj:..ris,,'PTes~iited li~ye U:tey' ~0.P~t{tpte:a:·s.6und prEiC~dent .Senator:that, as"he' knows this 'amend",;:
to"the"SIPC':and :tathe .;U.$.; Treasur:l7 for administering the broker-qealer in~' njel,lt was. 'sciin'-eV6-h:,;t :dili~rent ':when .:;t;
whlch.is ob).igated to 'lend up to $1 bmiori' surance pro1lTam.····' ............... '.' .. m§t·propo.'ied It. The.Senator from Mrt.tri~,"i'
to·tri~;SIP<::iri ilifeye~.t':th,a.t.'j~'.~ciiiill_9t· ":Mr:Pn:sident;I Wo;.ucr:h~p~<tl?at. the cIid .. ~ggeS:t,a moderation or change::~".;
cov~r. If.l;;~O!>SeS. So; the customer is ultI- distLnguished manager of the .bill coUld' the 'amen Cln1im't 'Virhich I think made i~.;·

~.:~ ';. i:
 D,-((iiiiJer 10, 1970 CONGRESSIONAL RECORD - SENATE
Qn]p'DIiJ11En t, the interest on Lhe segre- plete the liquid;;Uon of t.he broker/dealer. activHy flnd daiJy turnover In thC-Sf :1C-
~BI,ed C~.sJl which wouJd be held wouJd It is an Licipa terl tha L even under thesE count.s will either cease or be ~harply
"UJj inure La the benefit of t.he broker- procedures liquids Lion of the broker / redUCed, It would appear t~1 bE 1.0 the ad·
~eB]er, and not to the benefit of the in- dealer could take some considerable vanlage of the customers and t.he trustee
., ,Lor, So we are not Laking anything period of Lime to complete. Customer's that maximwn fiexibiJity bE allowed ill
~~31' Jrom the investment industry; we securities which are held by the firm negotiating with such creditors to con.
are ·I.J'ymg Lo protect them, bu!. at the could well decline in value if the cus- Linue Sucll10ans, withdraw the secllnLies,
same time to protect then ctL5tomers, tomer were required to wait until liqui- and liquidate those loans in an orderlv
.b2t na mel )', the investmg publlC. dation was completed. The protection manner. ~l.ill2Lr~.£~)?L()L,t.b£.§.E£]J..Iltig~_.
rnt J thank the distinguished Senator. afforded by this bill could not be effec- b~ the customers could well be more val-
~)5,' The PRESIDING OFFlCER. The ques- tive lli11ess the means were given for uabTeLot:hecustomers -than'jJ:"pa'S'ment
Aat j> poD is on agTeeing to the amendment of those customers to promptly receive their l~the trusCeefOTLnEvalue-of
~ ·fis~, . tbe Senator from Massachusetts. securities. This is the basic purpose of thesecurnre-s-:-su-ltm-g-a-s-the-credjtor-has
The amendment was agreed to. the legislation. . tlfefigJ1LTh-foreclose against such col-
Mr. BENNETT. Mr. President, ] send The legislation contemplated that la teral at any time, that creditor will be
,BD amen~ment to. the d.esk and ask for secured and general creditors should encouraged to continue the loans and
,;' itsimmedlate conslderatJOn. 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-
e legislative clerk proceeded to read procedures of chapter 10 of the Bank- tomers. JL is the clear intent 0; this leg-
amendment. ruptcy Act were adopted to give the islation to facilitate and encourage such
r. 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
be dispensed with. pending liquidation. This' procedure is which will be damaging to the rights of
PRESIDING OFFICER. Without neceSEary to meet the special require- customers.
lion, it is so ordered. Tne amend- ments of tills legislation. Should these creditors also hold cash
will be printed in the RECORD. One power given to the trustee and accounts of the broker/dealer they are
e amendment reads as follows: the court in chapter 10 proceedings, not damaged and wouJd suffer no detri-
sec, 35(m) (6) at page 58. line 5. willch is not generally available under ment from a stay of enforcement of their
the perind after the wnrd section 60 (e), is the power of the court rights to use such cash as a set off against
inserting a comma and addlng the to stay enforcement by creditors of their a loan under section 68 of the Bankruptcy
g: '"but the Cnurt shall nnt stay as right to set off and, their right to Act. The right to set off can only be
Ii bona fide purchaser, as defined delayed, not abrogated.
enforce valid nonpreferential liens
the Uniform Cnmmerclal Cnde or in against property of the debtor. Tills stay This amendment would accomplish
applicable state law, the right to en-
such a lieD." 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
BENNETT. Mr. President, this tion, to allow an orderly commencement that the court under its stay authority
procedures for the of liquidation procedures, to pay the could not stay the rights of a '"bona fide
orderly liquidation of SIPC claims of customers and to complete stock purchaser" to enforce a valid nonpref-
whenever required. These pro- transaction orders of the debtor entered erential lien. Tills amendment merely re-
to be conducted as if they prior to the final date. Tills procedure ftects existing bankruptcy law as regards
section 60(e) ,of the Bank- generally, will in no way be detrimental the rights of a "bona fide purchaser" and
willch section is the present to the rights of c'reditors because the would appear fully justified to accom-
law goverDing liquidation of stay authority is specifically stated to not plish the basic intent of tills legislation.
"~'.'--,"""-~ Certain shortcomings have abrogate any such rights. Mr. President, I ask the manager of
apparent in seCtion 60 (e), as it However, in one specific instance, the the bill if he is prepared to accept the
specifically, to liquidation of exercise of tills stay order could be amendment.
/dealers. Therefore, this bill pro- detrimental to the rights of a creditor. Mr. MUSKIE. Yes, I am. I thlnk it is
that SIPC members will be liqui- Creditors who hold securities pledged by a necessary technical amendment, and I
in special' proceedings outside the the broker/dealer as collateral against support it.
Act. The actual liquidation loans where that creditor is a "bona fide The PRESIDING OFFICER. The
will be conducted in accord- purchaser" should not be stayed from question is on 'agreeing to the amend-
and as though it were being enforcing their right to immediate fore- ment of the Senator from Utah.
d under: the provisions of'chap- closure against such collateral, if neces- . The amendment was agreed to.
of the .Bankruptcy Act, willch sary. NO'rmally, these creditors will be The PRESIDING OFFICER. The bill
business reorganizatiOns, provided financial institutions willch hold loan is open to further amendment.
, that no plan of reorganization accounts With the broker/dealer to fa- lVfJ. 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
trustee under the BankruptcyAtt. 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
designed to allow flexibility, to and type of securities pledged. These the brokerage firms which have gotten
special heeds in liquidation of types of loaris arean'integral part of the into difficulties, that will not be covered
KeJr {Uleal,,'l:IS to assure, ,that the, cus-
securities, busineSs. These creditors run by this bill, and that a telegram of com-
receive proID.ptreturn of their the'same risk as customers of substantial mUnlcation was produced from Mr. Rob-
alid cash he,ld by such brpker/ detriment 'and loss in the event the mar- ert W.Haack,.president of the New York
ket value' of those securities falls during Stock Exchange.
the' stay period. The status of a "bona fide I think perhaps it would also be of
purchaser" for value is well established ·help to us if a telegram which I have re-
in every jurisdiction and existing law ceived from the chairman of the board
should remain the 'same: as regards the of 'the 'exchange, who is himself a lead-
'rights of such "bona fidelmrchaser." ing broker and ,represents, in a sense,
:'As a practical'inatter,''the threat of those who will be paying out the money,
a
'such stay order byacciill't could well should 'go mto the RECORD. The telegram
is very brief,,'and I should like to read it.
openiXlntractual com- pr~cipitate.. sugh c!edit?~~ int~ C~g lt shows why I have bird-dogged the
t;U,LllI'''t'"''broker)de3.Ier.. SIPC,:wtn ??ch:,!~o~ ~d ~~!cP?:g "therr :rl~pts
Senator from Maine on this bill:
to the.:riglits of .the,icus- prior to,the fillDg of Ji.c;IllldatJon pro.Seed- '"AssUming the, SIPC leglsl!'-tlon, presently
to the extent it 'has advaDced ' ilJ.gs. 13.ecau.se 'of,~he natuti3;of .these loan ,p~ndlng lIi':Congress becomes ·law, I will'rec-
to the trustee and stand as a "accoimts these' creditors would in most ommend to ,the "board of governors that ,the
creditor in ,the liquidation pro- ,cases be aware that a broker/dealer is in exchange provide assIstance. 11 necessary, to
Finally, the trustee shall com- financial difilculty. In such instances the, the customers of the First Devonshire Corp.,
"'-/4 . \ n~ IL-\- '.4Wc - ~(p
SECURITIES INVESTOR PROTECTION ACT
AMENDfViENTS OF 1975

· "; HEARINGS
, BEFORE THE,

SUBCOMMITTEE ON CONSUMER PROTECTION

AND ;, FINANCE' "
] , COM~{ITTEE ON
:"--,.
,
:OF THE
'" ,.,

INTERSTATE AND FOREIGN ,COMMERCE'

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

, H.R. 8064';'
A 'BILL TOAl\~END THE SEOURITIESINVESTOR
PROTEOTION ,AQT OF 1979 ' '~ , ~ ';
,', ;', ,:. ,~- \~ 0 ::L-t\ ~1; \\;;:\>:,: l;:;,~
" , OOTOBER 20, 21, AND, 22, 1975" '

,'. ""'S~rial No. 19i1~t0;t9T6

~~:.~:;•• \ :::.. -.- ," " ,. .
',' . ~~~'~.() ,f"; ~. ~. ",~\,\ll
f,!...;1. __ "'-" -_
~[
Printed for th~ use,of .the --
_',(Joillmitt\,e o;:tlnte~state lind F?reipu'C}Oillillerce

1, '

:-,

I \ _'
 Mr. STUCKEY. Our first witnesses this morning are Ho11. HughF.
Owens, Chairman of the Board of the' Securities Imiestor' 'Protection
Corporation, and Mr. Theodore F. Focht, STPC's'GeneralCou:D:S'el.
Mr. Owens hasapp,eareabefore tl1issubddmmitteeasa Commissioner
.'ofthfSecu'rities ana Exchange Commission, but:' this :is his first' a;p-
'pearance:As Chairman of SIPC, Mr~Fochtis,'a, formE;r'member 01 the
jJr~feSsio:lal St'iff of this ccimii~itte~ arid played an iml:lOrtant~p~i;ti?
'the draftlng o'fthe SIPC legislation:, " ' : '" ' ,"}'" '
, ';1 wou~'d:,like to say thisdjirimittoo ,'arid myself' personally, :welcome
'y'ciu':baClf"this'morning, 'and,:w'ithhut b,bjedion; the writtilnsUite-
:m'entsof'allwitriesses who:appearbefor.e)tlle'lmbcomriiittee'thls'mbrH-
/ingwiltbe'ihcluded ih the record if t4ere are 'no opjec£ions, 8,n'<l'the
:vit?:ef~7hes~,aYd"higlilight,th~ir ,re!ila~k,? 9~:sun~m'ariz,~91ern, this i
"lng, 1 'L eyso eSlTe. ,"',',,"",.. ';' C
¥9rr-
" ,Chairman 1Owens, we will start off with you this )]lorn~ng .
~.~.~~. ;":
. :' :.:_'.1 ~.
'"'.":J.~.
',. ·~"i.?:~'i:~_J~:< .:
;"!" ~.>~. ~.... .'·'-~.: l;,~.:,
:", :1-'.. i· ..

'STATEM:btJ:::,OF )IUGl(]f., '(jWEN~:', CHAIRMAN!'SECURiTIESc/(N~

7:Y,J\:S,l'OIt' PROTECTiol'i /cdXp,i)':R~T.I(}N!,. ACCO.MJ,lAN~']!D :,R1:~t·,' w..
"'~HESNEY;VICE PJm~Ip:~N,r;;;m:;1i,A)~'(n~,;:t~¥'Q:[},OR~ ,l:r..;FP:C~,T!
-J,',.GENER:AL;C01J:NSEL;;AN1l ,WlLFRED:R: CARONlASSo,dTATE ,GEN-
;;'::;:E::RJiLCOUNSEL":;;';:;; ,.;; ;,,: ;;' ::'tLc,~ '".i
iH.1iilri·fi. ~:;~? ··:,'l.:}j.:~..:.:~i~.· ;. _.. ..... ~.::.. ;\:.<:;..~ .. :--;: ".'~
:~i'; Mr/:.bW:EN~.~"T·han1r·,yoU:.;· ~!.~!.,i--:: ... •. \ ~".' >: '. '!; .~·:·1'::~:.~ .:::::,::',:~ ~r';~.:·": ~'I!.
, ):'5'Mn;; Ghairn1l1n',;and members of'ltlie,',-subcomrnitteer it,isii!J[;jJ1eas.ure
tf~r:Ille to appear';pefore~yOU1.this:morning and:preseiitthe,view,s,of3tp.e
,,:Secui:iti~s'Ifi'vestorPr6tectionJCollp()ration on H.R:8.064!"a;"biH·whil:Jh
:3V'ould'miakec:significant minenaments\ ito;th~',:Securities ,Inv¢stor "Rro"
tectionAct of 1970, hereinafter referred to as, the,.~~1970' aotY;,::r' ::
:~ !,iliiY-additionto,peingiaccompaniedbYHeneralG01ll1sel', Mr.'¥oJ~htr on
:m:Y,ile#i;this~{Ih9rningFI ',ha,:ve·,W,ith,::m..e Ml'~::h?W:. rMcChesney';"Yice
'}Rir:e~id~rtt:+Fin:anceof;our Corporati0u,on myfrightandiMr{iWil£red
'KCaron, Associate General Counsel/6'nrmyexttemeilefb i::~ ;:;;.0;: h·;:
" ,';".,,' ., r L;review: the' many s~p,ortaht;impmvewents :which H.E.
, '. ' }imake~in; the,1970.:act,:perhaps i,tiwould:joo,usefuIH .-1; ,1'e-
, ' . ori:the; activities ,of; SIPG siriceitscreati6:h ';in

.L

bEl-
Jept

, " '' 9,l}eiQllt'tP,fPer

,OQ.Q;~&that ~mQun.'t
 53
One of my first official acts as Chajrman of SIPC was to appoint
a task force t.o review the 1970 act n.nc1 its operabons, with a view
towa.I'd achieving better, faster, n.nc1 more efficient methods of investor
protect.ion. That tn.sh: force was hen.dec1 by SIPC's Generid COlU1sel:ij
and 'wa.s composed of repreEentat.ives of orgn.nizations hn:ving n. S11 b- t!~
st.antial int.ere.st in the e.f\'ective oDeration of the act. It conc1udec1 its ',.;,
studv during the first half of 197"4 and made its recommendations to ·;:JW
the SIPC Board of Directors in July of that year. ,1"1

Yi;~~~h~J~g]-~l~~~1il~~t1~~~~:S~~1~~: ;~11~ ~~s~r;i~~~<ttr;)~~~e~~~s~lsd~~e~~

subjects, exee.pt one. Its recommendations represent an appropriate
.. ~:,; ,!~l;:\.·
:J::"r.",,:.'
..

compromising and blending of views and positions in order to obtain ..

f!1t~lfcc:~t~ v~;.bl!~~d ~ffi~i:~~e~l~ce~)\?;~~~~~~c1el1ce because of the ex- ·.:,;_.: ,.';!.~[,l:
.·. •.• · · ·

The t.ask force report serves as the foundation for virtuany 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 Amenciments,to the Securi-
ties Investor Protection 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
~i'r. OWENS. Tllank you, Mr. Cllairman.
- The 13o·ar1:1 of Directors of SIPC approved virtually all of the task .
foree recommendatiOl19:which were sulbsequent1y put into legislative
form and were submitted to Congress in Decemlber 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-
change Commission and the securities industry. I understand that you
will be hearing from the SEC as well 'asfrom many .of the securities
industry organizations over the. nex t few d a y s . · '. .: .' j!~li'
The proposed amendments carry out -the task· force .re.commenda- ~I'- \-.
tt~~~ are 'tc1:esjg~ed tOt;nalt~ t~e act m~\e IBSjJon51vfe ~o the e:xJ?e~t:r-
. IC\GB Ox lllves ms. ::cJveullongll trle oYverau pLtljJose cr.tneact IS oe;mg
j_:;".
lr .~_ .I;\.' l.; ~,.' ~.; · "
met, that IS to prOVIde protectIon to customers of bro ~er . Miers cus- ~,:
tamers 0 'al e rms s e leve le are no receivin 0: the rotection 11)1§

· tlle tbought t ley were o-omg to o-et and in the /Way they believe they ./m.
~~~c~ l~e s~u~ib:~~~!~ ea~~ellC men s
mil: WIeI lance l11ves or con-l.I.~

,- The difficulties are not so much with the administrwtlon of the 1 9 7 0 ' - iW;
act, as with some of ·the specific liquidation procedures and limitations /;lit
set fOl'th therein. The tmstees appointed by the courts are; for the most ~t.;.;.
part, doing a good job, hut they,ancl SIPC, 'are handicapped 'by some 'N,
infiexilbilities in the law. In broad terms, there are three r011ems for Ityi
"ihich the present act does liD . proVIc ea' equa' so utions. . !1.~W.,~.I._;~.:•.':
~ .first is tln(L customers generally expect to receive ·exactly what :::
is In their 'accounts when the firm stops doing business. If John Q. iiI;
Illvestor has 100' ially paid slIm es of IBM and'a credIt balance of·!l~.~.';.: .:_· :.•.
· $200 m his accOlmt,he expects to I ecei ve from the tl'm'ltee it stock eel - ;;;-
'tlneate for 100 shares·of IBM and a check for $200. .... . Ijt~.;.[.;,_
, Bu't that lS not alwa S 08si"01e becausesecilTIties ma lUlve been IN;
· lost, i'(nproperly hypothecated, 1l1lsappropr:l'ate .. ./lr:
~_-.6!B5>=-1J,;l1401-:-.~7'1;-e--!I'i>--~_-:--~---.:.-_ _ _ _ _ _ _ _ _ _ _ _ _ _ li
I~~
lit
.',- .~
J,~
..
39
 54
. . even stolen. If there are claims for m.ore IBM stock than is on hand,
lmder the p1'esent statute J oIm Q. will receive only [L prorata portion
of his 100 shares. For the remainder of the. shares due him, he will
receive cash in lieu of stock !based on the market price Oil the date the
liquidation proceeding is initiated.
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 complaints from John Q. But even ill that
situation, custom.ers can suffer certain clisadvantages, for example, tax
conseqllences of what is, inefi'ect, a forced sale of their stock. .
The second major )I'oblem Iwith -tlle ad is that the )rescribedliqui-
dation proce UTes ares ower than they need be. This wor's a hardship
"on customers because, while they are waItIng to reCelve th811' property,
..,....they <Gre nn,cble to m~r[:l now diem; in their aCOOttnts. They SLlLlll!. at
the"TIsk of Lhe IIralket. Then, LObi 'ehe normal 110w of chvidencls and
ot1ler cllSErrbuhons is dIsrupted and, ill certain inst.ances, tax problems'
can anse.
"'"'Third, the procedures are not only sometimes slow, they -are expen-
sive. There have been Smi.le eases where the trnstee'sadtrllnis'trative
expei.1Ses have exceeded the amounts advanced to sn;tisfy customer
claims. The framers of the act apparently had in mind the liquidation
of la:rge firms 'such 'as vVeis Securities, where there were 34;000 cus-
tomer c.laims. They c1iclll'ot contem.plate thfLt the bulk of SIPC'cases
would turn out to be c.onsi.derably smaller firms.
If I may depart for a moment from the text to point out 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 threB; neveTtheless we have to crank up the
ponderous Fecleral inachinery for a liquidation process in that case
So, under the present stati.1te, whether a broker/dealer has 50 cus-
tomers or 50,000, the same judicial procedures ·have to be 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 percent of our cases.
It was interesting' to me to note that the majority of the letters of
comment received by this c.ommitb~e in response to your chairman's
request for comments on SIPC discussed these sam.e 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 gre.ater flexibility to existing procedures, and to reduce
administrative expenses where. possible.
As I mentioned earlier, the amonnt of money which SIPC Gall
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 am.enc1ments would raise these limits to $100,000;
with a maximum of $40,000 to satisfy a claim for eash.
This correspoilds to changes last year in the FDIC and FSLIC
legislation incre.asing 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 eustomers in 31 liquida-

.-~ ..
." -; : . .
 55

J, tions with claims for cash [md/or securities which were Qver the limits
III of SIPS protection, That is about one-tenth of 1 perce11t of all claims
11 rec·eivec1. In terms of dollars, the amollnt of these chimswhich could
Ie not be srttisIiecl came to approximately $:2 million, represent.ing less
than 1 percent of the value of all cash rtnd securities clistriblltec1 to
g customers.
k . Hrtel these proposed higher limits of protection bee.n in effect. as to
n cbims satisfied to date In liquidation proceedings, the monetrtry im-
Lt pact on SIPC would have been relat.ively small-the tot.al aclditiol1ill
:s cost would have been approximately $1,600,000 ftncl only 17 customers
in all liquidfttiol1s ,vould not have had their entire claims sntisfie.c1.
I, Of course, the experience with these cla.ims was in a prog],am with
P the current $20,000/$50,000 limits of protection. It is possible that
" ]1acl the limits of protection been higher there would have, been more
;t large c1ftims, but t.his Cftl1110t be demonstrated with any degree of ftC-
c1 curacy. In 0111' best judgment., the aelc1it'ionftl costs to the program
S caused by t11is recommended cha.nge are reasonable in light ofnU the
factors. We believe that it .is only proper that t.he limit.s of prot.ection
to securities investoi'sbe kept on a monet.ary 'par wit.hprot.ectiol1 to
e bf\.nk depositors.. .' ..' '.'. .
r .·The j;roposed amenc1men.ts .call for chftlwes in th~. actl'vhieh ,\ollJd
e~1~ble.t.1e .rus ~e, .O.ft muc grea Bl' extent than IS' now JOSS] Ie, to
i'¢ner accOlUl s .0 cus .omer8 m 1e same forni as t.hey stood when
fhe fum went out of business.
~·U~rqer.secbon 8 (b) olthe 1}r6l)Osecl amendments, the trustee wOltld
• be authoI'ize\'l to go jn~p~heniark~t ftnd p1.1rchase secili'itie~to n}~ke up
!CI~' th()Se whIC-h are ml~~ng, so long as thIs CDuld b~clonem a nut.and
orderly l~larket..The t~ustee would also be empowered under s~ctjon
'7 (b) (2)' tbljQ·y, subject tuSIPC approval,bankJoans collateralized
by se<:;.uritie8, including margin securities, thereby reClaiming those
securities foi' distribution to custolbers. . . '.
: Tn airpiopriate cases, SIPG would be ftuthorizec1 to a'dvance funds
for this pui'pose. l\1~:tgin custo~ers .would be permitted to pay their;
qebit ,balailces and l;eceive the securities posted to their aCcoIDlts, If
!hese;rec.ommenc~atjQbs uxe.iTD.pJe-rpented, th~ Cl~rrent practice of pay:i'D'g
cash: ill heu of mlSSlll .secuntles would be e11mmate(l for the most part'.
'~Jlistomerswou reCelve illstead the secul'lties i]l t leII" accoun S. l'
.'Ii .... ectationis t 1[11, in'almost ali cases a customer's Claim Jor' secur-'
r~would be satisfied by the delivery 0 .seclmtles, an ,-iV, 18re nec'es-
sary) to accomplish this the trustee would go ]]lto the open market and
"'"1)urchase secm iLies. .'. ' ..
c· 'W,..eJieheve, however, that it is ~c1visable to provide that the trllstee:
w~uld not be reqUlred to mrcliase-secuntres where that 'could not be
done lJ1 a an an or er mar et. ne chief eoncern IS t lat Ie trustee
'not e requlrec 0 make }urchases in a market wInch IS bem 1m 1'0 }~
er y co· 0 e or mampu ate .
.' This 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 tlle 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 ei'
aecounts
'''( . .
to: customers
.
as.t ley
...
stoo w en e I'm. al e. ne .way 0

41
 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
i'
should like to express my personal appreciation to the members of the Task
Force who served without compensati{)n, for the many tireless hours 'of work
whicb' 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 th{)se 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 Bubard & Reed; and Harvey R.
Miller of Weil, 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 individnals 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 individuals, 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 sitnatton 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 aU of the problems which today beset the securities
ind,ustry. ~he, Task,FO,rce firmly believes, however, that prompt legislative im-
plementation of its rec{)mmendatioris coupled' with continning vigorous surveil-'
lance 'arid 'enforc'ement oil the part' of the regulatory' and self-regulatory' organi-
zatipns ',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
wiU 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,
G7J"gj!!man, SIPG Tas/;:, Force on Amendments.

INTRODUCTION

o December 30, 1970, the President of the United States signed into la IV the
Se'Cutities nves H <,>' er
prQtectwll,for customers of registered trrukers-:a:rrcI dealers all(~ memBers oi-fta-Hon-
WseC1iiifiese}_changes." The Act created the SecLITiLies Investor PI()'!;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 secmities customers of members
liquidated under the provisions of the Act.
In January, 1971, Byron D. Woodside was appointed 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 snccession 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 membersbip pursuant to Section 3 (n) (2) of the 1970 Act are:
". • • persons whose business as a broker Ot· denler consists exclusively of (il the
distribution of shares registered open end investment companies or unit investment
trusts. (ii) the sale of variable annuities, (iii) the business of insurance, or (iY) the
business of' rendering investment advisory services to one or more re~istered investment
companies or insurance company separate accounts." 0
 63
wbpre S]PC 'must ilet to liquielate iI mpmber in financinj uistress. CleilJ"jr, t.he
lJP"'t. protection fu]" Cn!;tOlJ]l'r~ and t.he best source of in'l'P'",tor confidence lie,,;
\yith the continuing pJIort::; of the regulntorr :lnd self-reglllatory org::mizatil.llls
nimecl nt. preventing jJrilc-tie-es whic-h may re8n1t. in inj11J":r to c-nstomers.
I. Basie Policy Deter11linations
The recolllmenc!ations of the Tasl, Force are bnsel! 11pon t.he follo\\"ing jlojicy
cleterminntiolls which gniclecl nll of its deliherat.ions:
A. 8!1'C's role should remain that of it liquidat.or not. a regnlator.
B. Broker-dealers in jjnancial difficulty whose cl1;;tomer8 ref)nire 1he protec-tion
of the Act shonld continue to be liQuiclat.ecl rather than rehabilit.at.ecl.
C. Once it becomes necessary for SIPC eit.her to apply to a court. for the
appointment of a trnstee or to satisfy cust.omers aclminist.rntiYely (see p. 2,)
the t.rnst.ee or SIPC shonlcl have greater f1exilJility than is curreutl:r affon!ecl by
t.he is/neE III UTdT!l to prol'irle prolDpt satJsInctloll of cnst.omer claims, lIlore
at~ customer protec:tlOll, aIlll greater eCollomy of "HJllilli,'f.~
~The prot.ectIon alforded cust.omers by the 1970 Act shonlcl be acleQnnte,
both quantitatively and qnalitatively, to enable SIPC to fulfill its fnnct.ioIJ iu
mninlnining investor confidence in securities finns and securities market;:.
The 'l'ask Force believes tllut tllepresent regulat.ory st.ructure of the securities
inclnst.ry, whereby regnlatory responsibilit.y is divided between govemment and
self-regulators, has performed effectively anclneed not be modified to implement
the ·amendments recommencled for tlle 1970 Act. Tbe ']lasl;: Force recommends,
therefore, that SIPC remain solely a liquidator :and believes thatSIPC c-an
curry ont that role effectively wit.hout becoming a regulator. The Task Force
d!o'ems it inappropriate for SIPC to llse it.s resources to rehabilitate a memller
in financial difficulty, as it favors neither premature SIPC intervention in ~he
affairs of a financially troublecl member nor gTant.ing toSIPC the regulatory
power anclst!l,ff capability consistellt with such an undertaking.
The Task J,l"'orce strongly recommencls that SIPC be granted ilexibility ilnd
discretion wit.hin its role as a liqUidator. Once a membel" has reached a point
where it has failed or is in danger of failing to meet its obligations to it.t;
customers; the expandecl powers to be given SIPC would cOllle into play.
The pTotection provided by SIP.O to customers of brokers liquidated under t.he
Aet must >be adequate to maintain the high level of investor conficlence envi-
sioned by the Congress nnd, endorsed by the Tasl, Force. E~1Jel"ience indicates
that maintaining investor coiIfidence is not solely a function of the clollar allJount
of .protection available, but depends as well on the nature of the protect.ioll n1'o-
vicled. ~he Task Force has, therefore, attempted to formulate its recommellcla-
tions'so tbat the protection proviDed by the Ad will conform t.o the' reasonable
expectations of public investors. Maintenance of investor conficlence is essential
to the continued vitality of the Amel"ican capit.al market and the securities inclus-
h'Y' which serves that .market.
II. Ma.jOl· Policy Recommenrla.tions
A. The basic framewOTk of the 1970 Act inregarc1 to satisfaction of customers'
claims should be modi,fied to better meet tlle legitimate expectations of cus-
tomers. The Task FOI'ce recOJllmends the following:
1. A. customer should.receive securities to the maximum extent. possible in satis-
~action of a clalm for securities. Oustomers whose claims fnll within t.he limlts of
.~j2rotectlOn prOVIded by the Act should receive theiT accounts as they stood on t.he
filmg date." In rurtlierance of tius encl, the trnst.ee s11011ld be authorized to llSe
'~OIDer-relaLed .msets Or SIPO funds to: .
.. a. Purcbase secU1'1tles ill the Openll1arket or complete open contmcts. as desired
b'llie trustee to obtam securIties needed 10 restore .customers' accollllts .
. h. Payor guarantee Iban;: oans an lere y rec 31m hypo' leca:e securit.ies.
2. All customer-Tela ted property available to the "tr:llst.ee fOT distribution should

3 Sectlon5-lb.) (4) (Bl of thp. Act· defineR "filin~ elntp." ns follows: Filin;! Dntp.-'l'he.
term "filing date" means the dnte on which nn application with respect to an,' debtor is
file(l unr1er subsection In) (2) : except that i f -
(i) a 'petition was filer1 before snch date by or against the debtor under the Bnnk-
rnptcy Act. or
(ii) the Ilebtor is the subject of n proceedinl!" pending- in any conrt 01' bpforp nll)'
Rg-ency'of"tbe United States'or any state in wbich a ·receiver. ti1Jstee, Or li~uillatnr
for snch' (lebtbr waR nppointp.d which proceeding was commenced before the ·dnte on
which sucb nnplication was filea: .. -
then tlJe ti'i-m"fillng ante'~ menns the date on whicb such petition wns filed or snch 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 iunon-compliance with such rules and regulations, but
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 s)1ou1d be used to satisfy the claims (for cash or securities)
of customers or SIP·b as subl'ogee. ' " " ,
b. To the extent cash or qilalified securities required under Subsection (e) (3)
6f Section 15 of the Securities Exchange Act of 1934 or the rules and reg11lations
thereunder to 'ge d~P9sited and held in a special reserve bank a'Cicount fol' exclu"'
sive benefit' of- -c-ustoI1iers, 'or in a special account' for the exclusive benefit of
ci.lstomershuve "not- Deen so' deposited and held, then: cash, otherwise held' by the
debtor should bell:Sed, to that extent, to satisfy claims (fol: cash or securities)
of customers cir',SlpC as 'subrogee.' , ,", -,' " ' .-
5. '.rIle' re.solirces' 'Provided through the use of-i.·ealization of the debit items
includable in-the''Jj'ol·Iiiula for Determination of Reserve Requirement for
Bl'oke'rs and-Dealei·s:"i under 'Rule 15c3-3, shouldbe'usecl t"o satisfy the claims of,
custom,ersor sr;£'C-'!i"ssubrogee and only the excess; if any, ShOlildbe allocated
to the general 'estateY" - -,-,' - ,',' "-' - :
,6. The trustee sliolJ-ld ,be authorized, without the .consent 6f customers, to ~ell ai'
otherwise transfer customel' accounts t.o another brokeI-d'Caler'. -
7. Where customer -accounts cannot readily be so' transferred, customers who'
have debit balan'c"Ej-dihould be allowed to pay their debitllalances promptly and
l'eceive sec'tll;ities:'tq''-fwliich they are eiltitled within the limitations prescribed
by the Act.' :' . , ' _' -, -, ' , - ' - ':
S. The ti'ustee,s4o'uld:lJe authorized to indemnify the transferee or I>utehaser
of customei·s";acC,ouilts-'against shortages in sucl;!a.ccounts;- 'Provide'd, however;
that the 'reasop.al;lly anticipated final cost til the; SIP-O fund arisiIig from suc-h
i.nclerimity- may l)-Ot 'exceed th{! amount whichSIPO reasonably estimates would
otherwise_ be/requIred to ,satisfY the- claims of ,"Cilstomers, -with respect to the
accounts t"ransferted;- up to the limits provided by -the Act and to pay necessary"
-costs and expenses of liquidation.
9. Expenses of administration, that partion of a ,customer's claim in excess of
the limit'> of'llratection, ,claims of persons other than cllstomers, and cla"ims 'of
SJ;PC as subrogee' (except a-s .otherwise provided), should 'be allowable 'onIy as
claims agail1_st. the general estate. , - ,_
These recommen,datiolls in conjunction with tlle' 'plaJ1 of allocation discussed
lJelow form tll,a -c,ote of the- recailllllendatiQl)S orthe Task Force. They are designed
to modify_ the ,)970 ACt to provide pratection which better comports with the
expeCtations ,orcasil anclmargiu customers alike withont significantly increasing
the ,bui:de'u ou"the SIPC fund" '
The recolllmend od a fundiment!).l departure from the- 197 ct.
Tli1... Task Force. ,'believes that cus omers accounts should be reconstituted as
thEw existed on the_filing date With due i.·egarij for the umltatlOns of protection
111:DV1CLed in the Act. It also believes that tIus 'Policy best meets the 1ei;rbulute ex-
pectatIons of cnstomers .
. llloreover, the knowledg-e that his account "ill be returned in the form in
which it existed on the filing· date, allaws the customer ta con,tiuue to exercise
invE'i':tmentpr'eragatiYes with respect to his portfOlio with minimal disi·uption. If
t.he account- is 'pramptly transferred to another broker-dealer, the customers may

"While the Ta~k Force anticipntes thnt certain recommendations will -reduce fldmlnis-
tJ"atlvp. expense~. it does not -believe, it is possible to accurately predict the financial ,Impact
or p,ach recommendation nor tbe impact of the recommendations of this report as a'whole.
i\[OI"eover. it "liould he noted thnt these recommendations are substantially integrnted so
that modification of one may affect otbers.

'+' '.
 87
Go., deleted as hlaplJi"opi'intE', since the aim of a Eectioll 6 IJrOceeding is the Iiquida-
ti(1l1, uot reorganization, of a member.
\lap-
E:xi~ting 6(c) (2) (A) OJ, defining the term "property," is deleted. Since t.reat-
meJlt of cash lind securities is not always the same, it is consillered prefernble to
s to jridicate jn the su:bstantive provisions themselves whether they apply to cn~l1
the or securities or both. "Property," therefore, is no longer a 11sefnl term. Til"
pro- refer'e·nce !fa "propert.y of a similnr chamctE'r" hns cansec1 confusion, and has
led. been .deleted in favor of an incll1siYe definition of the term "securities" in sub-
IIDe section {3 (c) (3) (0) ofthe Act.
one §6(c) of tbe Act-Rel1esignntE'tl as 6(c) is a portion of existing subsection
.ute fHc) (2) entitled '·SpecialProvisions."
§·6(c) (I) of·tbeAct-The uefinition of "customers" sboulcl include only per-
fer- sons who enj·oy the type of fiduciary relationship with the tle])tor that cllar c
ley. acterizes customers in general. Recent decisional Jaw is codified illto the c1efinitiim
Iny to proviUe that only secnri'lies received "in the Or(lin,1ry conrse of bm;iness a"
a broker Dr dealer" may form the basis of a customer claim. (:~ee .':I.E.O . .);,,,. P. O.
'ed BaTotJ Go., 497 F. 2c1 .280 2nc1 eir., 1974.) Also, the 'l'nsk Force agreed that
, of
customer status· should not lie ext!:'l1fle(l to lenc1er,~ of secnrities to tlie dt'btor
where sud): fenders' li:ive receivp<f eitlier collateral or consil11'1'>1 tion for fhl:il'
lie loans. Lenclel.'s of setui·jfjes· in ,':;11(']) eircUl1lstailces (an reasol1[l'bly be expeeteu
led to beai' tbe risk of tbe faili.lre of the uebtor's busiIless (See TFR II. 33)
ect Accordingly, some langl1ag~ from the current clenilition was dropped since it
:he llus:'been used oY·soine len uer:,; ill an att!'mpt Ito gnin for tllem:;el,'es the ·iJi'efelTetl
:he. position of customei·s. TIle deletion of the language is not int!'l1ded to chaJlge
PC the rights of' cflsh' or mar'brfn customers wflo'lend securities from tlleir tr,1(liilg
irri lH:cDu1l1s to their bj'okerf"vitbont taking back collateral or receiving addlticinal
ith (:onsideratjon). It L'3-' fnrfh!"l' pioYidetl that· contiibutors to capital emmot
le;; become customers by avoiding the contracts pursuant to which they have ctni-
;y. tributec1 capital, e.g., on the gronnds of fraud. Wbatever their rights may be, \
er it is not appi.'bpri:ite fo treat Slli:'h persons as customers. .-'. \. .....
E~isting 6 (c) {2i (A) (iii) is deleted. ·The concept of "cash cnstomer," a:
concept closely relntetl fo' that of "fipecifically identifiable propelty," is.nQ 1,)nger
'·useful. (See 6{a}(1){Ar and (B)-,above), Further; the"Task J?orce"inc,1ieated
t.hat the cli,,,;tinction made by SIP}" a)',. now in effect between margin and cash
eustohlei"s is·llotin keei:'iing Witlf fhe' goal of retuniing seem-Hi E'S wh erever· prt\(:-
tit-abJ.e, oi' with tlle In:stififrtil'e 'expectation' Of margin customers and others awl
they Will'be enti11hHil"tneirac:connts llpo:irpayi:rient of debit bl1Jances. (See TPR
Pli. 10 and 11)'
§, ~H (n (2) of tIi'e' ActoC.-Chilnges' to the (lefiliitiori of "net eCjuity" reilect the·
views that min'gin and· cli:sli Cli:stoi11ers shonlt1 be- t1'8n ted 0]1 an ~qu::tl basis
andthnt fl., c.ustomers whohns· entered into trl1l1sactions in goocl faith I after
the· filing date Sh01ild not'.be hal'J"e'd' from certain .prot ecti om:. (See :I'FJi'llP. ,., ".
10 ant1 42) :'lIPO adva'nces" fOl"' the' prbt.e-ctioii of such late tr'ln~actioti.<;, lim..".
t ever, are subjeot to the·- cUscretion of SIPC llndei' subsection g'(a:) of the A:ct.
Ainenc1m·ents to tliis subsection are also madenecessal'Y by the inodificati'on (If
the' concept {)f "&-peciftcal1y imlentifiable property" '( cUscllssed in 00nnectibh
with subsection 6 (c) (5') of tbeAct below) aJl(f by.. th'e liew 1JI'oyisions coy(;'.riilg
dose-Duts of .open 'contrnetnrrl commitments (CliSC1ilif!etl ill connedlOl'Lwith 151tO-
secUonS(ci below)'. .
,§ 6(c) (3) of the Act-Tbe new deilnition of "securities" is essentially p:,lt-
tern eel after tlle 'refiilitioll -in tbe 1934 Act. However, in recognition of ·the· fact
tba t the' defiJiitlon in' the ifi34 Act is for the purpose of enforcement, and regultl-
tiOJi and tbat the pui'poses of. SIP.A: are cUfl'erent, certain alterations in tIle
uefinitiOli UI:e macle. Ceitlficates of 11eposifand short term p~per are incluflM
hi thedefinlticiri of I{ecurit'ies {or SIPO pll1'110Ses;' ilivestment COJltracts, projj·t
sharing plans; oil and gas leases ftnd ·commodities contracts· are excllided.
§ 6 c C4 of the •.\'ct-Tlll,a SiictiOll defines "customer· propeTty." the conce]Jt
ivhicll ta es tbe plnce 0 ' . . ens ra· iine 0 ' . in·
eff '. 'ustoiner property, brfefiy ex )lainecl, ·c{lnsists of all caf::h am ·secnn 1('S
([)tl1·er lat, P ( ~ 1rit1es re°:!s ered in the name of D. cnst0l11E'1')
a'ir Ie to he- trustee ·for· the ,iatisIriction of custOliler claims. It includes all
casb and SeClll1 les Ie rom or or t le accoun 0 Cll ,: secnrities 11Pld
aSlthe-property of·t1Jeclebtor which ·are necessary to meet the uebtor's obligatiollS
tf) bis cl1bi{)merlf for: secu:dtie.s or the same class and series of an issuer. (Cf,
DueL v. Ho/.Uns, 241 U.S. 5Z3 (1916) ; Goniwn v. Littlejl.e].c]" 229 U.S. 19 (Una»
Also ineluded is Ijro:p'ei"ty generated from the use of debit items in cu&t'onjel'S'
acconht.i;i'a:iil1 prop·erfy·of the debtor which; upon complian'ce with llifJplicilble 1a\\,,';;;
 89
property ueemed to be "l'oiclnblE' llnder SIPA. In addition to transactions void
or voidable uncleI' the Banlil"uptcy Act, this sllbsection reaches tr:1lls~ctiolls
which have the effect of grauting prefereutial treatment to i])(liviclllfl!
cllstomers.
§ l'l (b) of the Act-'l'his sub~ectiou, carrying out ODe of the central recom-
lllend:ltJOns of the Task Jj'orce, :nHhonzes the trustee to pllrCIlase secunti€s for
t.hE' purpose or n'stonng clistowE'IS, dS Llr ,is possJble. to then' )JusilioIJ8 ",; or the
fjl~FIt p. 9j. 'I'D (be e:;tent mat TIe can' do s6 111.d. fair .<lid OInt'l'ly
lll;u"];:et, tHe trustee wOl'fn1Ue expected to purChase seclillt.I~~ to co vel -me
(lefi~iency l'emiUnmg III a CUE/orner s account after al:rocm:llJg to such custOmer
his sbare of custoii1er pI0peJt.l· .. ~ provHiecL in subsecbon 8(a) (I) of t~t.
'This wo()uld carry out a },ey OGectlve of the :task Force whlch IS the satisf?i"ctton
of~a custolller's -claim for securities by the denvery of seclI1!ues wherever tbat
i~ lJOssible. tl'he only time it is envIsIOneu that a trustee woullI not delIver se-
clll:iJies til <iatlsfy a claIm for seCUrItIes would be in tbose situations where
tlle market for tile seCUrItIes IS so tlim or so closely controlled by inSIders that
it IV 'ee . l lropn, e .. 11 unWIse or e trustee to e required to pur-
chalOe sep .' . s for e sa 18 ac ,lOll 0 , s. e rus ee may use - _ 1D S
to purcbase securities to replace [ a part of ri"customers ueticlencm securi-
'v
ties use va ue on e lllg a 'e 1 no exceed the limits of SIPC protection
provided in subsecbon 9 (a) or the Act. '
- § S (c) of the Ad 'I'lie uecISion of the TrrsIf Force, the presellt policy of SIPC
as expressed in the C0ll1111ission's Rule S6d-l, and tbe prevailing practice' ,of
trustees with respect to contract,s of tbe debtor 'open on the filing date, 'are all
re'ilected in this paragrapb. In. most instances, sucb contracts will be closed out.
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 actillg for a customer
(as defined in subsection 8(c) (3) of tbe Act) with resped to contracts, hE' will
be elltitled to SI'PC protection up to $40,000 for losses sustained for that custome':t'.
"Wbere tbe cloSing-out broker or dealer was not acting for a customer, !iny loss
be sllffers will be a claim against the general estate, not payable' from' SIPC
a(lvances. (See TFR p. 31) ,
§ SIc) (4) of the Act-The provisions of § SIc) will not apply, to a clearing
corporation ,which bas its own rules on close-outs for its members. 'Losses: 'by
clearing corporations are ~Iaims against the general estate only, and not payable
from SIPG advances. (See TFR p. 31) "'.. :,. . . ' , ,
§ 8(d) of the Act-This imp'oi-tant' new s\lbsedIon 'gives the' trustee tbe 'l'ight
to transfer in whole or ill part the account of a cust{)mer. In view of the benefits
to customers' and the ooving to SIPC that may 'l'esult in all appropriate case,
SIPC flmds may be used to facilitate such transfer of Rccounts. (See TFR p. 11)
§, S (e) of the Act-'-The subsection entitled ~'Paymentsto,CustO'lDers"'is retained
without' major change even thollghthe 'manner 'in wihich the trustee effects
"payment" will, in most instances, be substantially 'different. The trustee's power
,to satisfy Claims in either' cash '01' seciIrities must be preserved, however, to
enable'him to deal properly with the situation. ill which theTe is not a '~fair
and orderly market" available within the' meaning 'of §'8(b)" and the situation
,in which 'a: 'custom'er makes a late claim" that..is 'nevel'theless entitled' to' protec-
tion under § 8(f). In ad cliti on, it'is made:c1ear that securities are valued as of
the filing date for the' purpose 'Of dete=ining, wbat securities' a custom,er' is
entitled to receive.
§ 8 (f) of the' Act-.Since existi1lg' subsection 6 (11) is deleted, this section
preserve the substance of that former section entitled "Proof of Claim by As-
sociates and Otbers".
,§ S (f) (1) of tbe Act-Here, again, specific incorporation of the Banknlptcy Act
is deleted (see discussion in connection with § 5(b) (2) above). To'eliminate
any ambiguity in tlle use of the, term "customer", the trustee's duty to give notice
'is made'to 'apply only to,those customers who appear t{) have bad an open'account
'with the debtor witbin the twelve months preceding' the filing date. Notice to
creditors is 'tIle same as nncler the Bailkrnptcy A'Ct, except that it is given by
the trustee ratheT than by tlle court; .
§ S(f) (2), -of the Act-The limitations of time in SIPA'as now in' effect are
altered' to 'fit the contours of'the new distribution' scheme. It is provided tbat
'Claims for customer property mnst 'be' filed' promptly, reflecting the tnistee's
need for certainty in regard to allocation of ciIstomer pToperty at an early date.
'SIPC protection, however, 'may be extended to claims filed 'within six montbs.
 100
1\11'. OW:E:Ns.This is:mlllearc1 of in my expei·ience of almost 10 years
as,a;n SEC {Jolmnissioner .
. ,. Mt~ ·sTiJ:o~x. I tl1inkthat is. an indicatioil oftha lleed for' the
. bilkandT think it refleCts .on the study group that made the study
and came up with the recommendations. . '
So ·again, let me thank you and your staff for your testimony.
Mr. OWENS. Again, let me thank you, Mr. Chairman ..
Mr. 'STUCKEY: Our next ,vitness before the subcommittee this mol'll-
DIg is Mr. Robert Augenblick, president of the ICI. .
I£.you would like, Mr. AugenbEck, 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 'am president. With me
is the Institute's general counsel, David Silver.
The Dlstitute is the national association of the mutual fuml industry.
Its members consist of 389 open-end ·investment cOlnpanies-oom-
monly .called "mutual funds"-their investm.ent advisers and vrin-
cipal unde.rwriters. Our mutual fund members have 'aibout 8 million
sharehold'ers and assets of about $45 billion, comprising ove,r 90 per-
cent of the assets of all U.S. ITlutual 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~1 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 i and
(ii) Requiring the inclusion in the SIPC assessment base of broker-
dealers doing a retail securities business of the revenues which the.y
derive from the sale of mutual fund shares.
VVe confine our remarks to the mutual fund aspects of the bill, a1-
'though our comments are also generally applicable to inSUI'::UlCe.
products.
At present, mutual fund underwriters-technically within the eate-
gory of broker-dealers-whose activities as broker-dealers a.re 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 origina.l hearings on the SIPC bill, we strongly endorse.c1 the
principle of providing reasonable insurance protection for investors,
We also stat.ed our belief that the cost of insurance shoul d be borne bv
those who ereate the, risk and urg:ec1 that. the.re shan1r1 be a st.atutor"
exe,nlnt.i.Ol1 for t.hose broker-r1ea1ers who do not, hold and utilize i.n
t.heir O\Y11 business el.1SrOIllers' free, eredit ba.lances and customers'

./
 102

the fund to the public. Often the underwriter and aclviserare a single
entity. vVhere they are separate companies, they are usually, but not
a,lways, under common control.
Because the underwriter distributes securities, that is, the shares of
the fund, it is required to register as a broker-dealer uncler the Secmi-
ties Exchange Act of 1934. A mutual fund underwriter usually dis-
tribut.es the shares only of the one or more funds in a particular fund
DTOUp.
to Unlike broker-dealers doing a general securities business, a mut.ual

fund lmdBrwriter does not use customers' funds or securities in the

course of its business. IV11 en a customer purchases mutual fund shares,.
itis the fund's transfer agent which issues the shares t.o the customer
against receipt of the purchase mO!1ey and sends t.he money to' t.he
fund's custodian bank which often IS the same entit,y as t.he transfe.r
lto·eut. "Vhen a customer redeems mutual fund shares, it is the fmi.d's
t.J~'u).sfer agent which issTIf;s the redemption.check agajnst receipt of
t.he shares being redeemed.
The procedures for t llf!flow of money and mutnal fnnd shares in-
yolved in purchases and redemptions by invest.ors are not st.[tnc1nrrl
t.hroughout the llutua1 flmcl industry. This is to br. e:s:peded becHlIF("
some shares .are solclthrough independent brolmr-c1e(~lers, SfJme through
salesmen ~1irectly employed by the flmd's underwriter and some by
direct cont.act with the fund without any int.ervening salesman, (ulc1
also becallse the transfer work for so1'ne funds is done by an aJRliate
of the underwriter rather than by a bank or some other outside tl"ans c'
f(}r agent. . .
In many cases a c.ustomer'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 flUld. \
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-
<trdy t.o any customer by reason of the underwriter's possession is
limited to the time which it takes for the underwriter to process the
t.rade-a maximum period usually of from 1 to 3 da,ys. Customers'
flmds and securities, therefore, do not come to rest for all indefinite
pe.rioel of t.ime in t.he hands of t.he underwriteI'.
lVIr. STUCKEY. Will you yield right there '/
lVIr. AUGENBLICK. Yes, sir.
Mr. STUCKEY. That is the onl ~
runni~1g off WIt 1 the money?
Mr. AUGENBLICK. Yes, tha.t is correct.. As I wil J,.I.£-fJ..'1.J;=-
ticular risk IS rtmnll1D' 0 WIt.h t 1e mone an
r. TUCKEY. at IS 99.9 percent of the risk, and that is covered.
Mr. AUGENBLIOK. By fidelity bonds.
Thus, not only does the !Tiut.ual fund underwriter derive no eeo-
nomic benefit from holding customers' money or seenrities, but so far
<ts the underwriter's activities are conc.erne.cl, the risk to mutua.l funcl
investors is restricted to items in transit. The SIPC Fourth AnllllUl
Report for 1974, page 8, admits that. mut.ual fund unc1e.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~cl
"redemptions for the same 4-}'ear period amounted to over $30 bi11ioi1,
the $170,000 of claimed losses amolmted to 0.0006 percent of: this tot\tl
~~ " ,
,iVhat would this have cost ~ Based upon our sui-vey "already referre'cl
to, we estimate t.hat for the same 4-}Tear period the cost to brokei--
dealers at the n~~aillevel 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 w hich ,ve~-e
given to us, were relatively small. There is no evidence to indicate that
the losses occurred because of any practice on the ptJ,Tt of the seven
firms to use customers' money or securities during the course of their
normal business.
. .
Rather,
r
the evidence is that the losses occurred by ]"
naso sun Ie mi'sa) )rOpnatlOn. " """
~ The names 0 t e 39 c :11man oS were supplied to us by SIPC.V\Te
sent each claimant a questionnaire seeking the details of his loss.
Fifteen of these 39 claimants responded and their responses dealt with
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.confirinecl
the order to the underwriter but sent a bad check to pay fOT the shares.
,~T e think that these 39 cases of Joss 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
be ta,ken. The losses which occurred might well have been obviateclif
the broker-dealers in question had appropriate fidelity bonds. ,~Te
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.
CONCLUSION
. In summary, the events of the past 4: years prove that Congress was
clearly right when. it refused in 1970 to fOl'ce mutual fund under-
writ.ers to join SIPC. These lUlderwriters do not. use customer::;' money
or securitie.s in their business, no claim against SIPC on account ofa
fund underwriter has ever been made, and uncleI' these circlUllstances
it would have been monstrously unfair for these underwriters to pay
the. almost $5 million it would have cost in assessments had their
membership been mandatory. There is not.hing ·at present or in the
foreseeable future t.o justify a change in the earlier view of Congress.
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 retail broh:er-
dealer with newassessment.s for mutual fund revenues, but to tighten
t.he l:egl1latory proeess, if necessary, and possibly require a ppropria.te
ficlehty bonds. ""
-r,,1\f e 'believe t.hese exemptions were wisely legislated and should not
be repealed or diluted, "
,Ve appreciate t.his opportunity to present our views.
Mr. STUCKEY. Tha.nk you, Mr. Augenblick.

./
 139

Mr. STlJCKEY. Tlmn}.;: :Y011. And thank yon, Mr. Chai1'mfln.

Mr. VAN DEERLJN. 1\11". Eckhardt.
Mr. ECKHARDT. No qnesbons.
M1'. VAN DEERLlN. Mr. MetcaHe.
Mr. J\UTCALFE. No questions, Mr. Chail"lmm.
Mr. VAN DEERLlN. Connse1.
Mr. ROWEN. M1'. Macklin, efUl yon give us [\ bri"f hist.ory abont the
question of SIPC [\llvertising, (md tell 11S wh[lt t.he stat.us of that is
toc1f1.y.
M1'. MACKLIN. It will be brief, I am sure. The original bill W[\S so
written that SIPC could develop rules ,vhieh wonlrl .govern how theil'
members would use, on fl. vohmtary bflsis, the SIPC name a.nel logo
for advert.ising purposes. SIPC had a proposn.l t.o make t.he use of
t.hat symbol n'lanchtory, whieh was rejected by SEC.
N ow it is before you for the first. t.ime, and without. considerat.ion of
t.he t.ask force t.hat developed t.his legislation, to make it mandatory.
VlT e don't feel t.hat it hfl.s been fairly studied ont, find philosop11ieally
we 11[1:ve a deep opposition t.o forcing people to do something where
there 1S 110 clea.rly demonstrated public interest..
Mr. ROWEN. V\Tas the a.c.tion t.a.ken by t.he SEC on the basis of merit,
or beca.use ot a. lack of authority in SIl'C to adopt t.he proposed rule?
Mr. MACKLIN. I rlon~t.lmow.
Mr. DERRICKSON. Beca.nse of bcl;: of a.nthorit,y. .
M1'. VAN DEERLlN. Is thisint.emlec1 to giv'e confidence ~
]\11', ~1ACKLIN. Yes; t.o the extent it. does inspire eonfidence you
\vonlc1 t.hink it. ,yould ins11i1'e geneml use voluntarily.
Mr. RmvEN. Nothing: fllrt.her.
Mr. VANDEERLlN. Thank you, Mr. Macklin.
Mr. MACKLIN. Tha.nkyou.
Mr. VAN DEERLIN. The next. witness :is .James .T. Needham. cha.ir-
man. of the N e.w Yor1\: Stock Excha.nge, a.ccomp:lnied by senior vice
presldent Robert M. Bishop.

STATKWIENT OF JAJlifBS J"...NEEDHAlI~, CHAIRMAN, BOARD OF DIREC~

. - mRS. NEW YORK STOCK EXGIIANOE, INC., ACCOMPAJSIIED By
ROBERT M. BISHOP, SENIOR VICE PRESInENT '
M·r.NEEDH.Al\L ·At ·le.l1f3kt-he·. airplanes are. 'stiU .w0Tking in New.
Y ork-t.hat and t.he members of t.he New York St.odt Exdiange.
Mr. VAN DEERLTN. It is not. yet t.he "New J e.rse.y St.ockExchange: l '?
Mr. NEEDHAl\f. IVe1l. jf COlig:re.ss and t.he SEC still keep it up, I
think we will wind up ·workin.q'·for them.
Mr. STUCKEY. I underst.and t.here is lldditional land available at
Buzzards Point, if t.he.y want i t . . . 1 .'

Mr. NEEDH.<\}\L The report. of· the demIse of t.11eExchange IS a OIt

premat.ure. I understancl the President will only tax the dying and
the. dead.
Thank :you again; Mr. Chn.irman.
My name is .James .T. N eec1hnm. I am chairlIlan of the board of
directors of t.he. New York Stock Exchan:re, Ine. IVit.h me t.or}[l,y is
Robert. M. Bishop, senior vice president of the exchange. '
 140

I "auld 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 H.ll. 806~the Securities Investor Pro-
teet.ion Act Amendments of 19'15., ::, '
Thelurpose of this legislation is the im.proven1.ent of theptotec-
tion a orcled securltl(~scTISt~.a,hli~ti:es-In-ves­
tor ,Pr-Q.J;ecl-iEltl-8urp., t.o more effectively aml~ieItHJ71,eI;form
its role of protectmg Guston,1ersof registered orokeI's:'--and-deal-
'ers' ,~clwttll1rTa:t:lOn. We:reel that t1leblTrOeIore:tlilssubcom ~
mIt1.ee accom rlsles tIns goal and accordingly merits enactment i11
this seSSIOn 0 t 1e ol1gress., ' . "
Sinc.e its mception, SIPC11as compiled anoutstmic1ing record. In
its very first yea.r, the newly established corporation was faced with
the liquidation of 24 broker-dealers. Undel~ t.he leadership of its
first chairman, Byron D : "Woodside, SIPC met that c.hn,llenge and
proved t.o the investing public and the securities industry the effec-
tiveness of the legislat.ion passed QY Congress. "
Of course, 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 inliquidnt.ion to bring
its total t.o 109 bl'oker-dealers in 4 years. '
Even more impressive than tlie number of firms liquidated is the
protection which has been afforded public· cnstom.ers in the past 4
years. The yalue of eash and seeui-ities retunied to customers under
SIPC-appointed trustees amounts to $241 million. Further, throngh
t.he effort.s of these t.rustees 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 securit.ies held by the :firms in liquidation. Of t.he $241
million, only $39 million had to be pai~l out 'of SIPC funds.
The human, side of the tasks performed by SIPC cannot be over-
looked. These funds and securities represmlted' the savings and in-
vestments of over 97,000 public c.ustomers.·vVithout SIPC, these
savings would have been lost and their con:fidence in securities in-
vestment dest.royed. Also, these funds, and additional accumulated
savings, would not be available to meet the fut.ure.ca]Jita.l nee,cls of
American industry.
As the members of this subcommittee are aware, from 1965t.o 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 addit.ion, the exchange was vitally involved in protecting 300,000
public customers of cln Pont, Glore Forgan, 225,000 customers of
Goodboc1y, and 74,000 customers of 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-continned until May 1 of this
year.
 SECURITIES INVESTOR PROTECTION ACT
AMENDMENTS OF 1975

WEDNESDAY, OCTOBER 22, 1975

HOUSE OF REPRESENTATIVES,
SmCOlILMTTI'EE ON CONSUlIf:ER PROTECTIDN AND FINANCE,
Co:r.nnTTEE ON INTERSTATE AND FOREIGN COMMERCE,
Washington, D.O.
The subcommittee met at 10 a.m., pursuant t.o notice, iJl room 2322,
Rayburn Honse Office Builc1illg, H9n. Lionel Van Deerlin, chairman,
presieling.
JI.:fr. VAN DEERLIN. The Chair, noting the presence of an adeqnat.e
number of members, calls the hearing to order. .
The first witness is Commissioner Pllilip A. Loomis, Jr., of the
Securities and Exchruige
,'-' Commission.· .

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

- - AND EXCHANGE COMMISSION, ACCOIlI[PANIED' BY LEE A. PICK-
ARD, DIRECTOR, DIVISION OF MARKET REGULATION, AND ROB-
ERT J. MILLSTONE, SENIOR SPECIAL COUNSEL, DIVISION OF
MARKET REGULATION
Mr. LOOMIS. I run accompanied, on my left, by Mr. Lee A. Pidmrd, ~ .. '

director of t.he COll1l11iSsion's Division of Market Regulation, which is

i-esponsible for oversight in the SIPC area; and on my right is Robert
.J. Mmstone, 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 subcol1unittee, it. is a
pleasure to a.ppear before you t.oday t.o present the Commission's views
011 t.he proposed amendments t.o the Securities Investor Protection Act
of·UJ70. Five years ago, as General COlUlsel of the Con1Jnission, I ac-
companied Chairman Bl}dge in his appearances before' Congress to
e.xpress t.he Commission:s strong support for legislation to protect the
aeeonnts of public c.ustome.rs Of broker-dealers. At the time of those
appearn.nces, 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 ca:using substantial losses to
p1.1blic cust.omers. . . '. . .' ' . . ...
.. In·enaetin·o· the SIPC legislation, .COJ}gress aCted ql1ickl:v~nd de-.
cisively to r~store public confidence; many' investors' sa.viJ1gs were
restored to them beeanse of t.his· aGtion: At the. sa,metime, Coi1:~ress
O'aye'the Co]imlissiona Clear mandat.e to :determine. tlie underlYing
~auses of t.bg.~r.isis faeiilg t11eii"J.(histi'y·a~d toT~ip.ecly those problems
t.hiol'whstrepgthene.c1 piia:i1cialresiJonsibflity JeqluremBl'lts aaid,Slich
.. b '! i",· , . . ... "':(159)" .... ..' .... . . ..' .
 161

lishment of that task force and our staff devoted consieleHlble time to
its deliberat.ions. .
TJle proposals ~le~Teloped by the task force are now 'before this sub-
committee. IVhile 'wellavB comment.s ,rtbont cert,ain specific provisions
of the 'amendmentq, fhe COlllmission st.rongly supports the pl'opose.d
legislat.ion. In the overview, it. carries out the reasoned and thoughtful
rec.ommenc1ations of the t.ask force 'and would 'provide SIPC wiith the
flexibility to effect t.he most efficient solutions to the :broad l'alige of
problems whieh confront it.. Of greater impOli.ance, however, it 'would
assure that. the protections provided uJ1Cler the SIPC Act. would more
nearly meet t.he reasonable expectations of public cllstomers wit.hill the
limits of protection prov'idec1 in the act.
l\fr. Chairman, at. this time I Ivish to submit Ito tale sl1'beommittee
a fairly lengthy memorandum of some 17 pages, pIns ,an ap-
pe.ndix, which setsfort.h t.he Commission's position on a nnm'her of
sections of tlle proposed amendments which we 'believe should ;be
modifiec1. Some of tIle changes discussed in the memorandum are
necessary t.o c:onfOI'm the proposed mnellc1ments to the 'Se.cnrities Acts
Amendments of 1975 which were enactedaft.er the introduetion of
B.R. 8064. Others, of course, represent. areas where the views of the
Commission and SIPC may differ somewhat.
I will not. discuss these comments at this time, bnt w{lllld like to
submit. them for t.he recon1.
. Mr. VAN DEERLIN. 'Without abjection, they will be ac~epted for the
record.
_ :Mr. Lomns. I will s1!Jmmarize now, 'because you heard a good deal
of tJus 16e1me. i - .'
These amendments would rbasicaJ]y m,ake mOJ;"ej1exibleand ;;tremn-
, Imecl the 0 JeratJOn of SIPC woulet make i.t posslble for SIPC to
fulfill customers' expectations, in a most. a .1l1SLances, resormg, ·lelr
sE\curities to tJleml rather LlULll,givillg t1;emCtLsh'.in exc1mll(fe lor their
. Clarms,'a 11 (speec lmgs.up. lese 'are t e ..aI'eas in TVhi .
---::-mm ic las. com J ame , . 0 , open\, lonEl; tlat liquidations are too
810w ane ti .l'at they '(:h 1 t get leIr, ;;ecHI'i: . ' ,.: ,. . .
. Als?, SIPC wIlIbe 'ab~e to use more mformaI procedures, part.icli-
]aI'lym ~l1~all c~sesanc1 m t~pse' oases ~Jlerelms not. OJlly:been delay,
but admmIstratlOn expenses m proporl:.lOnto the size of tJle reQOyery
for t.he Cl1l;;.tQ{pgrs,:that was unduly high, simply 'beca.use oHhe neces-
sity .of 11~~~lg :fOl:~al!b.a~lkrl1ptcy. types of proceedings.wlIen c:ustomer
daim,t;lan),ount,ecl tQ nOJD.oreV1ianaOr:few thousand.dollars. . .
. The 'legisl'atio:n also would' increase tlie Il1l1it. of prot~ctiojl to
$100,000 for sec.uritiesand$40,000 for, the.,c,aslJ.PQrl:.ion. ViTe, think .tIlis
change is entireJy appropriate aw:1 will serve to, mailltnin investor,
9.q~lfi.q~nG~..,. : .,', :." ',' .....;.. ... " . . '..'
, I 1101'9- come to one, of two proiJosed changes ,yhi911 )ve have. The
first of these is the situation. where,a .CU,'3tql~1,er has a cOlltract, wit1} ri·.
broker-de~.1er for the purc!iase or sale of s~~!ni:!tie;;. ~1;~licll. is·f"xecniory·
on the fiImg date". That IS, the money and SeCllI"ltles 11 ave· not vet
eJluJ?ge.d ~lilnds. Weh,eli.eve .that such. aCiPqf.ol1J.el~shoul~1be .protected.
a..o;runst rIsk on that transact] on 2);1.d,b.e,PEl:r;ll1l:t~ecl tq, receIve the benefits
of hi$ bar,g~in eVE)nj£his.b,1:9ke.l~;faH$. :.. :',.'. ~: '. : ' ..•.
':' A~ ~ 11a1'e ahea,dy riotec1, .t1;t<:\ :]?ij,l~C;il)l~l ,pllrpQ~~.qf: tl:irse a.I;1el1c1~
J11ents IS t.o meet more nearly the re,asonable expectatIOlls of brokerage,
firm customers. . ... '
 165
b115ines5. Institutions lenc1 securit.ies in orc1er to levera.ge t11eir port-
io]ios,fI.nc1 t.he.y rec.ognizefLnc1 ire cflpo.:ble oi fLccei)ting the assocln.te(l
business risk: The institut.ions generflJJy require t.hebOTro\~'illg broker-
clea]er to, post e911(l.tera). ~q}lfLI tD fit least. 100 percent of the value or
the seemities b6n:bw,ec1 arid then mark t.he·\?ol1at.e.trrl t.o t.he ]11 [l.rket..
It woulcl not seem that such lenclers need t.he· prpte~tion of SIPC .
. . Oil the othei<harid-; brokers might borrow :ITOlT). 'ilic1i,ric1ual investol's
who would l1o"t re:aliz~·.that 'by e.nteTing into sneh arran gem e.nt.s they
would 105~ SIPCCOyQ1)lge ..' ." .. . ...
. The. point is 110t. ofma,jor importance, [l.nd we·do.not:object. to thE'.
proposed ehang,e, but we believe t.hat :wha,t SIBe proposes to do shoul<1
be ma,c1e cJea,r"a,t lea,stiil the legislative history. ·If ·.the. proposed
ehrmge is ma,de, IbeJie,Te the COl11miss'i,oll woul.c1 fincl it ne.eeSSfll')'
to provide a.c1c1itional 'protections for retail enst.omeis ,vho Jencl
seemities t.o their brokers; f];nc1 Ibe.lie1Te we
wonlc1be able to do so.
'\T'ole lia.ve ali.ot.h:el~'tn;ciblem wit.h the pr{)posec1 ·mnenc1ments t.o
section 6(c) (1) ,.whic}:LwOl}J,c1lJIovicle ~-h.[).t. onlY)I~c)Jrit.ies rec.eiv,ed or
held ;bythe broker-realer ·"in the orc1ina:l:y'cq~T!3e of. ·bil:;;iness as a >broker
Or (1e<l.1e1::' C:9ulcl b.e. t1~e:hn.sis fOT a cJ flim. I lmc1erstY;TiJl tha,t .SIPC pi'o-
po~es.:this il} {:n~cli'lr:tq:'c'Qd~fJ1':¢e~tahl easesi·which ha,ve:,c1eniecl claims
of [l, cnstomer.·w.ho ,a.iitec1.in~gl111Y orili1prbP~rly ill his .tl'rtnsact:ions
with th.e debtor. .' '.' .. " '.... . .•.. • ...
Ii,! Ii? agi'e.e with these decisions ancl this:' objective.. BU.t we think
the.Janguage is. too broa~t ;It Sh011ld ext.end. cinly to sitna.tions where
thecustcimep·clealt. witJd,lwbroker lmpl;6pei'li;'a;tiNphQnl~1110t exte.nel
to,Cl\SeS where. ,it w,as:th~ elebt.or not the, cn~t9me.r;.~~·h.o did not aet""in
the 'ordinaJ'j cOl1rse o.f.l;>:L1!3ii)~ss:" l,Ve thinktha.t:-wonld be nnhiT to f\.
cnstOlJler ifi-he we.r~' ~:ichlde.c1. ·b~CfLl:ise. the"clebtor: depaited irom the
ordinary course Dtbli.sll'.~e.ss.i:ii"(le;tiingwi£1i·:hinl~:,:· ...~ :.'. . ...
. v'i,T, e dcili~t·tlriiili:; this ac1ditionallangua.ge jll':bhe st!\o~l1te:is really nee-
eSsa.ry"tQ ac~o.mpl~¢.h SlPO's ·p.ui'pOse: ';rhe c"OL!-rts'have; already so, hel el, .J
but if. it is :to. be include,el, wdihinlr it slioll,ld'beliil1.ite.clto· ca~es where
the·customerclici" not ·elea.i. ~¥i th i~he.. . hr;obi'ifi 'the.; (trqJ.il~.:ty GDUrse' of
l;>i.1siness;· Tathel' thhi'J. the. other w:f1.y 'armU1cb:,,: ;-; l' .:'. ~', : :." . ' ...
'.' 'Dlus' )e.g~~la.:i:.lbli ·'im~9lv.e5· ma.ily.other;: t1iflj.cul~.questions, anel. the
Commisl3ionoffirs its .~il1'le.:i'p1,cl thetj~ne. 'Q;fj~l'{:~t,a;:(f to' a~l3ist CO~lgTess
in a.nywa.yd'l1ring.the legislative process .. : .. :: ..::.' ....... : .. , . . ... .
'. JA' qOlichi?io.n, ~he COl1'lmi~s.ion wishes· to rejtera.te its. wholehear;tecl
$.Up'pql;t of.: th.is.le:gi~laMo~) :which '~'I'e "heJieve: wi~l p~'ovic10 better, cus-
tomer prot~6tioJi ll~. a tim~]y~·.ii.nq .ecoppl\1f.c~rt":,s.~iioll. ..... "... '
T 'will b~ ·ha.ppy. to ~l~SWeI' a.ny questions. the81;1.q<;Q~11lnj~te~ '[.l}il.y l1fLye.
. []0i'. L00l111S' :pr:~l:).at;e.~l ~t9-tement anel the.mel1'l?ranelu:1'Il. referreoJo
follow:] .:. . " ... """ . "."' ,.:' .'.::;:." .. ' : ' . : ',,'
S~ATEMENT .OF ..CO:r;{¥IE'SIONER. ~H:r.LIP A.. LOO:MI:;;; Ji.; Sl'Ci:rRiTIES '~ND EXCHANGE
r.' ;." .. , . ",;:: ........,;. ·.·.'T;i~:tl;M!~SION . . · , .::' ~'::'.;' ;:',.':<;_:~:. :"··i.",,· ,
Mr. Cbai"tma:n unc1 nirimllers 'of the Snbcbmmittee; 'itr.is··a:'·pleasur.e;to appear
1JI;j'ore Y0"\l today to pJ:eseI)t the Qonpnission's -views'.orr'the' pr.ciJ.josecl amendment.s
tot1:i~ ~e~1ji·iHes·t:p'iiesi:Qii"~rQtecti(i.iJ' Act ·on.070. iFive;yeal's ago,. as; General OQ.l1n-
riel '6fthe Comillis§itiii. I ·accompaniecl·.8hah'bitm ,BuclgedlY bis,appearances. before
C(;ngr~s~ to' exi:if~ss :thg i'G!nnmisi;;i"ob'sstropg,rsuppoi·V·,;fol'.tlegislation. to 'protect
{h'e accihiilfsb.':E'j)lil)TiC·' c1.fsto'me'i's Of bl'bker,[dealers:UAt ithe'tiniei'of those: appe:u·.
.
~n,(,;¢ii:'i:l?:~:;'~~,s~W~1:ef:!lt1~li,st'i'r; :yn~ ·lll~!).':;~i;a "g;. C"l"i:sis),ipnl~li6con:ficlen<::e in' tlle
lnar kets 'was'a t';lt~~J.~!l.clll·l:a)lil, Slg111fican j;,nnm JrerSiofL bl'.oket,cleaJerfi. w.ere;,failing;"
frequentLY cau'srug substantial losses .to public !=l1stomers. In enacting the' :,:;j:'rc
65-1l4~7 fl.-.,--12 . . .
. " . ! . ' .. ~ ..
 167
which WE're enacted Rfter the intro[lnction of B.n. 8064. Others, of course, rE'p-
resent l1reilS where the views of the CUlllruission and SIPO may lUffer somewhat.
I shaH not' discuss these commen ts generally since many are narrow in scope
:md::tecbnical and are well presel1ted in t.he memol":llJdum. However, I 'wonld
like· to discuss a few broall issues wbicll should be consiclere.d.
, The OommilSsion's experience in )'espoJl(ling to i1lYestor complaints regarding
tlle SIPC Act inc1ir:at.es that the majority of these complaint.s concern two prob-
lems: the time required to satisfy a cu:,;tonH'r's claim, and the customer's in-
ability to nnclerstall(l the complexitfes of t.he liqui[lat.ion procedure, sncb as the
fact that he may not receive bar:]:;: all IIf t.he securities he had on deposit ",,'"ith
the broker-dealer. The proposed ilmemlments \vould help rectify both of tbese
complaints by streamlining the liql1ida tion ].lrOCedllres and more nearly meeting
"lh.a·reasonable exp€ctations of customers.
~'o streamline liquiOations, the propo~ed legislation 11rOYic1es SIPC with tbree
methods of satisfying t.he claims of cllstomers of a bi:6l,er"11ea1er in financial
'llHficulty. First, SIPC may initiate fI lil}nirlation' procedure an'a1ogous to 'that
currently provided, in which an independent. court-appointed trust.ee carrie,s ont
the liquirlation ; second, it may apIJoint itself or a member of its staff as trustee
1n certain deSignated smaller cases; tllird, it muy satisfy the .claims of customers
in the smfillest cases by paying those cnst.omers directly,' witbout initiating a
liquidation proceecling. In each type of procedure, the methods employed by
BIPO 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 conC111". SIPC's
experience in some 116 liquidations has bighlighted certain areas where the
Ad, although adequate to protect customers, lacks 'the flexibility wbich migpt
'have enabled SIPO to maximize the benefits t.o public cl1stomers without. incur~
-:i-hig . unnecessarY"administration expenses. 1I'Ieasn'r£'d .in: .t~iiJ;qS: of. the ratio of
a(lillinistration expenses "j:q the number of customer clrtims·:s..i.tii'ified; the current
Act appears to function reasonably well in larger liql1iuatioris. In the smaBer
cases, however, administration expenses are usually far out of line'. Tbe Oommis-
si-on agrees with SIPO that .the more flexible liquidation IJrocedures proposed
would ,be of significance in eliminating unnecessary administration expenses. Xhe
Commission also believes that the proposed alternative procedures would help
to assure 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 Pl1blic 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 that pOl'tion of a claim related
to cash. We ·think this change is entirely appropriate ,and will serve to maintain
investqr conti pence. In ade"jition, to the pxtent· possible:. SI;E'C would retutn'to'
the ·cust.omer his account: exactly as 'it stood on tli'e "fi"ling' ·eiate-;..custOmer~ 'no
longer w.ould receive cash in lieu' of ·securities but 'would rec'eiYe ·the securities
claimed. This woulel have several important conseqnences. First, t.1le customer's
:expectations are met; see-oncl, it eliminat.es from Sl"PC liquidations the chm:ice
drcnmstance 'Of a custDmer's recovery depending on whether the .broker-dealer
]las much or little of a par.ticl1lar seclllitya t -the time the liquidation is initiated;
third, the certainty of l."1lowing tbat o3n accopnt will be :returned intact permits
the customer t-o hedge against market risk if he so wishes. .
.IIT order to satisfy customer claims for securities, t.he trllst.ee would determine
tlle ShOl,tfall in· securities .claimed by cllstomers, and would be·.authorized to
Il1lrchase ,~nch securitie,"l in the 'Open market or to pay -or guarantee 'hank. loans
j:t:gainst which sec\1l'ities bad been hypot.h~te(l. Finally, the ttustee:'1vould 'be
. f\J;!thinized to ;=l.rrange thetransf.er of Cllstomers' accot!n~s toothe~':brol,er-dealers, .
'f11T;ther re[1ucing the disruptiori e~perienced by customer'!. . '.' ' .. ,ii"~:'
. ·A ana-es will assure more f1e..'tibilit speedier li llid·atioi:J.~ and
be'ter cus6cnner prote¢ ,On. n one area, h[Jlyever,. we suggest ~hat Congress
colisrcler f.ui:tlier expanding the SCOIJe of customer protection.· The 'CommIssion
believes tllat wbere a customer has a contract. with a' broker~dealer for' the
jmrchase or sale of· securities wh,icb is execut.ory on the filing' date-tliat is a
contract where money and seclirities have not changed hands-such custo~er
sh-o.uld be protect.ed agains.t risk on that tran.saction and permitted to receive
tlle benefit of his bargailf even if his broker fails. This should be true whether
the debtor 'Vas "3.(:"ting· fo~' the customer as 'plincipnl oi: 'ngent a·nd wliether .the
trarle was o.n. aHelive:- y v,ei's~s paYTI?ellt basis. I shall not discuss t.be technical
 186
STATEl'IIENT OF JAMES W. WALKER, EXECUTIVE VICE PRESIDENT
AND DIRECTOR OF GOVERNMENT RELATIONS, SECURITIES IN-
])USTRY ASSOCIATION, ACCOMPANIED 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 COnnVIIT-
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 approxinmt.ely 650
securities firms headquartered throughout the United States which,
collectively, account for approximately 95 percent of t.he Nation's
securities transactions handled on behalf of over 30 m.illioll stockholc1-
ers.
Accompanying me t.oday are Mr. Dakin Ferris, whom yon have al-
ready ident.ified, Mr. Chairman, and Ben Lubin. And Mr. Lubin is
appearing as a represent.ative of the Mal'ke6ng Committee of the
Securities Industry Association, and who is a representative to the
special task force formed by the Securities Investor Protection Corpo-
ration chairman, Hugh Owens, t.o review t.he operations of SIPC sub-
sequent to its cr~ation in 1971.
lYe are here t.och}' t.o urge prompt passage of R.R. 8064, and my asso-
ciates will provide specific reasons and explanations for our support.
First., however, I wish to bring to the attention of the subcom.mittee
the difference iIi the condition of the securities industry today than at
t.he t.ime, 5 years ago, when t.he Congress was engageel in developing
the 1970 act..
Pal'tly as a result of the act it.self and the leadership dem.onstrated
by the Congress, partly as a result. of regulatory and self-regulatory
action, fl.ncl partly as a result of industry initiative, the firms whieh
make up t.he securities industry of 1975 are more strongly capitalized,
better managed, more efficient., and bet.ter regulated tha.n ever h3fore in
history. The dat.a brought. to your attention Monday by SIPC Chair-
:tnan Hllo'h Owens well demonstrates this fact.
Dm'ing the past 5 years II'hen the Nation hflS experienced an extreme-
'. Jy broad range of economic problems, inducling staggering inflation
andre.eession, the rate of SIPC liquidations has st.e.adily anc1l'emark-
ably declined. Of the 116 firms which have been liquidated by SIPC,
only 5 percent. of t.he total has oeeurred so far t.his year. Last year the
number of liquida.tions amounted to 13 percent of t.he tot.al compared
with 26 percent. in 1973) 35 percent in 1972, and 20 percent in 1971, the
yea l' of SIPC's ineeption .
. This improvement in industry conditions is certainly an encouraging
aehieH'.ment.. It. should not.. however, lea.cl t.he subcommittee to con-
clncle t.hat. expeditIOUS legislative action is not needed simply because
there is no urgent and dramatic epidemic of potentia.l liquidations
at hand.
Revisions in t.he 1970 act, as contained in R.R. 8064, will result in
greatly enhanced inYestor protection and public confidence in secu-
 IS7
!"iiies markets. These carefully anel c1elibenltely developed impron-
ments should be in place for use 'when anel if the need should arise.
It ma.y be helpful to the subcommittee t.o know that I served on both
the industry task force established in 1970 to assist in the develop-
ment. of the orig1nal SIPC legislnt.ion and the 1074 Task Force appoint.-
ed by Chairman O·wens. The second task force under the leadership of
the SIPC General CounseJ,Mr. Theodore H. Focht, who served ns its
chairman, was able t.o function without the pressures and controversy
surrounding the work of the first tnsk force.
Thus, a careful anel systematic review of the SIPC activities nnc1
procedures and its denJings with many non-securities-industry organi-
zat.ions and individuals ,vas achieved. The diversit.y of views represen-
ted on the t.ask force pIns t.he care exercised nnd t.he leadership given
should illspire greater confidence in the bill developed from this work.
At. this point., :Mr. Chairman, I wish to ask Mr. Ferris to exphin the
~Li. position with respect to t.he proposedlegishtion.

STATEMENT OF DAKIN B. FERRIS

,,- .
Mr. FEHRIB. M:r. Chairman, the Marketing Committee of SIA is
concerned with the programs and a,ctivities 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 tIle 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 cortfidence in the financial responsibility of securities firms
'irhidl are actIve m the markets ancl who itea.l niLh t.he public, is it pre-
requiSite to broad public participatlOn I11 the market for securltJes
j n vW:JJ::umt.
The amendments under considerat.ion by the subcommittee provide
jmprovements in SIPC which will enhance confidence in securities
market.s. :&1any improvements will be recognized by persons with a
detailed knowledge of these markets, but the public investor will be
interested immediately in the one big, obvious improvement for his
benefit-an increase in the maximum amolUlt of SIPC protection to
$40,000 for funds and $100,000 for securities.
Thi,s im roved protection not onl )rovides for increased confidence
in the use 0 t e mar ets through members of SIPC, but also confidence
to encuurage castomers to leave securibes wlth the firm rather than
obf~very. .
..Ail absenceoJ:such confidence "ould frustrate the efforts of the
industry to immobilize the stock certificate and to provide an efficient
natiOllal system for the clearance and settlement of securities transac-
tions. Therefore, adoption of the amendments obviously will 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 t.he Securities Industry Associa-
t.ion's board of directors at its meeting last week. The board voteel
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 fuuds, they c10
handle them. Accordingly, the possibility of loss or misappropriation exists. III
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 lien of missing
mutual fund shal'es has been paid to 50 claimant.s in eight. diiIel'ent
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 transflctiOl1S
can give rise to claims in SIPC liquidations and since it is irleqnitflble
to be using SIPC funds to satisfy such claims if, at the same. time,
mutual f.und transactions are not part of the rtssessment brtse for SIPC
assessment purposes-the chrtnges provided in R.R. 80GJ on this ques-
tion are appropriate. I might add parenthetically that all of the in-
creased participation would not be paid by t.hose firms t.hat are not
now members of SIPC, but a large portion would be assumed by those
firms who are already members of SIA and who endorse increasing
their own assessments for t.his purpose.
Finally, it is appropriate in our view to cfLll 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 bureallGracy.
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, wit.h industry
participation, has perform.ed its job in an outstanding- manner and
deserves, in our view, public aclmowledgement of the achievem.ent and
.congratulations.
I wish at this point, Mr. Chairman, to ask Mr. Lubin t.o comment
further.
STATEMENT OF BENJAMIN L. LUBIN
Mr. LUBIN. Mr. Chairman, I am here today as the Securities In-
dustry Association's task force representative responsible for provid-
ing the tfLsk force with brokerage operations expertise. In t.his capac-
ity. I "ish to express mv unequivocal snpport. for H.R. 8064.
As you will recall, 1969 and 1970 were eritical years for t.he securi-
ties industry. In addition t.o 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 strnight.ening out t.he paper-
work crunch of the late 1960's. As a resnlt of the industry's cleteriorat-

58
 189

ing f:illflJlci:1l hf':1lth, the innstillg public began t.o lose confic1ence in
brokerage firms, causing a concom1t:1nt c1et.el'10ratlon 1n the streni!:th
ea
of the co~m tris p1t.aJ lnarh:ets. ~
In 1970, Congress, recogn1zing the severity of this problem) passed
the Securities Investor Protection Corpor:1t10]1 Act.. In doing :00, Con-
gress brought about a certain measure of calm to the 1nvesting public
in that it extended an FDIC-type of insurance protect.1on to fin inves-
tor's brokerage account. Unfortllnately, however, because of the urgent
necessity for this legislation, the 1970 act. was structured nrOllllel t.he
wholesale incorporation of the Federal bankruptcy statute.
As SIPC began to liquidate debtor members and indemnify public
customers, as provided for by the act, it soon becameappa,rent that
the 1970 leg1s1ation was far too rigid for the efficient handlil1g of many
brokerage llqu1dations. The act did not contemplate the complexities of
such industry phenomena as clearing corporations, fungible securities,
(:ontinnons net settlement accounts, and omnibus accounts.
According]y, liquidations were lengthy and cumbersome, customers
became disillusioned, and final settlements were inord1nately pro-
tracted. The public was unhappy with the indemnification procedures
and trustees, because of their inability to exercise routine discrebon or
business judgments due to the rigiclity of the act, were unable to be
responsive to the many unique situations which occurred on a daily
basis during the liquidation procedure.
Inl\1ay 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 COll-
clusively how the inflexibility of the 1£>70 act could be costly, inefficient,
and unsatisfactory to t.he public invest.or. At this juncture, I would
like t.o quote briefly from t.he .July 1974 report by t.he SIPC task force.
Furthermore, 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 speedi-
est methods practicable. It appears that many Weis customers were in some
measure dissatisfied with the protection afforded by the Act.
Since many clients were receiving indeIDllification in cash instead
of securit.ies and because their accounts were frozen for protracted
periods of time, t.he 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 expec1ienc
ali~nom, e task force etermme a ee ee are eXI e st.atu-
tory guide mes designed to allow IPC trustees to exerCIse e iscretion
. to make customers whole quiclr'!y and with minimum expense. SIPe
must be gi ven smrlT1Ld:ditionul lttlthority and cliscr€ltion as ar€llHlC€lSSapy
.to-- elltb1e it t;n l?edOT:m j~s. ra': more effectIvely and efficiently ana
mere y to aSSIst m mamtammg mvestor confidence."
'The amendments offered m 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 liquidat.ion 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 or the Union and ordered tObe printed~= =~==-=~-

]\'1r. ECKHARDT, from the Committee on Interstate and

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 an 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 shaU-
"(A) not be an agency or establishmellt of the United States Gov-
ernment; and
"(B) except as otherwise provided. in :this Act, be subject to, and
nave all the powers conferred upon ft nonprofit corporation by, the
'District of Columbia NOllprofit Corporation Act (D.C. Code, section 29-
·1001 and fol.).
"(2) ,MEMBERSHIP.-
." (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 reported bill, -which would [ll11Pnd the SeC'llrities Investor Pro-
tecbon Act of 1970 (SIPA), is designed to provide the federal courts
flnd the Securities Investor Protection Corporation (SIPe) ",yith
speec1ier and. more flexible procedures for the protection of Cl]stomers
of in~olvent brokers nnd denlers ilnd the nttenchnt hquicbtion of those
brokers and dealers. The bi]} \l'oul(Llna]~f~BIP ,L.L.DJOLQJJ',,'i12Qn~i~~eJo the
reasona ble eX-!:2cdutions of pubhc lnvestors a.nd WOll)ClJ2xovicle jn:\'(~s- ~
-tors ,nt.h greater protection ngalnst the financial faj]ure of stock-
'~ers, the reoy-enl1a n c-rrrg-JJlYest or=conIid en ceni=-l)JB~_s~ili~i tl~==
markefs. -
~ce enactment of SIPA at t.he enc1 of 1070, the. protections of the
Act. 1111l-e been matle RTaiJabJe to approximately 105,000 customers in
1:2:1: liqniclation proccE'(bngs across the ·conntry. In the C011rse of those
proceedings secUl'jtiE'S nnd ('ash hayjng a value of approximately $277
million have been tljstriuutell to customers. In ac1c1i60n, SIPe has 1118.c1e
J1et l1chanccs to trust-fes totalling approximately $53 million. Despite
-the impa-ct wl1ich such protections haY6 hac1 on investors who would
othenyise have lost millions of dolJars, there are significant limitntions
'vn SIPC~s ability to satisfy customers' claims and to complete the
liquidation of the broker promptly and at reasonable. ·cost. In the over-
-vieTI' the bi11 addresses (A) what the customer gets, (B) how fast the
customer gets it, and (e) how much it costs to get it to him.
A. TVhat The Oust01ner Gets.-A customer generally expeds to re--
·ceive ",vhat he believes is in his account at "Ehe fm1e the stockbroker'
'ceases business. But because securir:ies may-hannseenTosf,"lDlproperly
]'I}1mthecated mlsa )1'0 nated never rm1'cI1il:Sea 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 remainder, they will receive cash based
on the market value as of the filing date (normally the day the liquid a-
-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.ad t.heir accounts are netted out. One of the principal underlying
purposes of these amendments, is to permIt a cllstomer to r~celve secur-
'ltles to the maxbnum extent pOSSIble mstead of cash, ill satisfaction
. or a claim_for secunhes.l,? seeking to make customer accounts w1101e
~m(L returning them to Cl1.§.tOI!1~:rs 111 . ill .o-rm- ley-e:nstecl on TI1efiTmg
{late,the amendments. not o!lly w6l11d~ satl~~f~h.e custom~rs' Ie.giliillate-
·e:s:pectat.Jons, but also ",vour-Gallow 111m to contmue to.t}XerCISe-mvest-
n~lt prero,atIvesimc1 to. a-i-:'olc[Oftentimes adverse tax consequences.
B. H O'W ast He Gets 1 t.-The prese-nt hqmdation proc·e-dures al'8
:810:ve1' than necessary, particularly in smaller liquidations. 1I10reover,
w]111e customers are waiting to receive their property, they are un-
.able 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'r1 and tnx problems mfl,Y arise. The amendments expedite the
]iqlliehtion by minimiz.ing ellmbel"so~lle ac1minjst~:lt.i.ve 'procedllres
1,',hich hfl,ve prOH\n to be tJme-conslllmng nnd by e]mllJlahng- (:(,]·tnin
procE'clures ,yhich 11,1Y8 proven to be lmnecessnry. The bil1 "ould,
among other things, permit the direct payment of customer clnims or
the n.ppointment of SIPC or nn employee as trnstee llnc1er certain cir-
cnmst:ll1ces. In ac1c1it.joll, t.he bill ',,-,ould allow for the prompt trans-
fer of Cllstomer acconnts from t.he debtor to another broker-dealer.
C. If ow JJuch It Costs.-The procedures prescribed in SIP~-\" :11'e
mmecC'ssal'ily expensive in many casf's. In every liqnic1ation fl, t.rustee
must bo appointet1 by the conrt :111(1 in aJmost every liqlliclation coun-
sel for t.he trnstee is appointed :mc1 accountants ~.re retaine(1. This is
necessary and appropriate for larger broker-c1ealeTs, but, uncle.r SIP ~.\..:
the same procedures must be utilized whether a broker-dea1er has
thol1sands of customers or only a few. In small ]i(luidation proceed-
ings t.he expenses of administration are disproportionately high.
The reported bill is designed. to meet these s]wl'tcomings. Its pro-
visions will rec1nce aclminist.rative expenses whe.re possible and ae1L1
speed and flexibility. In order to increase the ext.ent t.o which cnst.omer
c}[!,ims for securities are sa6sf1ed ,vith securities rafher tJw.n cnslr:-t1N
blll wou1C1[i;ffi,1ThTIzetlIetnrst~l5rOKerage -nOll unaerg.Qlllg Tj'gl1~­
-d1ttloITto make up fOr missing se.curities by pnrchasing shares, so long.
5.s t.hjs could be done in a rau and orderly market. TIle wora:s "ta!l'
.- ana order! market" a,re used to assure t11a t the trustee WIll not be
~a to purc lase secuntles in a market control1ed by artificial in·
fluen.ces. For example, a ma,rket mlght not be deemed fmr and orderly
::fher;;tTlere were indicatwns of manipulation by insiders or ot-heTs.
1n addition to open market purchases, the blll would authonze the
t.rustee, subject t.o SIPC approval, to pny or guarantee loans coJlateraJ-
ized by securities. In appropriate cases SIPC conld advance funds for
this purpose. ~largin or ot.her cllstomers would be permitted to pay
the.ir indebtedness and receive the secnrities or cash in their accounts.
The current practice of paying cash in lieu of missing securities
would be substantially eliminated.
To speed np distribubons of securities to cllstomers, tJIe bin gives
t.he trustee the power to transfer some or all of the debtor~s cllstomer
acconnts to other broker-denIers. Customers 11'0111(1 noL of course, 11:-n'e
to leave theiT acconnts with the transferee broker-deaJers. It. mnst be
recognizerl, however, that snch transfers are not nhvays fen-sible, and
in many liqnidnt-ions this procednre ,yi11 not be 11tilized. Bulk trans-
fers would take place only ,vhere. \\'illing transferee firms are avail-
able, where the failed firm~s records are reasonably a.ccurate anel 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
liqniclation proceeding. .
In order to pare administrative expenses, the .bill ,,-ould specificaJl)T
~uthorize SIPC to designate itself or one of it.s emp]oyees as tl'11stee'
m smnller cnsf'S (those ,vhere the failed firm:s habi1ities a.ppenr 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 ,yonId 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 estabhshing procedures for
the adoption, amendment, and repeal by SIPC of byla,vs and rules.
Proposed byhw changes are reviewable by the COl11lnission, and may
be subject to the rulemaking procedure wllere the Commission deems
them significant. New procedures :tppropriaJe to legishtive, rather
than interpretive rules are provided since SIPC:s rules lIi11 ha.ve the
force and effect of law. Proposed rule elulJ1ges 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 snch procedures.
Section 6-SIPC Fund
Section 6 of the bill makes various teclmical changes in section 4
of SIPA. ill addition the hill clarifies SIPC's authority to maintain
confirmed hnes of credit se.parat~ fro111 the fun~y diminishing
-the possibility tiTIi:L~e mightYleedt:ObolTOIv from 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
contjnues the existing requirement that gross revenues from the securi-
bes business be computed on a consolidated basis, except that it ex-
cludes foreign subsidiaries from such consolidatlon. A companion
change in the definition of "customer:' contalned in section 15 of the
bill excludes from SIPC protection any person to the extent that his:
claim arises from transactions \\"ith a fore.ign subsidiary of a SIPC
member.
Sections 7, 8, and 9-PTotection of In'vestoTS, General Provisions of :a
Liquidation Proceeding and N e7.O Sectio11.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-regul::ttory organization to assist
a ~11ember of SIPC in financial difficulty or to take appropriate action
'nth 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.
Sect.ion 5(a) (3). This subsection c.oc1ifies existing Commission rules
(see 17 C.F.R. ~~ 240.15b5-1; 240.15b6-1J under \\"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 sub2ec.tion also makes clear tJ1at SIPC is not. obliged t.o.
~ct IIhere customer interests of the type protected by SIPG are not
mvohed.
 28
whether they apply to c8sh or secnribes or bOU1. The term "sC'cnfitv'"
,yould be c1eiinec1 by section 15 of the bil] (section 16(14) of SIP..:\.
as amended) and t.he some\vhat confusing reference to "prope~d.y
of a. similar chfLrnder: l has been deJeted.
Section 6 (c). The bill ,,'ould cochfy the prc~ent SIPC practice of
providing protection to cllstomers who, in good fait.h, enter int.o
trnnsa.ctions ,yith t.he debtor after the filing (late but before the ::lp-
pointment of a trnstee.
Secbon 6 (e). Uncler SIPA all costs an("1 expenses of the adminis-
tration of the debtor's estate are paid to tIle t.rustee (including rejm-
bursement of any money ac1vnnced by SIPC) in priority to all other'
claims. The amendments reflect a significant departure from Cllnent
Inw by providing that these costs and expenses shall be paid from the'
genera.l estat.e a.fter all customer net equity chims ha:ve been 2atisfiec1.
The priorities of distribution from the general estate are to be gOl"-
erned by the Bankruptcy Act. The bill makes clear that certain ad-
vances by SIPC will be deemed costs and expenses of ac1ministration~
SIPC is entitled to reimbursement from the general estate for ad-
vances made to broker-dealers for Josses 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 bUer a.dvances only to the
extent that they a.re made to recover securities which are apportioned'
to the general estate llTIder section 8 (d).
Section 7 (a). The bill here specifies the powers vested in a tTustee.
They are the powers of a trustee under the Bankruptcy Act to,<!cther-
with eertain specifically granted powers 'which may be exercised only
with SIPC approval. The use of SIPC employees to aid 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;rl1stee :with thecd::~~~~ ~~uste~,
under t e an rup cy c, p us specml dutles re'latmg to tEe saflsI1rC-;'
, tion of customer cla1ms for securities by the djstribution of secarit-ie:¥
to fne maXImum extent pOSSIble.
.- SectIon 7 ( c). The bIll mcorporates the reporting requirements of
bankruptcy rule 218 and adds other special requirements.
Seetion '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 t.he 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.
 29
Claims of customers and other creditors must actual1y 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 estabJished 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·efiect.s one of the essential features of
the ~lnenaments, namQY the aehvery of SeClJ)'itip:s::::tOCl..TSturrrers--to--t-he-
g"l'eaLest extent pracbcable in order to make customp.r accounts whole.
"1:'he section prov1des generally that a trustee shall seek to d1scharge
promptly all obligati~ns of the debtor r~lating 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
~claims, this section authonzes a trustee to deliver securltles III sabsfac-
. tion 01 claims to the extent they are avaifi.iETe.-:AJrertIieavailn-15le
, securitIes have been d1stnbuted to sabs such claims, the trustee sha.ll
I'

pure 1ase e I:lJance of the shares in open market purchase. However,

. \\-here. t:11e:feis no "fair and orderly marlre-t"-iilWIl:lch to )urcl1ase
sikurl ·les 1e trus ee 1S rOVl e wi' 1 au on y to satisfy claims for
securities with cash. Securities distribute to customers are to be
'-\:aJued as of tile 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, remaining 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 Iron1
SIPC up to the amount permitted by the bill.
Third, SIPC shall then be reimbursed as subrogee for the claims of
customers which it has satisfied with its own funds.
Finally, SIPC shall be reimbursed for any advances it has made to
guarantee or secure any inderrmity pursuant to sectjon 9(c) (2).
Any customer property remaining after the satisfaction of claims
by customers and SIPC becomes part of the general estate. A cllstomer
ma·y file a claim against the general estate to t.he ext.ent that his net
,..egu}ty exceeds hW share of customer propersy_pll1s SIPgYTotccbon.
-eneler subsectIon 8TCT(2rnretl'llSfee IS dlrected to deliver 'customer
name securities to customers if they arc not indebted to the debtor. If a
 37
Based on tllis review: it nppNlrs that no nd(ljhonfll ('ost to the gov-
ernment. wOl1Jc1lJe incll]'J'eLl n::: n ]"rslllt of rllnctnwnt of this biJl.
Sincerely,
ALICE M. RIVLIN, Dii'ectoT.

_-\..GENCY REPORTS

S·L\TF~.IEXT BY HrGlJ F. a'WENS, C1UIRl'UN ECURITIES INVE~!9A-__ .~_

PROTECTIOX CORPORA TIOX
------------~~-=----
::\11'. Chairman, anl1 ])10.111b(']'sof t lw ,Subcommittee, it is n pleasnre
fur IllP to appear before Y011 this morning a11(l prrsent the yirws of the
Spcnritics Investor Protrctlon Corporation on H.R. 8331; the Secllri-
ties Investor Protrction Act amrn(lmellts of 1077. A very similar biD,
n.R. 8064~ was thp subject of lwarjngs brfore this Sllbcommittee in
bte 1975. The- present bill incorporates many ~ll.ggestiolls made by
the Secllrities and Exchange C'ommi;.;sioll, SIPC: this SllbcoJllmittl~(>'s
OI,n staff, and othcrs in regard to H.R. 8064-.
Before I revic'w the many important imp]'ovemrnts ,yhieh H.n. 8331
,yonld make in the Securities In\'('stor ProtC'etion Act of 1070 (11Pre-
inafter referred to as the (;1070 act"), perha ps it '\"Gll]c1 be n:::eful if I
snmmarized bl'iefly the nctivities of SIPC' ~inC'e its creation in De-
epmber. 1970..As many of von ,yi11 recall, SIPC had its ori!!1ns in the
rlifficllJt. years of 1D68~1 !)7(j W]lPJl the pal)C'l" cl'llnch brong-ht Oll by nu
l1J1('xpectedJy high tmcling \'oJ11me 1n secllrities was follO\n'd by the
most severe decliJle in stock prices since the Great Depression. Hlln-
dl'pds of brokpl'/dealers wel'e mcrged, acqnirct1 or simply ,Yl'nt out of
business. There ,yere some "\"hich were 11n:1b]r to meet their obligations
to cllstomers and ,wnt bankrnpt. Public confidence in secllrit.ips mar-
kets "as in jeopardy.
--=--.In order to protect cnstomers of failerl brokrr/c1ea]rrs against finan-
cial loss and, thereby, l'C'sfore :in"\'(>sto1" confidence m the ~ecl1l"lties
.JH-r'lTkcls, COllgless p.tss-m the 1!)70 ad. 'That sfafnfe, which wns ~igned-~
into-law on Decembpr ~O, ID70, creatl'd SIPC :l11C .stn lished a )1" -
gram . ere y mOJ1les rom t 1'e • IPC Fllml ,,"ould br available for
t11e.'purpose of profectmg c11stomers of broker/dealer £inns which en-
COi:iTitel'ed financial diffien Ity. As the Act now Stal1cls, SIPC may
- advnnce a. maximnm of $i)()POO to protrct the claim of anyone custo-
mer of a failed brokrr or c1(>aler, bnt no more than $20,000 of that
amount may be advanced to pay c:laims fo), e(1;-:h as opposed to claims
for securitles. These. payments snppJement cljstribntions of avniJ;lble
securitirs and cash from thr debtOl'!s estate.
SUiCefhe enactment of t11r S'IPC legbt;'l tion, ] :2;) of the OI-er 8/iOO
broker/dealers which have becn SIPC members over the pa.st 61/z
yrflrs huyc been placed in lif)llic1ation procrrdings. As of June 30, 1077,
SIPC had made net llchaJlcrs to tl'ustl'es totaling $:j3,411,014. In Cl(1cli-
tion to these SIPC a(hances, significant alllounts of seenrit.ies ilnd
cash haye been ·djstl'ibntpcl to cnstomers hom assds ,yhich 'YCl'e
acquired from the debtol's~ ('states by the tl'l1sires at tlw t.im(> of thejr
appointments. IVe estimate that. to date secnritlrs and cash having a
:'aJue of approximately $277 m:illion have been distribnted to npprox-
lmqteJy 105,000 customers in the conrse of liquidation proceedjngs
 39
jn~ :11)(1 blrnc1in o ' of views and positions in order to obtil1n the goal
ot"n]] of us, mll1~elv, increased 1nl'estor confidence throl1gh the eX1st-
~llce of a viable anc(e'flicient SIPC Progrilm.
The, T:1::1>: Force Report serves :1S thee founchtion for virtunlly all of
the ch:-mgrs which the amendments being rOl1sic1erecl by you this morn-
in£" Iyodd make in the 1970 net. Accordingly, :;\11'. Chairmnn, I re-
<]l~rst that n. 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~cm'it,ies Inre8tor Protection Act of 1970] ,be included at this
point. in the record of these Hearings.
The Bon.rc1 of Directors of SIPC approved virtually a]] of the Tn.sk
Force, recommendations which were subsequently incorporated in H.ll..
8064:. In addition 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 designecl to make the act more, responsive to the reason-
able expeetations of investors. Even though the. overn.ll purpose of the
act is be,ing met, that is to provide protection to customers of broker/
c1ralr.rs: some customers of failed members still believe that they are
not. receiving the"protection they thought they we.re 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 \',hich the present act does not provide adequate solutions.
The first is that cllstomers generally ex )ect to recelv at" 1 their
ncC6i.lnts W len t 1(', mem er sto s doin a bllsine,ss. If John Q. Investor
. has 100 fully-paid shares of IB~l and a cree It alance oI$2Do-IIr-llts-
aCColl11t, 'Ie expects to reCelve from t he trustee n. stock certiftcate-ro'r
ilJOslnnes ntniH and a check for $200.
-:nm-1II IlHlIly instances that has not always ,been possible because
~ecul:1bes 'have TIeen lost, improperly hypothecated, mlsappropnated,
)~mrdm or even s o--e11.· , . len lere 'are va 1 c alms or more
- soc\: t lall is on hand, uncleI' the pl~esent statute John Q. will
)'ccei \'C only a. pro rata portiOll of his 100 shares. For the rernainder of
the shares ,dne him: he \vill receive cash in lieu of stock based 'on the
market. price. on the date the liquidation preceeding is initiated. 1\n.tu-
J'~]]Y, ifIB},f stoek goes up in price whileJohn Q. is waiting tohave
hl? clfljm settled, he will be decidedly unhappy with the check he re-
CelyeS from t]IP, trHstee. On the other hand, if IBM declines in -price,
':-e may receive no complaints from John Q. But even in that situa-
hon, 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 prescribec1liquida-
hon procedures are slower t.han they need be. This works a hardship
on cllstome.rs because. while they are waiting to receive their property,
they u.i',e ullable to e~ect transactions in their accounts. They stand at
 41

<:]"e,l~l' in (':1:::h protf'{·tion to ~-W.O()(). First. mfll1y r'll~tomrr:-; kl \'(' l~('n'r

been able to llnclrr::tflnd thflt thrir protcction from SIP(, i~ different jf
their clfllm is for (,:1:,-,11 :1S opposed to .~ecllritif':':. The di~hn('t ion bl'coHle:::
l'::=pt'cinJJy dr:1lTIfltic \\"llPn a cllstomer \\'ho klS hfld seclll'it jp;:: Oll rlc>-
l)o::it with his uro];:(']' for lllany montlJ~ (or )-ear:'1) Ecll~ tho:':f' ~rcl1ritje::;
~hortJy udore the filing (late. This conYrrt~ his c1nim :l~ajn:-t the
l)l'ob'r from a ('1:1jl11 fnr sl'cnrities to a claim for c:1:::h. ]\{01'(, importan t.
pprhaps, it COllYC'1't;:; the' maximnm adYflllrc~ he can grt from the SJPC
Fllnfl from $100.000 to n 11111ch ]o\\"er fignrr. T])('1'p. is an ineqllity in
th:1t situation '.vhieh is nnfortnJ1ate, and it is ~('yerel)' flggl'flYfltpcl if
the m<1Ximllm aclvance for cash claims is kept at the I.>xisting $20.000
instead of bC1ng raised to the recommended $40~OOO.
Second, it should bC' noted that the experience 'we ha\'e had to elate
\\'oull1 sCrm to indicate t.hat the costs of this propo:-::nl can ensi]y be
handled by the SIPC Fund. Of the 16;) claims to date \'.-hich han~
b<:(,11 OVC'r the existing limits of SIPC' prot('dion~ lOG \\'e1'E.' e1aims fo1'
cash over the $20,000 limits. The total donal' llmOll11t of the claims
anT the $20,000 1111lit "-as $1.2 111ill1011. If the propo;:;cd $-10,000 limit.
had brcn in effect for cash, 91 of those claimallt~ \\'ould h;u-e been
fully protected at nn additIonal cost to th~ SIPC Fund of npproxi-
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 Ollr securities markets~ there seems to be no com-
peJling reason for failing to keep the limits of protection for cash of
secnrit-ies investors on a monetary par '.vith protection to bank and
sa yin gs depositors.
The. proposed amendme.nts call for changes in the act which \,"ould
enable t.he trnstee, to a much greater extent than is now possible, to
render accounts to cllstomers in the same form as they stood when the
Inember went ont of business. Under Section S(d)! of the proposed
amendments, the trustee would be authorized to go into the market
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 empowereel under Section 7 (b) to pay, subject to SIPC
approval~ bank loans collateralized by securities, including margin
sec.nrities, the.reby reclaiming those securities for distribn60n to 'Con-
sumers. In a.ppropriute 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 accounts. If
these recommendations are implemented, the current practice of pay-
ing c.ash in lieu of missing secnrities would be eliminated for the most
part. Customers wonld receive, instead, the securities in their accounts.
Our ex ectation is that. in almost aJI cases, a customer's claim for
. secuntie·s would e S::.tlS ec y .1~dellveryoIs~~1Tritie"S-;-ancl,1fh~re~~_
~cessary, to accom hsh tIllS the trnstee wonld go 111to tile open marKet
. <, . nrc ase securItIes. . . e e leve, owevcr, la· 1 IS a ,~to ~
---~"ri.-deth'11:t"tlie trustee \YOm-ry not ~e reqmrea \0 purc1TIi'S8securlf~es -
"'here tJlat eou d not be done 111 a fmr and orderlY market. onecnlef_
'conte-!ii IS that the trustee not be re uired to make purcha.ses in a mal'-
k~ c lS emg Improper y con rolled or manipulated. TIllS may oe ..
c ,..

1 All se-ction rt'ferenee:; are to sections uf the IDiO !let a:; nmenllec1 by R.R. 8331.
 36326
securitles 1)\ls1nc5.<:;' rncn1.::i the SllJ11 of 1b1l1
without (Iupll"a Lion)-
., (A) conlJnl~slon!:i em'ned In connec.t lOll
witll l.rn.n~n~Llons In secnrlties cJrecLcd lor
cllst0J11CrS 11.';; llgent I llet of COIl1Jnis5ions }Jal(l
to other brokers uncI dcn.lcr.';i In connection
with o;l1ch trnnsllct.lons) nnd markllps wltil
respect; to purchnses 01' snles of securities :!s
principal:
"(B) chllrges for executing 01' rlenrlng
transactions In "ecuri tics for other brol(l'rs
llnd dealers:
"(C) the net reallzed gnln. if nny. trom
principal transnctions In 5ecurilles in U'aej-
Illg accounts:
"(D) the net profit. if any. from the m:1n-
ageli1ent of or participation in t.he under-
wr'lting or dlstribl1tion of securities:
.. (E) interest earned on customers' secu-
rities accounts;
..... (F) fees for inv~stmen.t adyisory servic'os
(except when rendered:to.one or more regisc
tered investment. con1paliies 'or insurance
con1pllny separate accounts) or acconnt
supervision with respect tosecuritJes;
'. "(G) fees for the solicitatJol1 of proxies
wIth respect to. or tenders or .exchanges of.
securities;
"(H) ·income fromseTl'ic~.chaJ"gesor other
· surcharges wi th respect to.securitles:
"(I) except A.S other"'iseproviCled by rule
of ·.the Commission. divide'nds' and inLerest
'rece'lved on securities in Investment accounts
· O!ttJebroker or :deR.ler; '. .••. .
"(J)' fees in Connectjol-i ·\vitllPtlt,qll. and
. other optionti:allsactibils :ii1.'seclli-ities:
· .... (K)comrnisslons ·earned.fromtransac-
tloris in (i) certificates of iiep',?sIti alid (il)
,.TreaslJry bills .. bankers ~cceptances;. or com-
nU!fcial'pap,er which haye'.a i nl.at ll T.ltj,'·at t.he
·time .:·oJ issuance. of:<.not. ·.~x:ce~dni~: niilE~
n10ntl1s. exclusive' .oJdll.Ys of. grac.c .br. an>:
renewal thereof .. the matllrity.of which is
"Hkewlse limitcd.'.except.'tha}SIPC ,shall' by
· b}'}aw' lric·lu.de . intl1c·aggi.egate 'or'gi'ciss' rev-
·... en~les ~:lJ1Iy'an appropriatepel.'ceiitage af Sllcll
tomniissiOllS based. oriSIPC's'Joss: experience
.\vith respl!c.t to ·such instrpnlents over at
'Ieast .;the ·precediJ;g.fiveyea~,s; :llrid
,;.: (L) . fees.and. otl1el'illCQnle'fr,?m such
j other, c~t~gori~s' 6f.tJie secliritiesbUsiness as
'·EiIPC sluillpro"ide b~'byl!l\';:
,... :S~lchterrn·does . not 'illcllide reyenues re-
'celved tija bro!{er ,or ici~ale(in~onilection
"'" .wi th ;the "distribli tion.of.shj·re.'i;of.· ajegis-
: te'red operi endj.tlvestmeI1tcOfnPaI,Y orunit
. in·vest.men t trust: or r'et'en ues 'derh'edby a
< broker, or dealer .fromtIlc. !i~lie,afvariable
;:; ,.ftj:fs")~ji1~,s.~~~l~~r~he~onduct of .the· busi-
:.~~I: .:~:~:...<: . ~:.; (:~.1 ):( ~~Q~~D~.~I~.~ _'..~Rqt~~.~IN.~.~,.T:~~ ~ernl
IF ·:Jiqu(dati6n.p~Dc~edlijg;inearl~!inyprOCeed­
'- ;tllg f()rcthejicJllidatioh o[adiibtorltl1der this
A!=t,in·,w.hi~l1 'a'~trustee . has', been: appOinted
;;, ',: :uil:d~.r :sec.tIoil, 5 (bYC3 ). ':
.-:.:·.(~2r:*T: ji,Qu:r:ry:,-:The term 'net equity'
'·nie·~ps:;ti1e. dOIl~,r;B;mo).iritof the account or
:·a,.cD.ulj),.~.of a :(:llstomer, to be determined
·e.
':bY.c-:,· . "Sec. 9. STpC ael\·ances.
' •." ... ," (Ao! c:alclji~tiJig the smn which would
'-;~ ; .•··haye·;;b.e~ll,:ow.ed!·:by the debtor to such cus-
·'.lamer if:the.'de.btor :had llqi.lidatect. by sale
.,', OJ" pllrchase :ori.the filing date. all securities
positioris. ci(such 'customer (othel' than cus-
,'. ··t~ri1er· name securities reclaimecl by such
:·.i:cust'onier I ; Ii1inlls . '-expense of liquidations by reviSing the
';:'.:;.'('8).' anY.illd~btedness of such customer
:; 'totlicC!~.~toron" the filing date; plus
. '.' ':( C):any':paynfent by such customer of
i"tsuCh -iildebtedness to the debtor which iz
;made ·.-with· thE' approval of the trustee and
::'\yi.thinsuch period as the trustee nlay de-
<.termine (but in no event more than slxt'1'
days after the publicatIon of notice 'clllde;'
section 8 (a) ).
I'n determining net equity ',1I1der th!s para-
graph. lLccoUlIts held by a customer In sep-
ar3.te capaCities shall be deemed to lJ2 ac-
counts of separate customers.
CONGRESSIOI~ AL RECORD - HOUSE ]V()/'{:.mlier I, I,')?'i
"! 1:3) PEHSONS ItEl;1STLIl!-:l) i\S IIHnl'::ERS OIl gen tlel1la 11 from N<lI'U1 C" rlllil!" 'H,.
IIC/Ii.I:nS.-··-Thr: lprJn 'pl'r:-:;.-;l1s )"I'gl:jt.en:(J ns
BHOYlIII.L} will be r:--'t:(n~njzc<l Jl)r :!.U
hnlkers ur tlca]en;' lncl\ldl'~ illlr l',rrsOJl who
I~ [l l1WllliJer of il naLJollal tlecllrillcti cx- minut.es.
.: 1111 I1g('. The Chair n!C:lll!.nizc.~ the g(,lli.ll:ln"n
"(14) PIlDTECTIVE UECflEL----Ti1c Lenn 'P1"O- from Texas 1M r. EClHIIIJI IlT' .
lrcU vc decrl'e nl(,llJ1!'; ;\. dccree, Issllerl IJY a Mr. ECKHIIHI.'T. Mr, Speakcr. I Ylcld
,'UlIrL UpOIl nppl!enUI1Il uf SlPC ullfier sec- lily se'l'f"'ii'1TC1TTi'J'l1l"'"!TSI 1ll:1 yeo n S lllll ~ .
Lion Ii la) 13}. thaL the customers uf a mel11- Mr. Speaker. L!lC SecuriLics II1\,c:;-
))('1' of SIPC are In need of the protecLlon
Lor Protection Act. :.IS mnl1v of
pl"I)\'lrlcej lllHler Lhb AcL
"115) SECUnITY.-··The term 'securiLy'means my colleagul!s will recall. \\'as cI;acted
any lIote. stOCk. treasury sLock. bond. debC'n- in December 1 !l70 in respollSf to a l:risi~
Illre. e\'ldence of indeIJtednes:;. lUll' ::ollateralwithin the brokerage communiLy. AfLr~r
Lrllst ('("·lificaLe. preorJ..(flnlzalion c~·rlltlcat.!· or
~he b~ar market ane! back office paper
sllbscrlpLion tmnsfenlble share. \'oLlnr; Lrusl crisis of 191:::3-70. the ma rket dropIJed off
certificaLe. cel'ti"ficale of deposit. ccrlilicate ofsharply. During this time. a number of
aeposi t. for II security. Imy In\'c5tm('n L con- brokeragc firm::; went out of business, :l1:d
tract orcertlflcatc of interest or particlpaUon public confidence in the securities mar-
in any proflt-sharlnr; agreement or In any oil.
gas. or mineral royalty or lease (If such In- kets was badly shaken. In an effort to
\'estment 'cOlltract 01' interest. 15 the subject rc·,t.ore investor confidence. Conr;ress
of a registration· stntement with the Com- ari;nted the 1970 act. crea ting the Secu-
mission .pursualit to the provl,;:ons of the rities Investor Protection Corporation
See uri ties Act or .H133) .any certificate of in- I SIPC) to provide financial protection
terestor ·pnrti,clpatlon.· in. temporary or In- for customers of insolvent broker-deal-
terim ceri.ificate'for.J'eceipt for. gu.lranteC of. ers and to aclmini;;ler the new law. SIPC
or warrant 01" i'lght to subscribe co or pur-
cha~e .crsell· llny .. of.tlle foregoiJlg. anel any
became the FDIC of the securities indus-
ot.hei· iilstrul11eh t cori1monly k.nown as a se- try.
cllrity. The term 'secllritv' does not Include Tn the 7 years since its creation. SIPC
an\' currency. or anvc.OJ11mf'ditv or related has appointed 123 trustecs. Through
cO;1lractor futures contract. or [my warrant their experience. certain glaring defi-
or right. 'to subscribe to or purchase or sell ciencies in the existing liquidation pro-
flny Of the'fol'egoing:". cedure have become evident. Accord-
AMENDMENT TO THE ·SECURI7IES EXCHANGE ACT ingly. SIPC appointed a special task
OF 1934 force to review the 1970 act and consider
SEC. 16. Section3(a) of the Securities Ex- the ileed for amendments. H.R. 8331 es-
change.Actof 19.34 (15 U.S.r.. 78cla) is sentially reflects the recommendations
amended· by adding at the end thereof the ~he task force. Tile amenoments
follo(ving )1eW pa'j'agraph:
"(40) :The t"erin ··;financial responsibility
lruI streamline the otherwise liquidation
rules: means the ru.les and regulations of the procedures. and reduce the expense and
Commission.or the r.ules liiJd regulations pre- administrative complexity of the process.
scribed 'by any self-regulatory organization In light of the fluctu?, ;ng state of the
relating lOfinancial responsibility and re- stock markAt. and till: potentially disas-
latedpractices which are designated by the trous consequences fo!' smaller broker-
Commission. by rule or regulation. to be fi- dealers of a precipitate downtown, we
nancial responsibility rules.".
need more ~han ever before to insure
TAULE OF CONTENTS SIPC's ability to liquidate insolvent
SEC. 17. The table of con ten ts of the Se- broker-dealers quickly and effiCiently.
curities Investor Protection Act of 1970 115 These amendments are very important.
U.S.C. 78ana et seq.) is amended to read as and very much in need by SIPC.
follows:
The bill would achieve a number of
"TABLE OF CONTENTS
important cl1ar..ges. Among other things .
"Sec. I. Short title. it would increase the extent of SIPC pro-
"Sec 2. Application of Securities Exchange tection for customers' cash and securities
Act of 1934.
"Sec. 3. Securities In\'estor Protection Cor- in an account with a broker-dealer. The
poration. act currently protects customer accoun~
"Sec. 4. SIPC Fund. up to a total of $50.000, with a ceiling of
"Sec. 5. Protection of ~ustomers. $20,000 for cash. H.R. 8331 would double
"Sec. 6. General provisions of a liquidation the amount of protection. raising to
proceeding. $100.000 the t.otal amount of protection.
"Sec. 7. Powers anel duties of trustee .
"Sec. 8. Special pruvisions of a liquidation
and to $40.000 the level of protection for
customers' cash. There was unanimous
proceeding.
sentiment that such an increase in the
"Sec. 10. Direct paymen t procedure. amount of protection \Va:. an important
"Sec. II. SEC funct.ions. mE:ans of improving investor cOllSdence
"Sec. 12. Examining authority functions. in the securities markets.
"Sec. 13. Functions of self-regulatory C'rgani- In addition tbe bill would seek to
zatlolls. sat.isfy more adequately customer expec-
"Sec. 14. Prohibited acts.
"Sec. 15. MlscelIaneolls pro':isions.
tations; and also reduce the time and
"Se~. 16. Definitions.".
procedure under certain circumstances.
The SPEA K~rl pro tempO!·e. Is a sec- Under the bill. the trustee ',""ould be
ond dema.';,i.1ed? 'required. to the extent he can do so 111
Mr. BROYHILL. MI'. Speaker. I c1e- a fair and orderly market. to pO! chase
IJl.J.nd a second. ';;€cuntles on the open marKet 111 saus-
The SPEAKER pro t t'mpore. \Vithout· 1acLlOn OJ a customer claIm for sec lll: 'ies:-
objection. a second will be considered as '-erne of the greatest shortcomings of the
ordered. proceclUre Ulidert-he-t-9-'TO act. to be ,1:fiJe-
C
There was no objection. 'died bv thIs mIl. IS Llle failUle to mee-t-
The SPEAKER pro temcore. The gen- Te!!itimate customer expect.atlOns of
tleman from Texas .Mr. ECKHARDT) 1~'ilI recelvmg II'hat II'as 111 their account at
be recognized for 20 minutes, and t.he the time of their broker's insolvency.
'-' ~.
69
 Nuvember 1,1977 CONGRESSIONAL RECORD- I-lOUSE
The bill v:"uld also lluthor;"c SIPC to Mr. BROYHILL. Mr. Spcakcr, I yield r~'(;1.iiring :•. ,nounceI11£:11L oJ SJPC nH.'1n .
transfer acco, nts from the insolvellt myself such tllne as I may l:Onlillmc. 'oer~;iliJl on televisioll ads, for c;';:1Jllph:,
broker-dealer to another broker to mil1i- Mr. Speaker, a~; lllC l:hairman oJ CQuld be .illst.ifled.
Illizc disruption and permit customcrs to the 5ubccmt1lillee 11:1S incliClttcd, this Mr. Speaker, in condUsion, I believl:
l:ontinlle to exercise investment discre- bill woulr! make a. number 01' needecl thai the amcndments made by Ll1i.' leg-
tion. and technical chnnges in the Seeu- islation are desirable. Tiley go 11 Iml!.: \'::;y
In smallliquidaLions, SIPC would have riLics Investor Protcctif']1 Act. Con- toward clearing up problem:, wI-ii!:!'! ex-
the authority to make payments directly gress enacted the act creating the Se- perience has shown exist unller thl, orig-
to customers, Instead of llaving to rely curities Investor ProtecLion Corporation inal act ancl, therefore, I urge thaI. t.hl~
UPOll a court-appointed trustee. This (SIPC) in 1970, aJl(lsince that timC', it legislation be enacted.
procedure would .allow SIPC to avoid has .become apparent that although the Mr. ECKHAHJJT. Mr. Spf,aker, 1 havl:
the disproportionately large administm- act for the most part is working well, no further requests for lime, lind I yi!:ld
tlve expenses inClined in small Iiquida- certaIn procedures speCified in the act back the balance of my ~!me.
lions. havp. turned out to be unduly inflexible TI1C SPEAKER, The quesLion is on the
The amendments would allow SIPC, and Inefficient. Therefore, the purposc moLion oJTerf:d by the gentleman fro' '1
or one of its employees, to be appointed oLthis ·bill is to make. thentt morere- Texas IMr. ECKHAHDTl that the Hou.'.>l
trusteeo! aiOnsolvcnt broker,dealer in sponsive to investors and pl'ovide them suspend the rules and ]Jass the bi1l H.R.
certain small liquidations where the with additional protection In the case of 833 J, as amended.
claims .do !1·o.tt:::t;e.ed$750,000 and where thefa.ilure of a broker-ckaier, The question was taken; and Ilwo-
there are fewer.than 500 customers, .In general temls, the act: directs i,he thirds having voted in favor thereof)
The. bill \vouldcontinue the exemption CorjXlration to establish a·rlmdm.adeup the rules were suspended and the bill,
from SIJ?Cl11embership and fromSIPC of assessments impOSed cinor6ker~deal­ a5 amended, was passed.
a<.sessment for exclusive dealers i.n ers , :who are members of SIPC,:which is A motion to reconsider was laid on the
mutual fund.shares andvariableam1Ui~" availlable to pay elauns'ofctistomers ·of tabJv.
ties. However,the.bill woLildsubject \0 bnikerage houseswhic!i'have,failed,
limitedassessriient transactloris . in . Sin'ce. it was established'lnj970,.SIPC
money 'inarke.Unstrumerils, which were. 'l1a~1:eturi1ed approximal¢ly,$277miIlon GENERAL LEAVE
exenlpt Jronlassessnlent under the i970 ·.jn:property to over 100;000 customers Mr. ECKHARDT. Mr. Speaker, I ask
act. Althoughtransactio'nsin th05esecu~anijhas advanced morethaIl$53miJ- unanimous consent that all Members
ri ties pose a
Il111itedrisk.to clistomer lio:nJrom the SIPC fundto:siaiis(r cus- may have 5 legiSfative duYsin which
fundsandseci.Jr:iti~s, SIPCJ1asexpeTi"to'mer clainis . . ' ......." ... ' to revise and'extendtheir' remarks on
encedaln:iosf' $2nlillion in Claims 'roi' ...ir6>vevel',expedence:"vj'tJ:i:tl1.0~~~JiCjui­ the bi11 just passed, H.R. 8331.
losses ~i.Jff~r,edonce'ttificates ofdeposit,datHms has highlight0dii.iea'!i,.\vhei'e . TIle SPEAKEYiipro tempore. Is there
and Treasury bills .. Therefore, we have . 'changes would be appropriii'te;.Foi·.ex- . objection to 'the request of the gentle-
])roposed 6ri.l~'.; a.·lillli.ted assessmen tf or '.' ample, thelegislation·makesa.numbel' lllan from Texris?
·.money.market .instrum{!nts, at a rate' 0(. changes .deSiglied tilgtiil(lhltt!eUmt There was ']Y.O objection.
tase'cr6ntlie'dsk'hivolved[o -customers .cUs.~oTllerS accoullts·. ri:ijr,iir.~~IIied.ag
andSIPC's)pssexpe:r:iehcefIi theseseci.i.,. tlleyexisted.PllOI~he,i1.1(ju.i.aat;joll. It
ritiesAinse,197q;S~chall approach\\iould"-:,,"ould . do thIS by ,allo\yl.ngS.I PC Lpgo SAFE I1R.INKING WATER ACT
produce,a'vi=ry I1lo.dest.assessment.. .• mtIJ:the. Ill"l k . 0··. . ........ . .. - AMENDMENTS
In additiqi1,JIiR:8331 wou:Id J'equiiel·~itleS' .. possibleratheritha~i;ret:Lirning
the stdcLeiiforcement 6[subordlriated'cash ·tothe customer..'I'he,:bilJ:alsocD1i- Mr. ROGERS. Mr. Speaker. I move
lending;agreehl.entSither;:by denying the "tains. anumberoLpl:Ovislbi.is~~\'l1iChiare to suspend the rules and agree to the
statuspf~·cust(}mer.:' forpuTposes .ofacle,sign~~ t(} e)(p!=di~eJ!l~'lifjiJic:l~qon resolution IH.Res. 885) providing that
SIPGlicitiida~ioriJopei.'s6nswho.':ilave;JJrgeessby .elil11inatin!(:.curi)b.e.rsbIl1~:pi·o" upon the adoption of thisresoiution, the
subor?in8;~e.dth.eii" e::i:pital>bylei~diilg'S€durcestha,thai.'E!PT\lv:e!f;f9fl:j,~;}lpll~:ces- bill (S. 1528) entitled "An act to ameml
secuntiestoabroker. This l)i'oviSion \\;i1J'.:sary; Further, cnde,r tlle::ptE;§·~.Ilt.;·ter.IllS s.ection 2 ofihe. Sa.fe ,Drjn:~ingWater
not preVen tcustcimers fiomseeicirigre- ·.. of .theaet, eachcustcimgi,.is'.lirriit~d'to a Act I Public La\V93~5231 to extend and
scissiO~16ttlieiragl'eementswhei'e the},.totah:i,rotection !ors~c.llrtf,i.~9~i}d;~aslU increase authorizations provided for
.~os~iNsi~M~·'ffJ~fenhta'~~e~c¥Z~'p~i~ .. ·~~1~5~~0'~OC~;i;~r}~i,1~~;~~?:~;t~t~»1~W6&~· . ;~~!;~n~~~~r t~y~~~~l1~O~~!11 a~~~n~~~:~~
.' ticipatipg'~~'~ith'bther"(!ush:irriers>intll~·. increase Jhe)imits of'SIPcG':prdte.ctiontb· theret6be, and the same is hereby, taken

·.i:~l~lt~~J~~~1i1I.,~i~t;i;h;;·f~~7!J~~~ji~f~~li~rj'1~1!tt%~~: E~~5t~~:~f:~{'~~;:J~'i~rfi
selves',tp:;tl:;ti'!;BUbl1cthhJughsonlE{nlfil;Undel' tliepresent tei~fiisbf ·theact, am. ndment numbered I. I> teo and the
i~i~li;}%~0?&~i~~l~~s~1~~~~~ii111YbfpAii}i~~#f£~r~mb~i:~;X~~;B~~~1t~'cif:~l~r:S~Yl~ ~~l~~~d~e~~~rebY, agreed to, \\'ith an
tinued"ex#p1p'ti9n'>fl:OJn:,'SIPt:meniber~ exclusiveJyseIlmutual fUlldsor variable The Clerk read as follows:
shipoIexclilslve:rrrutual'f;ulld:a11(J'va'i-l:' . al1b'uities. After a great deal of discus- H. RES. 885
abl~·2::npiiitS'r.l~~le.rs:;!:theillv~stij~gp)ib.~ sion,:wehave decided to retain thes'e ex- Resoll:cd. That upon the adoption of this
lir.shO.uld:l·layl~thedppcii't[mit~;·tolria}:e emptions. since it do.es not appear from resolution. the bill IS. 15:28) entitled "An Act
an-lnldriTie'd.;.dL;Cision,.as.to\vhether or the testimony presented .atthe hearings to amend Section 2 of the Safe Drinking

'- not:t,o',.'doj~)i~ir{ess':i.Ylth. a~;partii;ulaT

broker,. Mepibei;sl1ip'jriSIPCcan ·bean
1nfItie:iitia1jactoiiri:.'that :decision: 'The
. .... 'd'" ".. ·t····.. .
aI}le
. ...n ... m
'. '.'. .'.
. ·.·.e. .I,l..·....•.,.c.p.i1cern.i.l1g
.' . S. IPC
.
. advertis-
that mutual funds or variable annuities
present the kind of risk created by gen-
eral brokerage activities which are co\'-
db SIPC
ere Y •
Water Act (Public La\\' 93-5:23) to extend
and increase authorizations provided for
Public Water Systems" with 1.he Senate
amc::dments to the House amendment
thereto 1)e. and the same is llereb,·. taken

1
--
in(:;~.?X.,I;>r:iI1.gii!.g:about additional public
awaJ~!=l].esF·6f 'SIPC, is also designed 1.0
illci'~a5e")l1vestor confidence in the Na-
tibil"S'SecUrities markets.
The bill was reported unanimously OUf.
of the Consumer Protecti::m and Finance
Subcommittee on September 7. The full
Commerce Committee likewise approved
Finally, the bill \\'ould give SIPC the
authority 1.0 require broker-d·ealers to
make known their SIPC m::mbership to
their customers. It should be empha5ized
that SIPC may require only the mini-
mum amount of adl'ertising necessary
in order to guarantee that customers are
aware of the firm's membership. For ex-
from the Speaker's table 10 the end ill
that the Senate amendment numbered t2)
be. and tile same is llereby. agreed to: i21
t.hat the Sf'lHHe amendment numbered (1)
be. and the same is herfb,·. aere~d to ,-;ilil
a!l amendment as follows:' -
Strike Ollt the mauer propo.>ed to be i!:-
sened by Senate amendl11fnt !1tllllbe!'ed (1)
the measure unanimously. In addition ample, postin£.... notices of SIPC member- ani insert in lieu thereOf tile follo'.';ing:
'-\ B l Ii 1 In pre:;cri bing regulations nnde!"
to unanirnous bipartisan support, the ship in the brokerage firm probably ,his ~~C'tiol1 the Administrator shalL to the
bill enjoys the support of SIPC, 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 Cjuirements which ''''ould unnecessarily dis-
CXXIII--2286-Pnrt 28

70
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 SECURITIES INVESTOR PROTECTION ACT
AMENDMENTS

TUESDAY, APRIL 25, 1978

U.S. SENATE,
COMMITTEE ON BANKING, 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 WIlLIAMS. 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 HOllse 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 revisHed 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' pubtic in-
vestors against the faIlure Rnd Insolvency of brokers and dealers, the
llrI " . • ,e .
,ince a· tIme "- as a mlms ere 12 ro er-dealer liquida-
tions. The value of cash and securities it has distributed for 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 a void
abuse~
. Mr. LooMI8. Well, you mean the time frame ~
Senator Wrr.r.::tAlIfB. Not the time frame, the---
Mr. WILLIA1IfS. The procedures used 1
Senator Wrr.LIAlI[B. Yes.
Mr. J....oo:r.rIB. Well, the general standard isn't very clearly specified.
It simpJy 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
for 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 .of 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
chairmanship, in what you 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 ronows :]

72
 7
STATEMENT
BYHUG~AN,
SECURITlES INVESTOR PRO! Ec"llOl'1 'CtlRPOAATION
>., SUOR e 'fHHE':------
SUBCOMMITTEE ON SECURITIES
COMMITTEE: O~ltiNG, MOtlSfNGJIlil'b-umiJ'iN AFFAIRS
,,--.- UNITED STATES SCNATE
, Aprll 25, 1978

Mr. Cha1rman, and members of the Subcommittee, It 1s a pleasure

for me to appear before you thls mornIng and present the vlews of the :.

Securltles Inves tor ProtecUon Corporatlon (n SIPC") on H. R. 8331, the

Securltles Investor ProtectIon Act Amendments of 1977. Thls bl1l was passed

by the House of RepresentatIves on November 1 of last ye~r, It wuuld make

lmportant 1mprpvements 1n the program establlshed by the Securltles Investor

Protectlon Act of 1970 ("SIPA n ) , Bnd SIPC supports the leglslatlon In lts

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 1 summarlzed

brlefly the act1v1tles of SIPC slnce lts creatlon In December 1970. As many

of you wlll recall, SIPA had lts orlglns In the dlCflcult years of 1968-1970

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

In securttles was folJowed by the most severe decllns In stock prlces

sInce the Gre"t Depresslon. Hundreds of broker/dealers were merged,

acqulred or slmply went out of buslness. Some were unable to meet thelr

.----

V In. 73
 8
obItgations to theIr custOmers and went bankrupt, Public confldence

In our securities markets was In Jeopardy.

In order to protect custOmers of {ailed broker/dealers agaInst

fLnancLalloss and, thereby. restore investor confldence Ln the securltLes

markets. Congress passed S[PA. That statute. whIch was sIgned Into law

'"
on December 30. 1970. created SIPe and established a program whereby

m·onles from the SIPe Fund would be avaIlable Cor the purpose o{ protecting

c~stomers of broker/dealer firms whIch encountered flnanclal dlCllculty.

As the statute now stands. slPe may advance a maximum o{ SSO,OOO

to protect the claim of anyone customer of a failed broker/dealer,

but no more than $20.000 of that amount may be advanced to pay clatms

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

distrIbutions of avallabJe securltles and cash from the debtor's estole.

Since the enactment of the SIPC legislation. 129 of the over B, 700

broker/dealers which have been SIPC members Over the past 7 years have

been llquldated under SIPA. As oC March 31, 1978, SIPC had made net

advances to trustees totallng $54,518,825. In addition, Significant amounts

of securilies and cash In the debtor's possessIon have been distributed

to customers by the trustees. We estimate that to.date securltles and cash

having a value oC over $279 mUllan have been dIstributed to approxlmat~ly

105.000 customers In the course of liquidation proceedings. We belleve

 29

Section 9

§7(a) of the Act--Pursuant to the decisIon to delete the general In-

corporation of chapter X of the Bankruptcy Act (see §5(b) (2) of the Act above

and accompanying discussion), the powers with which the trustee Is vestod

by this sectlon are described simply as those of a trustee under the Bankruptcy

Act, together with those powers specl£1caJly granted In subsections (I), (2)

and (3). which may be exercised only with slPe approval.

§7(a}(IJ oC the Act--The powers granted here are the same as those

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

§7(a}(2) of the Act--The trustee Is specifically authorized to Use slPe

employees In connection with a liquidation proceeding, thus making theIr

experIence In handllng such proceedings available directly to the trustee. It

Is antlclpated that this will increase both the speed and effIcIency of I!qulda-

tlon proceedings.

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

accounts to facilitate [heir transfer under subsection 8(0 oC the Act. As In

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

contractual commlonents Is deleted.

§ 7 (b) of the Act--As elsewhere, Incorporation oC a partlcular section of

the Bankruptcy Act has been deleted In favor of a general reference which

wll! not be dl'sturbed by amendment and renumberlng. In addltlon to the dutles

Incumbent on 0 bankruptcy trustee, the SIPA trustee Is charged with the follow-

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

and, under appropriate circumstances; to guarantee the debtor's Indebtedness

75
 42

estBte, but merely held by thB debtor BS bol1~e, This, of course, I, not

Intended to limit the exclusive Jurisdiction of the court handling a liquIdation

proceedIng 10 deal wllh customer name securilies end any disputes concerning

them, Excluded from this definition are securities In negotiable form, (or

example. securities registered tn customer name but [or which the customer

has signed Btock powers,

§16(S) of the Act--Thls section dellnes "customer property," the

concept whIch takes the place oC 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 Cor the satisCactlon of customer claims, It Includes

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

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

Also 1ncjuded Is property generated from the use of debit items In customers'

accounts and property of the debtor whLch. upon compl1ance with appUcable

laws. rules and regulations would have been set aside or held for the

benefit of customers.

S 16 (6) of the Acl--The definitIon of "debtor" Is changed 10 make It

conform 10 amended subsection SIal (3),

§16(7) of the Act--The deflnltlon of "examining authority" Is changed

to make It conform to amended sectlon 13.

§16(8} of the Act--The deflnltlon of "filIng date" Is changed to

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

--' \..,.. ...

 230

TO CUSTOMERS. WH[LE TH[S [S NOT A LARGE AMOUNT, SIPe

ARGUES THAT BECAUSE SOME LOSSES DO OCCUR, MUTUAL FUND
REVENUES SHOULD BE SUBJECT TO ASSESSMENT . . IN ADD[T[ON,
SIPC 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 COMMlSSION 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 [N NEED OF THE PROTECTION PROVIDED UNDER THE
SIPe 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 SIPe ACT IS MOST
CLEARLY DIRECTED~ '·THE COMMISSION BELIEVES THAT ALL
 ,',: ' 1\, :,',
S. REP. 95-763 P:Jge I

S. REP. 95-763, S. Rep. No. 763, 95TH Cong., 2ND Sess. J 978, J 978 U.S.C.C.A.N. 764, J 978 WL 8748
(Leg.H is!.)

*] *764 P.L. 95-283, SECURlTIES INVESTOR PROTECTION ACT AMENDMENTS OF J 978

SEE PAGE 92 STAT. 249
HOUSE REPORT (INTERSTATE AND FOREIGN COMMERCE COMMlTTEE)
NO. 95-746, OCT. 26, J 977 (TO ACCOMPANY H.R. 833 J)
SENATE REPORT (BANKING, HOUSING AND URBAN AFf AlRS
COMMlTTEE) NO. 95-763, APR. 25,1978 (TO ACCOMPANY
H.R.8331)
CONGo RECORD VOL. 123 (1977)
CONGo RECORD VOL. 124 (1978)
DATES OF CONSIDERA 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 COMMITTEE ON BANKING, HOUSiNG ANI)" ORBAN AFFAIRS, TO WHICH WAS REFERRED THE
BILL (H.R. 8331) TO AMEND THE SECURJTIES INVESTOR PROTECTlON ACT OF 1970 HAVING CON-
SIDERED THE SAME, REPORTS FAVORABLY THEREON WlTH AMENDMENTS) AND RECOMMENDS
THA T THE BILL AS AMENDED DO PASS.

COMMITTEE DELlBERA TlONS

H.R. 8331 WAS PASSED BY THE HOUSE OF REPRESENTATIVES ON NOVEMBER 1, 1977 AND RE-
FERRED ON NOVEMBER 3, 1977 TO THE COMMITTEE ON BANKING, HOUSING AND URBAN AF-
FAIRS. THE SUBCOMMITTEE ON SECURITIES 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 PROTECTION ACrOFJ2'ZQJSjPALWAS ENACTED TO PRQVlj)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:TSF!1IDT:F1:l:
SECuRITIES INVESTORS PRo1"ECI JON CO]{PORJITTOl'T"1SJlYChANDNPROFIT CORPORATION, TO
ADMINISTER SIPA THROUGH STATUTORY ASSESSMENTS OF SIPC MEMBERS.
SIPA HAS DEMONSTRATED CONSlDERABLE SUCCESS SINCE ITS ENACTMENT IN 1970. AS A RE-
SULT OF BROKER-DEALER LIQUIDATIONS IN WHICH SIPC HAS BEEN INVOLVED, APPROXIMATELY
105,000 CUSTOMERS HAVE BENEFlTED DIRECTLY FROM ITS PROTECTIONS. THOSE CUSTOMERS
HAVE RECEIVED IN SUCH LIQUIDATIONS CASH AND SECURITIES 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 LIQUIDATION PROCEEDINGS. ALL OF THIS HAS BEEN ACCOMPLISHED WITHOUT 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 L1QUJDATIONS HAS BEEN DECLIN-
ING SINCE THAT TIME.
ALTHOUGH THE FOREGOING DISCUSSION ILLUSTRATES THE OVERALL SUCCESS OF SIPA. LlMl-
TATJONS EXJST UPON SIPC'S ABILITY TO PROVIDE THE TYPE AND DEGREE OF PROTECTION FOR
SECURlTJES CUSTOMERS FOR WHICH SIPA WAS ENACTED. SPECIFICALLY, THESE LJMITATIONS
IN SOME CASES JMPAJR THE SATJSFACTION OF CUSTOMERS' CLAJMS AS FULLY, PROMPTLY AND
EFFJCJENTL Y AS THE COMMITTEE BELJEVES IS DESIRABLE. H.R. 833] ADDRESSES THESE LlMJ-
TATJONS IN ORDER TO PROMOTE THE ENHANCEMENT OF JNVESTOR CONFJDENCE IN THE SECU-
RJT1ES MARKETS. THE BJLL ALSO RESPONDS TO A NUMBER OF SPECJFJC PROBLEMS THA T HA VE
ARJSEN IN SJPA LlQUJDATJON PROCEEDINGS.
*2 I. COVERAG£.-- THE BJLL JNCREASES THE AMOUNTS A V AJLABLE TO BE DJSTRJBUTED IN
L1QUJDATJONS TO EACH CUSTOMER FROM $50,000 TO $]00,000; NO MORE THAN $40,000 (JNSTEAD
OF THE PRESENT $20,000) IS A VAJLABLE TO SATISFY CLAJMS FOR CASH.
IN ADDJTJON, H.R. 833] MODIFJES EXJSTJNG LAW BY DJRECTJNG THAT THE TRUSTEE PURCHASE
SECURJTJES WHEN NECESSARY IN ORDER TO DELJVER SUCH SECURJTIES TO CUSTOMERS IN OR-
DER TO SATJSFY CLAJMS. THE TRUSTEE'S DUTY IN THJS RESPECT JS QUALJFJED TO THE EXTENT
THAT SUCH ACTJON JS TO BE TAKEN 'TO THE EXTENT THAT SECURJTJES CAN BE PURCHASED IN
A FAIR AND ORDERLY MARKET.'
UNDER PRESENT 1 Aw,....BECAUSLSECURJTJES BELONG.ThLG~I.CL.CU£J'..QME.RS..Ma.Y HAVE BEEN
LOST, IMPROPERLY HYPOTHECATED, MJSAPPROPRJATED, NEVER PURCHASED OR EVEN STOLEN,
.----rr JS NOT ALWAYS POSSlBLE TO PROVJDE TO CUSTOMERS THAT WHlCH THEY EXPECTTO"RE:-
CE1VE, THAT JS, SECURJTIES WHJCH THEY MAJNTAJNED IN THElR BROKERAGE ACCOONT:1.N::-
_ __ ___ __ __ _
__ ___ ___' ___ ____
~
.
_
~
~
~
~
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.
,
,
_
.
~
'
~
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'
~
~
~
_
"
~
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=
~
_
.
~
STEAD, WHEN THE CUSTOMER CLAIMS FOR A SECURJTY EXCEED THE SUPPLY AVAJLABLE 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 F1LJNG DATE (NORMALLY THE DAY THE LJQUJDA-
TJON PROCEEDJNG IS JNJTIATED). IN ADDJT10N, CUSTOMERS OWJNG CASH OR SECURlT1ES TO
THE STOCKBROKER (FOR EXAMPLE, MARGJN CUSTOMERS) ARE NOT NOW PERMITTED EJTHER TO
DELJVER THE SECURJTIES IN OR TO PAY THElR DEBJT BALANCES; JNSTEAD THElR ACCOUNTS
ARE NETTED OUT.
h A PRJNCIPAL UNDERLYING PlJRPOSE OF THE BILL IS TO PERMJT A CUSTOMER TO RECEIVE SE-
CURJTIES TO THE MAXIMUM EXTENT POSSIBLE JNSTEADOF CASH, IN SATISFACTION OF A CLAJM
FoR:SEcl:JRJTIES. 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 laMER TO HIS POSJTJON PRJ OR TO THE BROKER-DEALER'S FINANCIAL DIFFICUL-
,:·TIES. TIDS wILL""'.CNltBLE4"Jm-e'l:J"3'f(JMER I 0 PURSUE HIS JNVESTMENT OBJECTIVES WJTHOUT
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 LJQUIDATlONS.-- THE LJQUIDATlON 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
lNEVJTABLE, SOME REQUIREMENTS OF SIPA HAVE PROVED UNNECESSARY, PARTICULARLY IN
SMALLER LlQUIDATlONS.

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 S REP. 95-763

SECURlTIES Ol~ BOTH. THE TERM 'SECURlTY' WOULD BE DEFINED BY SECTION 15 OF THE BILL
(SECTION 16(14) OF SIPA AS AMENDED) AND THE SOMEWHAT CONFUSING REFERENCE TO 'PROP-
ERTY OF A SIMILAR CHARACTER' HAS BEEN DELETED.
SECTION 6(C). THE BILL WOULD CODIFY THE PRESENT SIPC PRACTICE OF PROVlDING PROTEC-
TION TO CUSTOMERS WHO, IN GOOD FAJTH, ENTER INTO *775 TRANSACTIONS WlTH THE DEBTOR
AFTER THE F1LlNG DATE BUT BEFORE THE APPOINTMENT OF A TRUSTEE.
SECTION 6(E). JT IS MADE CLEAR IN THIS SUBSECTION THAT CERTAIN ADVANCES BY SIPC WILL
BE DEEMED TO BE COSTS AND EXPENSES OF ADMINISTRATION, AND WILL BE RECOUPED AS
SUCH. OTHER CLAIMS AGAINST THE GENERAL ESTATE HAVE THE SAME PRIORJTY 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 SPECIFICALLY
GRANTED POWERS WHlCH MAY BE EXERCISED ONLY WJTH SIPC APPROVAL THE USE OF SIPC
EMPLOYEES TO AlD THE TRUSTEES IN CARRYING OUT A LlQUlDATION PROCEEDING JS SPECIFJ-
CALLY AUTHORJZED. THE TRUSTEE IS FURTHER AUTHORJZED TO MARGIN AND MAINTAIN CUS-
TOMER ACCOUNTS SO AS TO FACILlTATE ANY POSSlBLE TRANSFER OF ACCOUNTS TO OTHER
BROKER-DEALERS.
*12 SECTION 7(B). THE BILL CHARGES THE TRUSTEE WJTH THE DUTIES OF A TRUSTEE UNDER
THE BANKRUPTCY ACT, PLUS SPECIAL DUTJES RELATING TO THE SATISFACTION OF CUSTOMER
CLAIMS FOR SECURJTIES BY THE DlSTRJBUTlON OF SECURJTIES TO THE MAXIMUM EXTENT POS-
SlBLE.
SECTION 7(C). THE BILL INCORPORATES THE REPORTING REQUIREMENTS OF BANKRUPTCY
RULE 218 AND ADDS OTHER SPECIAL REQUIREMENTS.
SECTJON 7(D). THE BlLL IN CORPORA TES THE INVESTIGATORY AND REPORTING REQUJREMENTS
OF SECTION 167 OF CHAPTER X. WHICH IS BROADER THAN THE COMPARABLE PROVJSIONS RE-
LATING TO ORDINARY BANKRUPTCY. INVESTIGATJON OF THE CAUSES OF A BROKERAGE FIRM'S
FAlLURE MA Y BE QUlTE 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 PRECEDlNG THE FILING DATE.
NOTJCE TO CREDlTORS OTHER THAN CUSTOMERS WILL, UNDER THE BJLL, BE THE SAME AS UN-
DER THE BANKRUPTCY ACT THOUGH GJVEN BY THE TRUSTEE RATHER THAN BY THE COURT.
THE BlLL WOULD REQUJRE CUSTOMERS TO FILE SOME WRJTTEN STATEMENT OF CLAIM
PROMPTL Y, REFLECTING THE NEED FOR EARLY CERTAINTY IN REGARD TO THE ALLOCATION OF
CUSTOMER PROPERTY.
CLAJMS OF CUSTOMERS AND OTHER CREDlTORS MUST ACTUALLY BE RECEIVED BY THE
TRUSTEE WlTHIN A SIX-MONTH PERJOD FROM THE DATE OF PUBLICATJON OF NOTICE. THE
TRUSTEE WOULD BE AUTHORJZED TO SATISFY CLAIMS FILED MORE THAN THE TIME ESTAB-
LISHED BY THE COURT, NOT TO EXCEED 60 DAYS BUT LESS THAN SJX MONTHS AFTER THE DATE
OF PUBLICATJON OF NOTICE IN THE MOST ECONOMICAL WAY, THEREBY PROTECTING SIPC
AGAINST SPECULATION BY CUSTOMERS WHO MIGHT WITHHOLD THEJR CLAIMS FOR A PERJOD
OF TIME TO SEE JF A CHANGE IN THE MARKET MIGHT GJVE THEM A MORE VALUABLE DJSTRJBU-
TION. CLAIMS FJLED MORE THAN SIX MONTHS AFTER PUBLICATJON WOULD BE BARRED EXCEPT
FOR CERTAIN CLAIMS BY A GOVERNMENT AUTHORJTY, AN INFANT OR AN INCOMPETENT. IN
ANTICIPATION OF THE POSSlBILITY THAT FJRST MEETINGS OF CREDlTORS MAY BE ELIMINATED
WHEN THE BANKRUPTCY ACT IS REVISED, THE PERJOD RUNS FROM THE DATE OF PUBLICATION
OF NOTICE RATHER THAN FROM THE DATE SET FOR THE FIRST MEETING OF CREDlTORS.
_SECTION 8(B). THIS SECTION REFLECTS ONE OF THE ESSENTIAL FEA TURES OF THE AMEND-
MENTS, NAMELY THE DELIVERY of SECURITJES TO COST01VlERS H),IHE GREATEST EXT"ENT
J5RACTICABLE IN ORDER TO MAKE CUSTOMER ACCOUNTS WHOLE. THFSECTI0M-PRGY'-IDES--GEN-
'~RALL Y THAT A TRUSTEE SHALL SEEK TO DlSCHARGE *776 PROMPTLY ALL OBLIGATIONS OF
THE DEBTOR RELATING TO CASH OR SECURJTIES TO THE EXTENT THE OBLIGATIONS MAYBE ES-

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 S. REP. 95-763 Page 12

TABLISHED FROM THE DEBTOR'S BOOKS. IN ADDITION TO AUTHORIZING THE TRUSTEE TO USE
SIPC FUNDS TO SATISFY CLAIMS. THIS SECTION AUTHORIZES A TRUSTEE TO DELIVER SECURI-
TIES IN SATISFACTION OF CLAIMS TO THE EXTENT THEY ARE AVAILABLE. AFTER THE AVAIL-
ABLE SECURITIES HAVE BEEN DISTRIBUTED TO SATISFY SUCH CLAIMS. THE TRUSTEE SHAL~
DJRCHASE THE BALANCE OF THE SHARES IN OPEN MARKET PU-RCHASE IN ACCORDANCE WITH
SECTION *(D) SECURITIES DIS I RIBUTED TO CUSTOMERS ARE rOBE VALUED AS THE FlUNG
DATE.
*13 SECTION 8(C). THIS SECTION ESTABLISHES THE PRIORITY IN WHICH CUSTOMER PROPERTY
SHALL BE ALLOCATED.
FIRST, SIPC IS ENTlTLED TO REIMBURSEMENT FOR DISCRETIONARY ADVANCES MADE TO RE-
COVER SECURITIES THROUGH PAYMENT OR GUARANTEE OF ANY INDEBTEDNESS OF THE
DEBTOR TO A BANK, LENDER, OR OTHER PERSON, TO THE EXTENT THAT THE SECURITIES ARE
APPORTlONED TO CUSTOMER PROPERTY UNDER SECTION 6(D). THE RECOVERY OF SECURITIES
GIVEN BY THE DEBTOR TO OTHERS AS COLLATERAL FOR LOANS IS AN IMPORTANT MEANS OF
FACILITATING THE DELIVERY OF SECURITIES TO CUSTOMERS.
SECOND, REMAINING CUSTOMER PROPERTY WOULD BE ALLOCATED RATABLY AMONG CUS-
TOMERS IN SATISFACTION OF THEIR RESPECTIVE NET EQUITY CLAIMS. TO THE EXTENT THAT A
CUSTOMER'S NET EQUlTY CLAIM IS UNSATISFJED 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 CLA]MS OF CUSTOMERS
WH]CH IT HAS SATISF]ED WlTH lTS OWN FUNDS.
FINALLY, SIPC SHALL BE REIMBURSED FOR ANY ADVANCES IT HAS MADE TO GUARANTEE OR
SECURE ANY ]NDEMNITY PURSUANT TO SECTION 9(C)(2).
ANY CUSTOMER PROPERTY REMAINING AFTER THE SATISFACTION OF CLA]MS BY CUSTOMERS
AND SJPC BECOMES PART OF THE GENERAL ESTATE. A CUSTOMER MAY FILE A CLAIM AGAINST
THE GENERAL ESTATE TO THE EXTENT THAT H]S NET EQUlTY EXCEEDS HIS SHARE O_L.CUS-=-..
TOMER PROPERTY PLUS SIPC PROTECTION.
'----uNI)ER SUBSECTION 8(C)(2) THE TRUSTEE]S DlRECTED TO DELIVER CUSTOMER NAME SECURI-
TIES TO CUSTOMERS IF THEY ARE NOT INDEBTED TO THE DEBTOR. IF A CUSTOMER HAS ANY
OUTSTANDING INDEBTEDNESS, HE MAY PAY THE TRUSTEE, AND WITH THE TRUSTEE'S AP-
PROVAL RECLA]M CUSTOMER NAME SECURITIES. IF A CUSTOMER DOES NOT LIQUIDATE ANY
EXISTING INDEBTEDNESS, THE TRUSTEE SHALL NET THE CUSTOMER'S ACCOUNT AND PAY TO
THE CUSTOMER H]S NET EQUlTY ON THE FILING DATE.
THE B]LL WOULD PRESERVE THE SUBSTANCE OF SIPA SUBSECTION 6(C)(2)(D) WHICH DE-
SCRIBES TRANSACTIONS DEEMED TO BE VOIDABLE UNDER SIPA. SUCH TRANSACT]ONS INCLUDE
THOSE VOlO OR VOIDABLE UNDER THE BANKRUPTCY ACT AND THOSE WHICH HAVE THE EFFECT
OF GRANTING PREFERENTIAL TREATMENT TO INDIVIDUAL CUSTOMERS .
.g:CTION 8(D). ONE OF THE CENTRAL FEATURES OF THE BILL ]S TH]S SUBSECTION'S GRANT OF
AUTHORlTY TO THE TRUSTEE TO PURCHASE SECURlTIES IN THE OPEN MARKET OR OTHERWISE -
OBlAIN lHEM FOR IflEl}'tfR:P ~tlN~ft1"11::ft<t(j-I1K.f'1:
'PbSllIONS. A KEY OBJECllv.c-eF-'f~JSFAeTItJN OF A CUSTOMER'S CLA]M FOR
'SE'CURlII£S BYlFr.ET.lELlVERY OF SECtfRJl IES TO THE GREATEST Bff-ENT POSS1BI::E. SIPC FONDS
:tViA'TBEMADE AVAILJtBtC'fO-'f-H£--'FR1::tS-TYElO-:PtIREHA:SE-S'.lxtJRlTIES TO REPLACE THAT PART
OF A CUSTOMER'S DEFICIENCY IN SECURlTIES WHOSE VALUE ON THE F]LING DATE DID NOT EX-
CEED THE LIMITS OF SIPC PROTECTION PROVIDED IN SUBSECTION 9(A) OF SIPA AS AMENDED.
*777 SECTION 8(E). TH]S SECTION DESCRlBES THE PROCEDURE TO BE FOLLOWED FOR THE
CLOSING 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 COMPLETION OR THE CLOSING 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 COMPETITION 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
TIME SHALL BE PRESERVED BY THIS STATUTE UNTIL SUCH TIME AS SIPC ADOPTS ITS OWN
RULES.
*]4 THE BROKER OR DEALER WILL BE ENTITLED 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 S]PA AS AMENDED. ANY LOSS SUFFERED BY THE BROKER
OR DEALER WHO WAS NOT ACTING FOR A CUSTOMER WILL CONSTITUTE A CLAIM AGAINST THE
GENERA LEST ATE AND NOT BE PAYABLE FROM SIPC ADVANCES. PERSONS WITH CONTRA CTS
NOT WHOLLY EXECUTORY SHALL HAVE A CLAIM AGAINST THE GENERAL ESTATE FOR ANY
LOSSES.
THE PROVISIONS ALLOWING THE PA YMENT OF CLOSE-OUT LOSSES WILL APPL Y NEJTHER TO A
REGISTERED CLEARING AGENCY THAT HAS ITS OWN RULES ON CLOSEOUTS FOR ITS MEMBERS,
NOT TO PARTICIPANTS IN SUCH AN AGENCY, TO THE EXTENT THEIR CLAIMS MA Y BE PROCESSED
WITHJN THE CLEARING AGENCY, UNLESS SIPC PROVIDES OTHERWISE BY RULE. CLEARING
AGENCIES WHICH SUFFER LOSSES HAVE CLAIMS AGAINST THE GENERAL EST ATE ONLY, AND
MA Y NOT BE PAID FROM SIPC FUNDS. SIPe'S RULEMAKING AUTHORITY IN THIS REGARD IS SUB-
JECT TO CERTAIN LIMITS SET FORTH IN SUBSECTION (E)(3). IT IS RECOGNIZED THAT THE CREA-
TION OF A NATIONAL CLEARANCE AND SETTLEMENT SYSTEM IS CERTAIN TO CAUSE CHANGES
IN THE OPERATION OF REGISTERED CLEARING AGENCIES. THEREFORE, IN EXERCISING ITS
RULEMAKING AUTHORITY UNDER THIS SECTION, SIPC SHALL CONSULT AND COOPERATE WITH
THE COMMISSION IN CARRYING OUT THE CONGRESSIONAL DIRECTIVE IN SECTION J7A OF THE
1934 ACT TO CREATE A NATIONAL CLEARANCE AND SETTLEMENT SYSTEM.
SECTION 8(F). AS DESCRIBED EARLIER IN THIS REPORT, THIS SECTION ENABLES THE TRUSTEE,
SUBJECT TO PRIOR APPROVAL BY SIPC, TO TRANSFER A CUSTOMER'S ACCOUNT TO ANOTHER
BROKER-DEALER. THE BENEFITS TO CUSTOMERS AND THE POTENTIAL SAVINGS TO SIPC WHICH
MAY RESULT FROM SUCH TRANSFERS MAKE IT APPROPRIATE THAT SIPC FUNDS BE AVAILABLE
TO FACILITATE SUCH TRANSFERS.
SECTION 9(A). IN ADDITION TO INCREASING THE AMOUNTS AVAILABLE TO SATISFY EACH
CUSTOMER'S CLAIM, SECTION 9(A) OF THE BILL WOULD CONTINUE TO APPLY THESE LIMITS TO
THE SHORTAGE REMAINING AFTER THE ALLOCATION OF CUSTOMER PROPERTY RATHER THAN
TO THE NET VALUE OF A CUSTOMER'S ACCOUNT. THIS MAKES THE BENEFIT OF SIPC ADVANCES
ADDITIONAL TO WHATEVER BANKRUPTCY-TYPE REMEDY THE CUSTOMER MAY HAVE HAD. FI-
NALLY, THEBI\-L MAKES C1 EAR THAT TEE DOLLAR LIMITS APPLY TO THE FILING DATE VALUE
QUHE SECURITIES IN RESPECT OF WHICH THE SIPC ADVANCE ]S MADE, RATHER THAN TO THE
CASH ADVANCE ITSELF. . ..
SECTION 9(B). ADVANCES FOR CUSTOMER-RELATED LOSSES ON CLOSED OUT CONTRACTS AND
EXPENSES OF ADMINISTRATION WHERE THE DEBTOR'S ESTATE IS NOT SUFFICIENT TO PAY THEM
ARE MADE MANDATORY.
*778 SECTION 9(C). THIS NEW SUBSECTION IS ADDED TO PERMIT SIPC TO MAKE DISCRETION-
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 IF SPIC DETERMINES THAT IT IS NO LONGER APPROPRIATE. THE
RlGHT OF A CLAIMANT TO AN ADJUDICATION OF A DISPUTED CLAIM IS EXPLICITLY RECOG-
NIZED.

82
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 S REP. 95-763 Page 15

THE BlLL DEFlNES THE TERM 'CUSTOMER NAME SECURlTlES' AS THOSE SECURITlES WHICH
ARE REGlSTERED IN THE NAMES OF CUSTOMERS OR ARE IN THE PROCESS OF BElNG SO REGIS-
TERED ON THE FILING DATE. JT TREATS THOSE SECURlTIES NOT AS PART OF THE DEBTOR'S ES-
TATE BUT AS PROPERTY OF THE INDIVIDUAL CUSTOMERS, WI·-lJCH IS BEING HELD BY THE
DEBTOR. SUCH SECURlTIES WILL BE RETURNED TO THOSE INDIVIDUAL CUSTOMERS. EXCEPT TO
THIS LlMlTED EXTENT, THE CONCEPT OF 'SPECIFICALLY IDENTIFIABLE PROPERTY' IS ELIMI-
NATED. SIPA'S DEFINlTION OF 'CASH CUSTOMER, ' CLOSELY RELATED TO THE DJSCARDED CON-
CEPT OF 'SPEC]FICALL Y IDENTlF]ABLE PROPERTY,' IS DELETED AS BEING NO LONGER USEFUL.
*]6 Till BILL PROVIDES FOR 'CUSTOMER PROPERTY' TO REPLACE WHAT IS NOW TERMED THE
'SINGLE AND SEPARATE FUND.' lHE BILL PROVIDES THAT ALL CASH AND SECURITIES, EXCLU-
SlVE OF S]PC ADVANCES AND CUSTOMER NAME SECURlT]ES, WHICH ARE A V A]LABLE TO THE
TRUSTEE FOR THE SATISFACT]ON OF CUSTOMER CLA]MS S[:lALL BE DEEMED TO BE CUSTOMER
'PROPERTY. ]NCLUDED IN THIS CATEGORY IS PROPERTY MADE AVAILABLE THROUGH THE USE---·-
cOF REALIZATION OF DEBlT CASH BALANCES IN CUSTOMERS' ACCOUNTS AND, AS DETERM]NED
BY THE COMMISS]ON, OTHER CUSTOMER-RELATED DEBlT lTEMS. ALSO INCLUDED ]S PROPERTY
WHICH WOULD HAVE BEEN SET ASIDE OR HELD FOR THE BENEFJT OF CUSTOMERS HAD THE
DEBTOR COMPLIED WlTH APPLICABLE PROVIS]ONS OF LAW.
THE BILL MAKES CONFORMING CHANGES ]N THE DEFINlTlONS OF 'DEBTOR', 'EXAMIN]NG AU-
THORITY', AND 'FILING DATE'.
THE BILL ALSO DEFINES THE TERM 'FOREIGN SUBSIDIARY' AS MEAN]NG (I) ANY SUBSID]ARY
OF A MEMBER OF S]PC WHICH HAS lTS PRlNC]PAL PLACE OF BUS]NESS IN A FORE]GN COUNTRY,
OR (2) ANY SUBSID]ARY OF A MEMBER WHICH ]S ORGAN]ZED UNDER THE LAWS OF A FORE]GN
COUNTRY.
THE B]LL MODlFJES THE DEFINIT]ON OF 'GROSS REVENUES' BY ]NCLUD]NG IN GROSS REVE-
NUES A CERTAIN PERCENTAGE OF COMMISSIONS FROM TRANSACT]ONS ]N MONEY MARKET ]N-
STRUMENTS.
BECAUSE S]PA LACKS A CLEAR DEFINlT]ON OF THE TERM 'SECURITIES: SIPC HAS RESOLVED
THE AMBIGUITY IN A WAY WHlCH HAS RESULTED IN THE USE OF DIFFERENT DEFINITIONS FOR
THE PURPOSES OF PROTECTION AND ASSESSMENT. AS A RESULT, SIPC HAS EXTENDED PROTEC-
TION TO PERSONS WHO HAVE CLAIMS RELATING TO MONEY MARKET ]NSTRUMENTS WITHOUT
ASSESSING COMMISSIONS EARNED FROM THOSE TRANSACTJONS. IN LIGHT OF PAST INVESTOR
LOSSES IN THESE SECURITIES, THE COMMITTEE HAS DETERMINED THAT SIPC SHOULD BE ABLE
TO ASSESS REVENUES EARNED FROM MONEY MARKET INSTRUMENTS. HOWEVER, THE COMMlT-
TEE RECOGNIZES THAT MANY OF THESE TRANSACTJONS ARE GENERALLY CONDUCTED FOR THE
BENEFIT OF LARGE INSTITUTIONS RATHER THAN INDIVIDUALS, AND THA T THE COD NATURE OF
THESE TRANSACTIONS TYPICALLY POSES LITTLE OR NO RISK TO CUSTOMERS.
THE COMMITTEE HAS ADOPTED A COMPREHENSIVE DEFINITJON OF THE TERM SECURITIES
WHICH WILL, AMONG OTHER THINGS, RESOLVE THE DUAL TREATMENT OF MONEY MARKET IN-
STRUMENTS. IN ADDJTJON, THE COMMITTEE HAS DECIDED TO PERMIT SIPC TO ASSESS ONLY
THAT PERCENTAGE OF REVENUES WHICH WOULD REFLECT SIPC'S LOSS EXPERIENCE IN THESE
SECURITJES FOR THE PRECEDING 5 YEARS.
*780 THE BILL MODlFIES THE DEFINITION OF 'NET EQUITY' IN ORDER TO MAKE CLEAR THAT
MARGIN AND CASH CUSTOMERS ARE TO BE TREATED EQUALLY AND THA T CERTAIN PROTEC-
TIONS ARE A V AILABLE TO PERSONS ENTERING INTO TRANSACTJONS IN GOOD FAITH AFTER THE
FILING DA TE. CERTAIN CONFORMING CHANGES ARE ALSO MADE.
THE PRESENT SIPA DEFINES 'SECURITY' BY REFERENCE TO SECTJON 60E OF THE BANKRUPTCY
ACT. THAT SECTION, HOWEVER, DOES NOT ITSELF DEFINE THE TERM. THE BILL ADDS A NEW
DEFINITION OF 'SECURITY' PATTERNED AFTER THE DEFINITION 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 DlFFERENT.
*17 COMMODlTY CONTRACTS AND OPTJONS RELATING THERETO ARE EXCLUDED, AS ARE IN-
VESTMENT CONTRACTS, PROFIT SHARING PLANS, AND AN INTEREST OR PARTJCIPATION IN OIL

83
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~~W~~========== ______________

April 26, 1978 CONGRESSIONAL RECORD - SENATE

There being no objection, the Senate ties. These payments supplcment clistri- Commerce flll 1\1ll.!ll.'.t 1. :!. ;]\lel 3. jU·j'7.
proeeeded:to consiller the bill (H.R. 8331) butions of available securities and ca:;1! The bill was appru"l:ci bv \.ill.: JlO1l:w 1)1
which had been reported from the Com- from the debtor's estate. HeprescntaLives Oll N1H';:IllIJl"J" I. i ,rn
mittee on Banking, Housing. and Urban Since the enactment of the SIPC legis- The ollbcummitLl:t: un !.~I'(:lIril.il::·: held
Affairs with amendments as follows: lation, 129 of the over 8,700 broker/deal- hearings un the bill Oil j\prll ~;i. Ic)'ill.
On page I, J1ne 5, strike "19'/7" and Insert ers which have been SIPC members over alld tht: bill was approved by a Illlidll-
"1978"; the past 8 years have been liquiduted 1ll0\l~ vote of til" filii Sen:tI." !lallkin,:
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- \Vllill: there llave been .~lJlI1e IlSI:11l1 and
On page 46. J1ne 25. slrlke "determInation ing $54,518,825. In additi"Cln, significant construt:t1ve revisions marll; in the ori;!-
has" and Insert "determInation) has"; lnal SIPC recornmellClatiol!s by trw DOli:;!:
On page 51, line 6. strike" (3)" and Inseyt amounts of securities and cash in the
"(5) ": debtor's posse~sion have been distributed of Representative;;. the ba,ilc wisdom and
On page 52, after the comma, Insert "as to customers by the trustees. SIPC esti- advice frum SIPC lJa n: beell ])Tl:sen.... d
redesignated by this Act,"; mates that to date securities and cash almost completely intact. As it i:; lIDW
On page 54, line 19. flfter the comma, insert having a value of over $279 million have before us, the bill is a positiVe' sLl:p 111
"as redesIgnated by this Act,"; been distributed to approximately 105.- the d:rectioll of more C:JJicient :;olutions
On page 6£, line 2. strIke "subscription 000 customers in the course of liquida- to the brand ranb:E' of problems which
~ransferable" and Insert' subscription, trans-
tion proceedings. These figures demon- confront SIPC. In my judgment. thiS
ferable"; bill goes a substantial way toward im-
On page 67, beglnnlL6' wIth line 8, insert strate vividly the effect which the SIPA
the following: program has had on investors throughout proving the protections afforded seCll-
SMALL ISSUE ExEMPTION this country and point up the wisdom rities customers nnd enabling SIPC to
perform its role more expeditiously and
SEC. 18. Section 3(b) of the Securities Act of Congress in establishing SIPC and
of 193 (15 U.S.C. 77C(b» Is amended by the SIPA program in 1970. efficien tly.
strIkIng out "$500,000" and inserting in lieu In short, SIPC has protected inves- As passed by the House, the Sccurities
thereof "$2,500,000". tors against loss in the manner envi- Investnr Protection Act would achic"\"c a
sioned by its creators and at no cost to number of important changes in the orig-
AMENDMENT TO THF. SECURITIES EXCHANGE ACT
the taxpayer. As of March 3l. 1978, inal 1970 act.
First, the bill would increase the ex-
SEC. 19. Section 11 (a) (3) of the Ser.uritles S:'PC had assessment revenues from its
Exchange .Act of 1934 (15 U.S.C. 78k(a) (3» members which totaled over $198 million. 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 1, 1978" mately .$31 million in interest income on broker-dealer. The act currently protects
and by striking out "May 1, 1978" each place its investments, giving SIPC total rev- customer accounts up to a total of SSO.-
It appears and inserting in lleu t.hereof enues of $229 million. SIPC's expenses 000, with a ceiling of S20.000 for cash.
"November I, 1978". from ince?tion to this date totaled ap- H.R. 8331 'would cauble the amount of
Mr. WILLIAMS.. Mr. President, as proximately $64.5 million. As noted above protection. raising to S100.000 the tota:
'Clm1:fiilan of the Senate' Subcommittee $54.5 million of that total represents amount of protection. and to $40.00n the
on SecuTities;I am pleased tolaybefbre advances made to trustees in SIP A level of protection for customers' cash.
the Seriate for its in1mediatn;onSidera.- liquidations and the balance represents This corresponds to the changes in 1974
tionH.R.8331, the SecurIties·:rnvestor overhead expenses for SIPC's op€ra- 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
bill w9u.1damend in significant respects E'TPC's expenses for its internal op€ra- depositors.
the Securities InvestorPretectiori ACt of tions have been slightly le.ss than one Second, the bill \,'ould modify the act
i97Cl'bystreamlining liquiClationproce- third of the interest income SIPC has to provide protectlOn wInch better cOJu-
dures:available under the act,reduCing earned on its investments. currently, thl' por,ts--w+t+t-tf.H!-~ec.b'1.tion 01 both CGosh
the expense:ind complexity oftheproce- S:h-'C fund totals approximately SlB).5 and"lJJargin cust.omers. This would be
dures'tinder tpeact, and providing public million. aC(:.omRlished by moving ru'La.Y.....l.!:Ql a
custom!:!:,s oLfailing·bi;tikeragefir'Jriswith As my colleagues may recall, SIPC was str~~ce con~ept and toward a
'increased andhripl'ovedtnsur'ance cover- considered and passed on an emergency sC~-e-!;Hfl~~~ltS
age.Turge the immediatep'assageof the basis. The need for prompt action re- i 'ct as the existe when the broker-
amendments. quired that certain technical problems dealer became jnsolyent The ..bene s'o
Sirice,COngreSS has not revisited or re- relating to the procedures for liquidating cthe customers of firms in liquidatlon:will

examined the SecuritiesJnvestorProtec- securities firms would be left for later \J!0rnmeasurable sidce tlJey wi11110 longer
tien Corporation, ,created to, administer solutions 'in light of act,ual experience b.\!-depnved for lengthy pe:.cods of thee
the.act.sinceits creation m1970,abtfef under the new act. At his first confirma- use of, or access to, tfie1r cash or seGllri-
review of th'e circumstances surrounding tion hearing in November 1973, then and J1es.
its creation and its expeijerice during the stillStpC Chairman Hugh F. Owens, ad- Third, liquidation procedu.!",=s would be
past 8 years. should be useful to my col- vised the committee that SIPC would un- streamlined and tile cost c,f liquidations
leag\ies;Int~OSingda~of Uno., Goll.=-dertake a thorough study of possible reducea by aut.10!'izing ;::i1PC to make
gress·,estiQJlt ..ethe SeCurities Invest.or amendments to the SIPC Act. Pursuant payments directly t,) custome:.: without
pro,tectiOI1.CorporatlOmmresponse to the to this commitment, Chairman Owens the necessity for a judicial proceeding.
Wall.streetback oIfice,cns1s ana the bear appointed ". broadly based task force And SIPC would itself be the trustee fn r
mar,ket o(the'lute 19.60's. Durmg thiS to explore better, quicker and more ef- liquidation of small brokers and dealers
tur-bll1ent>penod, hundreds of brokerage ficient methods of achieving the investor where the claims dG not exceEd $750.000
fifms.wenCoutofbusmess. The1r publiC protection and concomitant investor COD- and wl"i<'re there are fewer than 500 cus-
customers were expose.a to senous fi", fidence envisaged by Cungress when it tomers.
I?aIiCIallos,ses and pubhc cohhaence ill passed the 1970 act. Fourth, the bill wonld c:onth',ue Lhe eX"
t~securme:'Jga~et5 =rraken. badly. ._ The task force issued its repor~ in emption from SIPC memoer"hip and
TOrese<ir __u IC c.!ill...-ence m the July 1974, and the SIPC Board of D1re(;- 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§tdrs against the taJlure and msolvency_ mendatiuns. These were subsequently in- able annuities. I believe it is er;tirely ap-
of btgkers an~ealers, the Secntities 1n-, corporated into legislative proposals and propriate to retain G:.~~.; exemptions
veii~'ffln Act o.f--t!}'{"o was transmitted to the Congress. In 19'14, I since exciusive dealers in these instru-
ad~ Under the original stat-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 1[;70 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 ]0]]]
Telephone: (212) 589-4200
Facsimile: (212) 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. Madoff Investment Securities LLC and Bernard L. Madoff

2. SECURJTIES INVESTOR PROTECTION CORPORATION

805 Fifteenth Street, N.W. Suite 800
Washington, DC 20005
Telephone: (202) 371-8300
Facsimile: (202) 37] -6728
By: Josephine Wang
Kevin H. Bell

Attorneysfor the Securities Investor Protection Corporation

3. SECURJTIES AND EXCHANGE COMMISSION

100 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. CRAV A TH, 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 & STERL1NG 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

Attorneys/or Carl Shapiro and associated entities

] 7. SONNENSCHEIN NA TH & ROSENTHAL LLP

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

Attorneys/or certain investors

Pro Se

]. 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. Yolanda Greer

9. Joseph M. Hughart

10. Marvin Katkin

11. Marshall W. Krause

12. Jason Mathias

13. Michael and Stacey Mathias

14. Shawn Mathias

6
 I S. Herbert A. Medetsky

J 6. Josef Mittleman

J 7. JosefMitlleman, on behalf of Just Empire, LLC

18. Arlene Perlis

] 9. Gunther and Margaret Unflat

20. Lawrence R. Ve)ve)

21. Alan J. Winters

PARTJES NOT TAKING A POSJTJON ON THE CALCULAT10N OF NETEQUJTY

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

9]] Chestnut Street
Clearwater, FL 33757
Telephone: (727) 46] -1818
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
Facsimile: (212) 735-8708
By: Michael R. Dal Lago

A l1orneysfor David Silver

7
 The IA Business, on the other hand, perpetuated Madoffs fraudulent activity. Physically
h
isolated on the ] i 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. BLMIS 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 Decl. 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 mms, SIPA establishes procedures for liquidating failed broker-

dealers and provides "customers," as defined by SIPA section 78111(2)/5 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 ....
SIP A section 78/ll(2).

18 91
also Conn. Nat. Bank v. Germain, 503 U.S. 249, 253-54 (1992) ("[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(J 1):

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(11) (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 SIPA'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

00
vv

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~A 6-608-2400
v';i;
 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 OJ I MOllday with regard to arrangements for contacting tlie court. '
Thank you and 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 only 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 110t 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 110t 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 (\

 lJear 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: 'clarosa@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 8.lTanged 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 cOlTectly 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 still later 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 24th.

3. The Trustee and SIPC will file their replies by December 1st.

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

5. If the COUli 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.
Q9
vU
1119/2009
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; RequestForProductionofDocuments.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 secUlities shown in
their statements of November 30,2008.

As you surely are aware, SIPA -- a name which, like SIPe, 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 SIPe 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 SIPe 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 SIPe 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
~wi1l implicitly cover this matter, since your pOSItIOn, as I understand it, is that no discovery can be
had on any questIOn. It would be pelreetly understandable, 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 Vel vel

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)

CORPORA TION,
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. VEL VEL

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 L. 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 L. 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, ]5 U.S.C. §§ 78aaa, et seq. ("SIPA"), and

the Protective Decree, entered on December 15, 2008 by the United States District Court for the

Southern District of New York in Case No. 08 CV 10791, 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
IslBurton 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
CIn Group Inc. 812,346,000
CLA
Class B
Coca Cola Co. 10,844,700
Comcast Corp. 9,231,020
Conocophillips 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 of the market capitalization of the Us. equity markets". Standard & Poor's, S&P 100 Fact
Sheet (Dec. 31, 2008) available at
http://www2.standardandpoors.com/spflpdflindexiSP 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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July 27,2010 - ROBERT SIEGEL, host:
your money
Irving Picard is a man in search of ill-gotten gains, Picard is the lawyer from the firm of Baker and Life Insurance Firms
Hostetler, who is the court appOinted trustee in the biggest financial swindle of all 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 billion 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 possibly 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 from
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 hol 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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http://WWW.llpr.org/templates/transcript/transcript.php?storyld=128802589 8/2/2010
 PRESS RELEASE FROM
CONGRESSMAN KANJORSKI
 Page 1 of2

LaWi'Sl'1ce Velvel

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

Sent: Friday, July 30, 20106:07 PM
To: FSC-WEBUPDATE-BA31@LS1.HOUSE.GOV
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 (SIP A), 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-C1.TIii.fii1an KanJorski. "As part of these efforts, we
- mustalso ensure that the SeCUrItIes Investor Protection CorporatIon, the enflty charged wIth
Triiplementillg SIP A, follows the spuit Ohne-extstillgtaw and-wOrlcs to protect the best interests
of illvestors. Omortunately, SIPe has dellIed the claims of customefsDasecl on statement . -
',-- balances provided to them by their brokers, yet SIPC expects customers to use those very same
~ statements to report unauthorized trading ill theIr accounts. ThIS paradox resu1:tsilHl customer's
'~15eing meanmgless whenever it could harm SIPC, but not when it harms the customer.
We need to explorellils 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 liamnan 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:"faud an ollier Ponzi schemes has been_
~tany illadequate. Thousands of illIlocent VIctims remain destitute fi:2!!l. financial frauds because
SIPe IS determined to payout as few claims as possible. SIPC's obdurate refusal to provide
coverage to indirect investOlsi5ecomes even more mfUriating given that, for more than a decade,
~ip')iC=;-,--jfuf=nd::re::-:d:rbCy::t:b::ro::1k::::e=r--::di:e:::a1:le=rs;::-,:in=-:;:trn::=n:-:a:'1f"i':fo::r::1d-:::-ed::r::m::i:1illi::io::n::s:-:an=dl':m3il1:1i'=o=n:::-s-::ocf-::ra:::-oIITl::::ar::::s'-:I:::-n--:Cm=:s"""l=lr=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

Cliairniim'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
dignity to the vICtIms of Ponzi schemes, as wetl as ensuring that fLiture victims otl5f5ker:aeaJ:erraiIiires
"'llliCtIrau s ar bett· ec e e as sura 1 es 1'C was intendea to proVIde," added Vice Chairman
Ackennan. "I 100kJ:orward to this important hearing, and hope It WI ea to Increased protections an
iiiiproVed insurarice coverag~ for the i.gp.ocent victims of POllZi schemes t~-PC has left 15el'iiIicl~

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."

VEO: 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 rec~nr 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 (SIP A), 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 Madoffinvestor 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 8/312010
 No. 10-2378

IN THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

IN RE: BERNARD L. MAD OFF INVESTMENT

SECURITIES LLC.

BRIEF OF APPELLANT LAWRENCE R. VEL VEL

Appeal From an Order of the

United States Bankruptcy Court for the Southern District of New York

Lawrence R. Velvel
Massachusetts School of Law
500 Federal Street
Andover, MA 01810
Tel: (978) 681-0800
Fax: (978) 681-6330
Email: velvel{ci{mslaw.edu
 TABLE OF CONTENTS

Table of Authorities ................................................................ .

Jurisdictional Statement ............................................................. 1

Statement of Issues .................................................................. 1

Statement of the Case ................................................................ 1

Standard of Review ................................................................... 1

Statement of Facts... ... . .. ..... . . ........ . .. ... ... ...... . ..... ... . ........... . .. ... ... 2

Summary of Argument ............................................................... 5

Argument ............................................................................... 6

1. Congressional Intent Requires Use Of The Final Statement

Method, Especially Because CICO Eviscerates Congress'
Intent To Protect Investors ......................................... . 6

A. The Congressional Intent ................................... . 6

B. The Legislative History Showing The Congressional

Intent ........................................................... . 9

1. SIPA Is Intended To Protect Investors,

Especially Small Ones, And To Build
Confidence In Markets ............................... 9

2. SIP A Provides Insurance, In Emulation Of The

FDIC ..................................................... 14

3. An Investor's Reasonable Expectation Is That He

Has What Is Shown In His Account Statement.
And Congress' Legislation Encouraged Investors
To Leave Their Securities In Street Name, So That
They Had To Rely On Their Account Statements
To Know What They Had .............................. 16

4. Investors Are To Be Paid Promptly, Not After The

Lapse Of Many Years ................................... 17

1
 5. Investors Should Be Given The Securities That
Were In Their Account Whenever Possible ......... 17

6. Theft And Missing Securities Were A Major

Problem To Be Remedied By SIP A .................. 22

II. The Congressional Intent, Not The Contrary Ideas Of SIPC

And The Trustee, Necessarily Controls This Case .................... 23

III. The Proceeding Below Was A Summary Judgment Proceeding

On Which No Discovery Was Allowed ................................. 28

Conclusion .................................................................................... 3 1

Certificate of Compliance ................................................................... 33

11
 TABLE OF AUTHORITIES

Cases

In Re Bernard L. Madoff Investment Securities LLC,

Debtor, Securities Investor Protection Corporation,
Plaintiffv. Bernard L. Madoff Investment
Securities LLC, Defendant, No. 08-01789 (BRL),
424 B.R. 122 (2010) 4, 7-8, 30

In Re Bernard L. Madoff Investment Securities LLC,

Debtor, Securities Investor Protection Corporation,
Plaintiffv. Bernard L. MadoffInvestment
Securities LLC, Defendant, No. 08-01789 (BRL),
Unpublished Order of the Bankruptcy Court
Denying Discovery (November 24,2009) 5,29

In re New Times Sec. Servs., 371 F.3d 68 (2nd Cir. 2004) 3,24

In re Old Naples Sec. Inc., 311 B.R. 607 (M.D. Fla. 2002) 3

Rolfv. Blyth, Eastman Dillon and Co., 570 F.2d 38 (2nd Cir. 1978)25

Legislative Materials Passim

A. Congressional Hearings Passim

1970 Hearings: Federal Broker-Dealer Insurance

Corporation, Hearings on S. 2348, S. 3988, and
S. 3989 before the Subcomm. on Securities of the
S. Comm. on Banking and Currency, 91st Congo
(1970). 1,2, 14, 16,22

1975 Hearings: Securities Investor Protection Act

Amendments of 1975, Hearing on HR. 8064
before the Subcomm. on Consumer Protection
and Finance of the H Comm. on Interstate and
Foreign Commerce, 94th Congo (1975). 1,2, 16-17,
17,18,22

1978 Senate Hearings: Securities Investor Protection

Act Amendments: Hearing on HR. 8331 before
the Subcomm. On Securities of the S. Comm. on
Banking, Housing, and Urban Affairs, 95th Congo (1978). 13, 16,21

III
 B. Congressional RepOlis Passim

1970 House Report: H.R. Rep. No. 91-598 (1970),

as reprinted in 1970 u.S.C.C.A.N. 5254 10, 14-15, 17

1977 House Report: H.R. Rep. No. 95-746 (1977) 13, 16, 17,
19-20,22-23

1978 Senate RepOli: S. Rep. No. 95-763 (1978),

as reprinted in 1978 u.S.C.C.A.N. 764 13, 14, 16,
21-22,23

C. Congressional Debates Passim

1970 House Debate: 116 Congo Rec. 39345 (1970) 11, 15

1970 Senate Debate: 116 Congo Rec. 40861 (1970) 11, 15

1977 House Debate: 21

1978 Senate Debate: 124 Congo Rec. 11611 (1978) 14,22

D. 2010 Congressional Press Release 32

Transcript of Argument Below 15, 16

SEC Report: Investigation of the SEC to Uncover Bernard Madoff's

Ponzi Scheme, Rep. No. OIG-509 (Office of the Inspector General of
the SEC Aug. 31, 2009). 3

AIiic1es:

Randall Smith, SEC Breaks Up Investment Company That

Paid Off Big but Didn't Register, The Wall Street Journal,
Dec. 1, 1992; Randall Smith, Wall Street Mystery Features
a Big Board Rival, The Wall Street Journal, Dec. 16, 1992. 2

Charles Hunter & Lawrence Melton, A Measure of Quality and

Quantity -- Market Adjusted Damages as Proof of the
Broker's Failure to Diversify -- A Causal Connection Between
Malfeasance and Damages, 14 PIABA B.J. 8 (2007). 25

Mary E. Calhoun, Norman Padgett & Ross Tulman, The

Calculation of Damages in Securities Arbitration,
1264 PLI/Corp 1061 (2001). 25

IV
 National Public Radio (NPR) Transcript, July 27,2010, 27
Robeli Siegel, host, Untangling MadojJ's 'Winners And
Losers,'"
http://www.npr.org/templates/transcript/transcript.php?storyId=128802589

Terrence Hendershott, Automated Trading,

forthcoming, Encyclopedia of Quantitative Finance,
available at http://faculty.haas.berkeley.edulhenderiAlgo EOF.pdf
(last visited July 16,2010). 28

Books:

The Club No One Wanted To JoinlMadojJ Victims In

Their Own Words (Erin Arvedlund ed., Doukathsan Press 2010)
(hereinafter The Club No One Wanted to Join). 4,24

Markopolos, No One Would Listen (John Wiley & Sons, 2010). 25,26

Velvel, MadojJ and Not MadojJ(Doukathsan Press 2010). 27, 31

v
 JURISDICTIONAL STATEMENT

This is a direct appeal from the Bankruptcy Court's judgment in a SIPA

liquidation proceeding. The lower cOUli had jurisdiction under IS U.S.C. 78aaa et seq.

The Court of Appeals has jurisdiction under 28 U.S.C. § IS8(d)(2), because it granted a

direct appeal from a judgment that is final on the question of net equity. The Court of

Appeals provided for Appellants' opening briefs to be filed by August 9,2010.

STATEMENT OF ISSUES

1. Whether the judgment of the Bankruptcy Court must be reversed because

it contravenes the continuously stated Congressional intent.

2. Whether the judgment of the Bankruptcy COUli must be reversed because

it was a summary judgment on which no discovery whatever was permitted.

STATEMENT OF THE CASE

The case involves the appropriate method of determining "net equity" in a

proceeding under the Securities Investors Protection Act ("SIP A"). The Appellants asseli

that the "final statement method" must be used in a SIPA case. The Appellees assert that

they can use the "cash-in/cash-out" method if they so choose. The Bankruptcy COUli, per

Judge Lifland, held for the Appellees, 424 B.R. 122 (2010). The Bankruptcy COUli

celiified a direct appeal to this COUli, and this Court granted a direct appeal.

STANDARD OF REVIEW

The judgment below is subject to denovo plenary review because two conclusions

of law are involved. In re Ionosphere Clubs, 922 F.2d 984, 988 (2nd Cir. 1990). The

two legal conclusions are that net equity can be detennined by the cash-inlcash-out

method in a SIPC proceeding, and that a sUlnmary judgment filled with putative facts can

1
be granted without allowing the losing side any discovery whatever to develop facts or to

test the accuracy of factual claims of the wilming side that were relied on by the Court.

STATEMENT OF FACTS

A. Appellant invested with Madoff from April 1995 onward. A crucial

determinant of his decision to invest was the SEC's public statement in December 1992

that it had found no fraud regarding Madoff. 1

Beginning in 2003, Appellant withdrew money from Madoff. Much of the

withdrawals were to pay federal income tax on what turned out to be phony Madoff

profits. Appellant thought the profits were real rather than phony, and that he was

withdrawing real income. He never had the slightest inkling that Madoff was a fraud.

None of the foregoing is disputed.

Because of annual withdrawals, pmiicularly to pay taxes, on December 11, 2008,

when Madoff s fraud was disclosed, Appellant had withdrawn somewhat more than he

had invested. However, his withdrawals were only about half the amount shown in his

account on his final, November 30, 2008 statement. Because he had never had any reason

to doubt that he had made real profits or the accuracy of the statements he received

before December 11, 2008, it appeared at all times that the amounts in his monthly

statements exceeded his investment and his withdrawals. This was logical because he

had invested since 1995 mld his supposed em'nings had been building ever since.

None of this is disputed either.

I Randall Smith, SEC Breaks Up Investment Company That Paid qff Big but Didn't Register, The Wall
Street Journal, Dec. 1, 1992. (Quoting SEC official Martin Kuperberg's comment on the broker-dealer
[Madoff] in the SEC's investigation, "'Right now, there's nothing to indicate fraud. "'); and Randall Smith,
Wall Street MystelY Features a Big Board Rival, The Wall Street Journal, Dec. 16, 1992 (identifYing the
broker-dealer as Madoft).

2
 B. For decades an investor's net equity had been determined by his final

statements in SIPC cases (Securities Investor Protection Corporation cases). Appellant

believes that in 321 prior SIPC cases, net equity had been determined by this method in
?
319Yz ofthem.-

But some time after Madoff s fraud was disclosed, SIPC and Trustee Picard

decided that net equity would not be determined by this method in Madoff. Instead, it

would be determined by comparing the amount victims had invested (their "cash-in")

with the amount they had withdrawn (their "cash-out"). If one withdrew more than he

put in, he had a negative net equity regardless of what was shown by his final statement.

Thousands of persons who believed Madoff was legitimate, and who had withdrawn

monies they thought were real profits, were informed that, instead of having a positive

net equity as shown by their final statements of November 30, 2008, they had a negative

net equity. Appellant was one of those investors. 3

Because SIPC and the Trustee declared that such investors had a negative net

equity, the investors were ineligible to receive a payment of up to $500,000 from the

SIPC fund set up under Congressional mandate to make payments to victims. The

investors were also ineligible to participate in the separate fund called customer propeliy.

2 It had not been used in the so-called Old Naples case, In re Old Naples Sec. Inc., 311 B.R. 607, 617 (M.D.
Fla. 2002), and in pmt of the New Times case, In re New Times Sec. Servs., 371 F.3d 68 (2nd Cir. 2004)
(hereinafter New Times). But apparently it had been used in every other SIPC case.

3 The 457 page report of the SEC's Inspector General on the Madoff matter established that, unlike small
ordinary investors, there were Wall Street insiders who knew or suspected Madoffwas not legitimate. (The
now famous Harry Markopolos was only one of them.) However, none of those Wall Street figures made
their views known publicly, most said nothing to the SEC on a private basis, and the SEC ignored those
few who, like Markopolos, tried to warn it that Madoff was a fraud who must be stopped. So small
investors remained completely ignorant of the fact that Madoff was illegitimate. Moreover, as the IG's
RepOli shows, even large investors like hedge funds continued to invest in Madoff because the SEC
continuously gave him a clean bill of health. Investigation of the SEC to Uncover Bernard Madoff's Ponzi
Scheme, Rep. No. OIG-509 (Office of the Inspector General of the SEC Aug. 31, 2009, pp. 427-29).

3
Additionally, the investors were subject to "clawbacks" of the amounts by which their

withdrawals exceeded the amounts they had invested.

It has been estimated that 3,000 elderly people have had their lives decimated by

this. Although the media long focused on the highly wealthy and celebrities, "small

people" suffered even worse by the thousands. People in their 70's and 80's were left

with no income because of the absence of any payment from SlPC, have had to sell their

homes to raise money to live, have scrOlmged for food, and have had to live with children

and relatives. 4 None of this is denied by SlPC or the Trustee. 5

C. The economic disaster caused investors by the use of the cash-inlcash-out

method ("ClCO"), especially the hOlTific disaster caused to "small people," led to

litigation in the Bankruptcy Court over whether net equity has to be detennined by the

final statement method normally used in a SlPC case, or can be detennined instead by

ClCO if SlPC chooses. All Madoff victims who were pati of the consolidated Madoff

proceedings in the Bankruptcy COUli were allowed to patiicipate in the litigation on net

equity. Appellant did so, atld, in "Appendix 1 - Appearances" to the lower court's

decision, he was listed by the Batuauptcy Judge as pro se patiy number 20. (Addnd., p.

87.)

The Batumlptcy Court ruled in favor of the Trustee and SlPC, holding that net

equity could be determined by ClCO. (424 B.R. 122 (2010).). The net equity

proceedings below were proceedings for summary judgment. Although they were not

4 To the extent that such people might be eligible for refunds of income taxes paid on phony profits or for
returns of taxes due to theft deductions, SIPe and the Trustee have taken the position that such monies are
subject to clawback.

5 The travails of a few of these victims have been elaborated in a recently published book entitled The Club
No One Wanted To JoinlMadoffVictims In Their Own Words (Erin Arvedlund ed., Doukathsan Press 2010)
(hereinafter The Club No One Wanted to Join).

4
generally called summary judgment proceedings, there is no dispute that that is what they

were.

No discovery was allowed, however, prior to the briefs and argument on summary

judgment. SIPC and the Trustee asselied that every single fact and document in their

possession was privileged and not subject to discovery. They also refused to provide a

privilege log. They said they were asserting wholesale privilege rather than making

objections because objections might imply that some discovery could be proper. They

likewise declined to discuss narrowing of what they asselied were overbroad discovery

requests lest such discussion imply that more na11'0wly worded requests might be proper.

Their asseliion of wholesale privilege which immunized them from any discovery

whatever, their refusal to provide a privilege log, their claims of overbreadth and refusal

to discuss narrowing of requests they claimed overbroad, were accepted by the

Bankruptcy COUli, which in broad language ruled in their favor. (Addnd., pp. 101-102.)

Subsequently, when the Bankruptcy Court relied on facts, it accepted the facts given to it

by SIPC and the Trustee. 6

The Bankruptcy COUli invited the paIiies to seek a direct appeal to this Court on

the question of net equity. Several paliies did, and this COUli granted a direct appeal.

SUMMARY OF ARGUMENT

1. The legislative intent underlying the 1970 enactment of SIP A and its 1978

amendments was continuously expressed in legislative hearings, Congressional repOlis,

and floor debates. But the cOUli below paid viIiually no attention whatever to the

extensive legislative history, and its opinion contravenes Congress' intent in numerous

6 Some of their facts were taken from the criminal aIlocutions of Bernard Madoff and his prime henchman
Frank DiPascali, two of the biggest liars and fraudsters in the history of WaIl Street. At Madoffs
aIIocution, the Govermnent denied the truth of certain of his statements, e.g., as to when the fraud began.

5
ways. Its opinion thwarts the legislative intent to protect investors, especially small ones,

to build investors' confidence in markets and to allow them to realize their reasonable

expectations, to create an insurance program, to have payments made promptly to

investors, to have investors be paid from a fund that is separate from "customer

property," to have them protected against theft, and to have them receive the securities

that were in their accolmts when such securities can be purchased in a fair and orderly

market. Because of its extensive contravention of Congressional intent, the decision

below must be reversed.

2. The decision below must also be reversed because it is a summary

judgment -- chock full of purpOlied facts put fOlih by SIPC and the Trustee -- yet no

discovery whatever was allowed to enable Appellants to determine facts or to test the

accuracy of specific factual claims of SIPC and the Trustee. Such claims, many of which

the lower cOUli relied on, often appear already to be wrong.

ARGUMENT

1. CONGRESSIONAL INTENT REQUIRES USE OF THE FINAL

STATEMENT METHOD, ESPECIALLY BECAUSE CICO
EVISCERATES CONGRESS' INTENT TO PROTECT INVESTORS.

A. The Congressional Intent.

Congress' intent when enacting and amending SIPA in 1970 and 1978 was to

protect investors, especially small ones. All-impOliant confidence in the securities

market would thereby be built up.

The intent to protect investors, especially small ones, was not something stated

only once or infrequently. Rather, it was a constantly reiterated leitmotif throughout the

legislative process. It was a leitmotif that was regularly stated in 1970 hearings, in 1970

6
legislative repOlis, in 1970 floor debate, in 1975 hearings on amendments, in a 1977

House Report, in 1977 floor debate, in 1978 hearings, in 1978 legislative repOlis, and in

1978 floor debate.

The intent to protect investors was stated by some of the most prominent

Senators, Representatives and Executive officials of the 1970s. It was specifically

expressed by President Nixon, Secretary of the Treasury Kelmedy, Senator Muskie,

Senator Han-ison Williams, Senator Cranston, Senator Proxmire, Senator Hartke, Senator

Belmett, Congressman Staggers, Congressman Anderson, Congressman Rostenkowski,

Congressman Moss, Congressman Broyhill, Congressman Eckhardt, Congressman

Boland, Congressman Vanik, Chairman Owens of SIPC, Commissioner Loomis of the

SEC, and Chainnan Haack of the New York Stock Exchange. 7

The continuously reiterated Congressional intent of protecting investors,

especially small ones, were no pali of the arguments of the Tmstee or SIPC, who instead

created a host of arguments divorced from any of the legislative history. The legislative

history was viliually ignored by the Bmllauptcy Court. The Comi's 34 page slip opinion

thus devoted a total of only 16 lines, in two sepal'ate places, to dealing with any aspects

7 Senator Muskie was Chairman of the Committee on the Budget and a member of the Committee on
Banking and the CUTI'ency and the Subcommittee on Securities (and also ran for the Presidency); Senator
Hanison Williams was Chair of the Subcommittee on Securities of the Committee on Banking and the
Cun'ency; Senator Cranston was a member of the Committee on Banking and the Currency and served as
the Democratic whip; Senator Proxmire was Chairman of the Committee on Banking and the Cunency;
Senator Hartke was a member of the Finance and Commerce Committees and Chair of the Committee on
Veterans Affairs; Senator Bennett was a member of the COlmnittee on Banking and the CUTI'ency;
Congressman Staggers was Chairman of the House Committee on Interstate and Foreign Commerce;
Congressman Anderson was a member of the House Rules Committee, was Chainnan of the House
Republican Conference and ran for President; Congressman Rostenkowski was a member of (and later
Chair) of the Committee on Ways and Means; Congressmen Moss and Broyhill were members of the
Committee on Interstate and Foreign Commerce; Congressman Eckhardt was a member of the Committee
on Interstate and Foreign Commerce and the Subcommittee on Consumer Protection and Finance;
Congressman Boland was Chair of the House Intelligence Committee and a member of the Appropriations
COlmnittee; and Congressman Vanik was a member of the House Ways and Means Committee and the
Trade SubcOlmnittee.

7
of the continuous, extensive legislative history8 -- which covers a wide number of

relevant aspects and is elaborated inji-a. (Addnd., pp.91, 92.) SIPC, the Tmstee and the

lower court had to ignore the legislative history because CICO eviscerates Congressional

intent. Thus:

• Congress intended to protect investors, but CICO has devastated

thousands of them, especially small ones.

• Congress intended for SIPA protection to build up investors' confidence in

the market. But because of CICO investors have lost confidence that they will be

protected and have lost confidence in the market.

• Congress intended for investors to realize their reasonable expectations,

which, it said, are based on the statements received from brokers. But SIPC and the

Trustee say the investors cannot base reasonable expectations on statements from

brokers.

• Congress intended for the Securities Investor Protection Corporation

("SIPC") to make payments promptly to investors. But CICO insures that payments will

take years, since it takes years to reconstruct hundreds or thousands of brokerage

accounts to determine their cash-in and cash-out.

• Congress intended SIP A to be an insurance program that protects investors

in the same way that the FDIC insures banle deposits. SIPC and the Trustee claim SIPA

is not insurance.

8 Cited portions of the decision below, and parts of the legislative history quoted or cited infra, are set forth
in the Addendum (hereafter "Addnd."). Also in the Addendum are part of an appendix attached to the
opinion below, a discovery order below, communications below among counsel that were appended to a
prior filing in this Cowi, a transcript of a recent NPR interview with Irving Picard, and a recent
Congressional press release.

8
 • Congress intended the SIPC fund -- from which investors with a positive

net equity are to receive up to $500,000 -- to be a wholly separate fund from the fimd of

customer property. SIPC and the Trustee claim the two funds are just one fund.

• Congress intended investors to be paid money when victimized by theft

and when securities had not even been bought by brokers. There was massive theft here,

and Madoff did not buy the securities he claimed. But money was not paid to investors.

• Congress intended that, wherever possible, SIPC should acquire and give

investors the securities that were in their accounts rather than mere cash. SIPC and the

Trustee did not give investors such securities.

B. The Legislative History Showing The Congressional Intent.

Because of the continuous and overwhelming character of the legislative history

being contravened by SIPC and the Trustee, Appellant shall take the unusual step of

setting it out in extenso in order to give the Court its full overwhelming flavor.

1. SIPA Is Intended To Protect Investors, Especially Small Ones,

And To Build Confidence in Markets.

1970 Hearings 9 : Treasury Secretary Kennedy quoted President Nixon as saying

that "To fuliher protect the small investor, I support the establishment of an insurance

corporation with a Federal backstop to guarantee the investor against losses that could be

caused by financial difficulties of brokerage houses." (Addnd., p.l 0 (emphasis added).)

Kennedy himself said that "proposed legislation [was] to provide protection and

insurance ... to customers of brokers and dealers in securities." (Addnd., p. 10.) The

9 Federal Broker-Dealer Insurance Corporation, Hearings on S. 2348, S. 3988, and S. 3989 before the
Subcol71l11. on Securities of the S. COl71m. on Banking and Currency, 91 st Congo (1970) (herein "1970
Hearings") (Addnd., pp.1-13).

9
SEC said that SIPC proceedings were "primarily for the protection of all customers of the

broker dealer in question." (Addnd., p. 12.)

Major industry figures said that the bill's sponsor, Senator Muskie, had said it was

"'to protect investors from loss because of the failure of broker dealer firms,'" and that

they "accept the need to protect the individual investor from loss due to the failure of a

broker or dealer." (Addnd., p. 9.) NYSE President Haack said concepts would "be

blended in a way to increase the protection to investors." (Addnd., p. 6A.) Chairman

Leslie of Bache & Co. said "I would like to say at the outset that the aims of the bill

deserve support since an element of insurance protection would undoubtedly contribute

to reinforcing public confidence in the securities industry." (Addnd., p.2.)

1970 House RepOli 10 : The Report said "The primary purpose of the repOlied bill

is to provide protection for investors if the broker-dealer with whom they are doing

business encounters financial troubles." (Addnd., p 14.) It further said that bankruptcies

of brokerage houses "may lead to loss of customers' funds and securities with an

inevitable weakening of confidence in the U.S. securities markets. Such lessened

confidence has an effect on the entire economy .... [O]ne objective of the bill ... is to

provide investors protection against losses caused by the insolvency of their broker-

dealer. The need is similar, in many respects, to that which prompted the establishment

of the Federal Deposit Insurance Corporation and the Federal Savings and Loan

Insurance Corporation." (Addnd., p. 15.)

10 H.R. Rep. No. 91-598 (1970), as reprinted in 1970 u.S.C.C.A.N. 5254 (herein "1970 House Report")
(Addnd., pp. 14-19).

10
 1970 House Debate II : Chairman Staggers said the bill is "to provide greater

protection for customers of registered brokers and dealers and members of national

securities exchanges .... " (Addnd., p. 20.) Congressman Broyhill said "Contributions

by the members would create a fund to protect customers when a broker-dealer fails to

meet his financial obligations." (Addnd., p. 25.) Congressman Boland said this

"legislation [is] to protect the small investor." (Addnd., p. 26, (emphasis added).)

Congressman Rostenkowski said the bill "would protect investors from loss because of

the failure of broker-dealer firms." (Addnd., pp. 27-28.) Congressman Anderson said

"The purpose of this legislation, put quite simply, is to provide adequate protection for

the investor in the event that his broker-dealer encounters financial difficulties."

(Addnd., p. 27.) Congressman Yanik opined that "this legislation is essential in order to

provide a greater degree of security for the investor." (Addnd., p. 27.)

1970 Senate Debate I2 : Senator Muskie said the Security Investor Protection Act

of 1970 "would accomplish a similar purpose for securities investors [similar to FDIC

insurance for bank deposits] by protecting them from losses because of the failure of their

brokers." (Addnd., p. 30.) Senator Williams said that approval of the legislation "will go

far toward restoring investor confidence in this country." (Addnd., p. 31.) Senator

Williams fmiher said that "The insolvency of a Goodbody or Dupont could create havoc

in the securities industry due to the inter-relationship between broker-dealers. The real

losers would, of course, be our Nation's small investors, many of whom have invested a

significant pOliion of their savings in securities. It is imperative that these investors, who

11 116 Congo Rec. 39345 (1970) (herein "1970 House Debate") (Addnd., pp. 20-28).

12 116 Congo Rec. 40861 (1970) (herein "1970 Senate Debate) (Addnd., pp. 29-36).

11
are the backbone of a healthy economy, be fully protected, against brokerage firm

failures." (Addnd., p. 32, (emphasis added).) Senator Bennett said "the primary purpose

of the bill before us is to provide insurance protection for millions of individuals who are

customers of brokers or dealers in securities tlu'oughout this country." (Addnd., p. 31.)

Senators Hartke and Cranston both said that the bill would "protect securities investors

against losses." (Addnd., pp. 33, 34.) Senator Proxmire said the legislation "will provide

the customers of brokerage firms with protection in the event the brokerage firm fails."

(Addnd., p. 35.)

1975 Hearings 13 : SIPC Chaimlan Owens said "Congress passed the 1970 Act ..

." to protect customers of failed broker/dealer against financial loss and, thereby restore

investor confidence in the securities market." (Addnd., p. 38.) A representative of the

NYSE said the purpose of proposed amendments "is the improvement of the protection

afforded securities customers." (Addnd., p. 51.) Commissioner Loomis of the SEC said

proposed amendments "will assure . . . speedier liquidations and better customer

protection." (Addnd., p. 55.) A representative of the Securities Industry Association said

that the proposed amendments would give "improved protection [that] provides for

increased confidence in the use of markets." (Addnd., p. 57.)

1977 House Report14: The RepOli said the proposed amendments "would provide

investors with greater protection against the financial failure of stockbrokers, thereby

enhancing investor confidence in the securities markets." (Addnd., p. 61.) It quoted

13 Securities Investor Protection Act Amendments of 1975, Hearing on HR. 8064 before the Subcomm. on
Consumer Protection and Finance of the H Comm. on Interstate and Foreign Commerce, 94th Congo
(1975) (herein "1975 Hearings") (Addnd., pp. 37-59).

14 H.R. Rep. No. 95-746 (1977) (herein "1977 House Report") (Addnd., pp. 60-68).

12
Chairman Owens' statement that "In order to protect customers of failed broker/dealers

against financial loss and, thereby, restore investor confidence in the securities markets,

Congress passed the 1970 act. That statute ... created SIPC and established a program

whereby monies from the SIPC Fund would be available for the purpose of protecting

customers of broker/dealer firms." (Addnd., p. 66.)

1978 Senate Hearings l5 : Senator Williams said "To restore public confidence in

the securities markets and to protect public investors against the failure and insolvency of

brokers and dealers, the Securities Investor Protection Act of 1970 was adopted."

(Addnd., p. 71A.) Chairman Owens of SIPC said the 1970 law "established a program

whereby monies from the SIPC fund would be available for the purpose of protecting

customers of broker/dealer films which encountered financial difficulty." (Addnd., p.

74.) SEC Commissioner Loomis, presenting the Commission's views, said "the SIPC

Act is most clearly directed" at "the small and frequently unsophisticated investor."

(Addnd., p. 77, emphasis added.)

1978 Senate Report l6 : This RepOli said "The Securities Investor Protection Act

of 1970 (SIP A) was enacted to provide to customers of securities broker-dealers

protection against losses which might occur as a result of the financial failure of broker-

dealers." (Addnd., p. 78.)

15 Securities Investor Protection Act Amendments: Hearing on H.R. 8331 before the Subcomm. On
Securities of the S. Comm. on Banking, Housing, and Urban Affairs, 95th Congo (1978) (herein "1978
Senate Hearings") (Addnd., pp. 71-77).

16 S. Rep. No. 95-763 (1978), as reprinted in 1978 U.S.C.C.A.N. 764 (herein "1978 Senate Report")
(Addnd., pp. 78-83).

13
 1978 Senate Debate 17: Senator Williams said "To restore public confidence in the

securities markets and protect public investors against the failure and insolvency of

brokers and dealers, the Securities Investor Protection Act of 1970 was adopted."

(Addnd., p. 84.)

Brief Recapitulation: The legislative history establishes overwhelmingly that SPA

and its 1978 amendments were enacted to protect investors, especially small investors,

and thereby build confidence in markets. The use of CICO, however, has devastated

investors. And it has undermined their confidence in markets.

2. SIPA Provides Insurance, In Emulation Of The FDIC.

1970 Hearings: Senator Muskie said "The United States now wisely insures banle

deposits under the Federal Deposit Insurance Corporation and the Federal Savings and

Loan Insurance Corporation which are the models for the Federal Broker-Dealer

Insurance Corporation. The FBDIC would give the investor, who leaves his savings with

a broker, the same protection now afforded the depositor, who places his money in a

banle." (Addnd., p. 3.) The Investment Company Institute said the legislation tmder

consideration would "establish a system of insurance for customers of broker-dealers

who are unable to meet their obligations to customers." (Addnd., p. 13.)

1970 House RepOli: The Report said that the need for protection of investors "is

similar, in many respects, to that which prompted the establishment of the Federal

Deposit Insurance Corporation and the Federal Savings and Loan Insurance

Corporations." (Addnd., p.1S) The RepOli quoted the General Counsel of the Treasury

Department, who said that "on June 17, 1970, President Nixon ... specifically endorsed

the concept of insurance protection for investors in securities." (Addnd., p. 19A.)

17124 Congo Rec. 11611 (1978) (herein "1978 Senate Debate") (Addnd., p. 84).

14
 1970 House Debate: Congressman Springer said " ... we created what I would

like to term the FDIC of the securities investors. The theory of FDIC, which is the

Federal Deposit Insurance Corporation, which governs most banks in this country, is to

create a fund to reimburse depositors of defunct banks. The temper of this legislation and

the intent of this legislation, however, is exactly the same." (Addnd., p. 22.)

Congressman Moss said "When we had bank failures in the 1930s, I remember I lost

money in two banks and how happy I was to see when you had a Federal Deposit

Insurance Corporation at least to guarantee your money, to whatever the figure was,

around $10,000." (Addnd., p. 24.) Congressman Barrett said the legislation is "new

insurance." (Addnd., p. 25.)

1970 Senate Debate: Senator Muskie said that SIPC "would administer an

insurance fund," that the legislation calls "for an industry-financed insurance fund"

(Addnd., p.30), that there would be "an insurance fund to protect the assets of investors,"

(Ibid.), and that "the insurance plan established by (the legislation) is a necessity."

(Addnd., p. 31.) Senator Bennett said "the primary purpose of the bill before us is to

provide insurance protection for millions of individuals who are customers of brokers or

dealers in securities throughout this country.,,18 (Addnd., p. 31.) Senator Cranston said

that under the legislation "a nonprofit corporation would be set up to maintain and

administer an insurance fund.,,19 20 (Addnd., p.34.)

18 The dismissive attitude of the Trustee and SIPC towards Senators and their effOli to establish an
insurance program was expressed at oral argument in the Bankruptcy Court by the Trustee's counsel; "if
you look at the legislative history, one could be beguiled by some of the statements made erroneously by
the senators there to the effect, yes there is insurance. They are wrong .... " (Addnd., pp. 94-95.)

19 Because SIPA established an insurance fund, the SIPC fund was intended to be separate from the fund of
"customer property." Thus, the 1977 House Report emphasized the distinction between customer propeliy
and the SIPC fund by saying that a customer "may file a claim against the general estate to the extent that
his net equity exceeds his share of customer property plus SIPC protection, (Addnd., p. 65) (emphasis

15
 3. An Investor's Reasonable Expectation Is That He Has What Is
Shown In His Account Statement. And Congress' Legislation
Encouraged Investors To Leave Their Securities In Street Name,
So That They Had To Rely On Their Account Statements To
Know What They Had.

1970 Hearings: Senator Williams said, and Peter Block replied, as follows: "I

thought I understood Senator Muskie to suggest that under his bill there would be a

greater ease in stock transfers through the encouraging of customers to leave their

securities in street names with the brokers. Did that come out? Did I understand that

correctly?" "That is con-ect." (Addnd., p. 9A.)

1975 Hearings: A representative of the Securities Industry Association said that

the improved protection provided by the bill would "encourage customers to leave

securities with the firm [i.e., in street name] rather than obtaining delivery," which was

necessary in order "to provide an efficient national system for the clearance and

settlement of securities transactions." (Addnd., p. 57.)

1977 House RepOli: The RepOli said "A customer generally expects to receive

what he believes is in his account at the time the stockbroker ceases business." (Addnd.,

added). The Report quoted Chairman Owns of SIPC as follows: "In order to protect customers of failed
broker/dealers against financial loss and, thereby, restore investor confidence in the securities markets,
Congress passed the 1970 Act. That statute, which was signed into law on December 30, 1970, created
SIPC and established a program whereby monies from the SIPC Fund would be available for the purpose of
protecting customers of broker/dealer firms which encountered financial difficulty." (Addnd., p. 66.)
Chainnan Owens of SIPC said, in the 1978 Senate Hearings, that "customer property, briefly explained,
consists of all cash and securities (other than SIPC advances and customer name securities) available to the
trustee for the satisfaction of customer claims." (Addnd., p. 76 (emphasis added).) The 1978 Senate
Report reiterated that "A customer may file a claim against the general estate to the extent that his net
equity exceeds his share of cllstomer property plus SIPC protection." (Addnd., p. 81) (emphasis added).)
The Senate Report also said the legislation "provides that all cash and securities, exclusive of SIPC
advances . .. shall be deemed to be customer property." (Addnd., p. 83 (emphasis added).)

20 The dismissive attitude of SIPC and the trustee to the legislative history showing that Congress intended
there to be two funds, not one, including a SIPC fund from which payments would be made, was expressed
at the hearing in the Bankruptcy Court by the Trustee's counsel: "Your Honor, ... let's not get confused
over what we are dealing with here because we are in this case, because we are in Madoff, the world just
doesn't go upside down. It stays right and steady. We stay with the fact that we are dealing with a fund, a
fund of customer propeliy, and it is out of that which distributions take place." (Addnd., p. 94.)

16
p.61.) It also quoted SIPC Chairman Owens' statement that "customers generally expect

to receive what is in their accounts when the member stops doing business." (Addnd., p.

67.)

4. Investors Are To Be Paid Promptlv, Not After The Lapse Of Many

Years.

1970 House RepOli: The Report said "Your Committee also believes that it is in

the interest of customers of a debt or that securities held for their account be distributed to

them as rapidly as possible in order to minimize the period during which they are unable

to trade and consequently are at the risk of market fluctuations." (Addnd., p. 17.) It also

said there was to be "prompt payment and satisfaction of the net equities of customers."

(Addnd., p. 19.)

1975 Hearings: A task force report said there should be "prompt satisfaction of

customer claims." (Addnd., p. 43.)

5. Investors Should Be Given The Securities That Were In Their

Account Whenever Possible.

1970 House RepOli: The Report said "that it is intended that, to the extent

possible, the Trustee will deliver to a customer against his claim for securities, the same

securities (that is, securities of the same issuer, class and series) which were held for his

account on the filing date." (Addnd., p. 17.)

1970 Senate Debate: Senator Bennett said that the legislation "assures a customer

that he will receive securities he has purchased or cash he has left with a firm in the event

that finTI faces financial insolvency." (Addnd., p. 31.)

1975 Hearings: Chairman Owens of SIPC said that "The proposed amendments

call for changes in the act which would enable the trustee, to a much greater extent than is

17
now possible, to render accounts to customers in the same form as they stood when the

firm went out of business." (Addnd., p. 55.) "If these recOlmnendations are implemented,

the current practice of paying cash in lieu of missing securities would be eliminated for

the most part. Customers would receive, instead, the securities in their accounts. Our

expectation is that, in almost all cases, a customer's claim for securities would be

satisfied by the delivery of securities, and, where necessary, to accomplish this the trustee

would go into the open market and purchase securities. We believe, however, that it is

advisable to provide that the trustee would not be required to purchase securities where

that could not be done in a fair and orderly market. One chief concern is that the trustee

not be required to malce purchases in a market which is being improperly controlled or

manipulated ... [O]ne of the principal goals of the proposed legislation is to make it

possible for the trustee to render accounts to customers as they stood when the finn

failed." (Addnd., p. 41, (emphasis added).) The Task Force said "A customer should

receive securities to the maximum extent possible in satisfaction of a claim for securities.

Customers . .. should receive their accounts as they stood at the filing date," and for tIns

purpose the trustee is authorized to "Purchase securities in the open market." (Addnd., p.

43, (emphasis added).) The Task Force fmiher said "that customers' accounts should be

reconstituted as they existed on the filing date with due regard for the limitations of

protection provided in the Act ... [T]his policy best meets the legitimate expectations of

customers . . . [It also] allows the customer to continue to exercise investment

prerogatives with respect to his portfolio with minimal disruption." (Addnd., p. 44.) The

Task Force also said "This subsection, calTying out one of the central recommendations

of the Task Force, authorizes the trustee to purchase securities for the purpose of

18
restoring customers, as far as possible to their positions as of the filing date (see TFR

p.9). To the extent that he can do so in a fair and orderly market, the trustee would be

expected to purchase securities to cover the deficiency remaining in a customer's account

.... " (Addnd., p. 46.) SEC Commissioner Loomis said the amendments "would make it

possible for SIPC to fulfill customer expectations, in almost all instances, restoring their

securities to them rather than giving them cash in exchange for their claims, and would

speed things up." (Addnd., p. 53.)

1977 House Report: "One of the principal underlying purposes of these

amendments, is to permit a customer to receive securities to the maximum extent possible

instead of cash, in satisfaction of a claim for securities. By seeking to make customer

accounts whole and retuming them to customers in the fonn they existed on the filing

date, the amendments not only would satisfy the customer's legitimate expectations, but

also would allow him to continue to exercise investment prerogatives and to avoid

oftentimes adverse tax consequences." (Addnd., p. 61, (emphasis added).) "In order to

increase the extent to which customer claims for securities are satisfied with securities

rather than cash, the bill would authorize the trustee for a brokerage finn undergoing

liquidation to make up for missing securities by purchasing shares, so long as this could

be done in a fair and orderly market. The words 'fair and orderly market' are used to

assure that the trustee will not be forced to purchase securities in a market controlled by

artificial influences. For example, a market might not be deemed fair and orderly where

there were indications of manipulation by insiders or others." (Addnd., p. 62.) "The bill

charges the trustee with the duties of a trustee under the Banlauptcy Act, plus special

duties relating to the satisfaction of customer claims for securities by the distribution of

19
securities to the maximum extent possible." (Addnd., p. 62.) "This section reflects one

of the essential features of the amendments, namely the delivery of securities to

customers to the greatest extent practicable in order to make customer accounts whole."

(Addnd., p. 65 (emphasis added).) "In addition to authorizing the trustee to use SIPC

funds to satisfy claims, this section authorizes a trustee to deliver securities in satisfaction

of claims to the extent they are available. After the available securities have been

distributed to satisfy such claims, the trustee shall purchase the balance of the shares in

open market purchase. However, where there is no 'fair and orderly market' in which to

purchase securities, the trustee is provided with authority to satisfy claims for securities

with cash. Securities distributed to customers are to be valued as of the filing date."

(Addnd., p. 65.) The RepOli quoted SIPC Chairman Owens' statement that "Our

expectation is that, in almost all cases, a customer's claim for securities would be

satisfied by the delivery of securities, and, where necessary, to accomplish this the trustee

would go into the open market and purchase securities. We believe, however, that it is

advisable to provide that the trustee would not be required to purchase securities where

that could not be done in a fair and orderly market. One chief concern is that the trustee

not be required to make purchases in a market which is being improperly controlled or

manipulated." (Addnd., p. 68, (emphasis added).)

1977 House Debate: Congressman Eckhardt said the amendments would remedy

the "failure to meet legitimate customer expectations of receiving what was in their

account at the time of their broker's insolvency" (Addnd., p. 69), and that the legislation

would "guarantee that customers' accounts are maintained as they existed prior to the

20
liquidation. It would do this by allowing SIPe to go into the marketplace to replace

securities if possible rather than returning cash to the customer." (Addnd., p. 70.)

1978 Senate Hearings: Senator Williams said the amendments move "toward a

scheme of returning customers' accounts intact as they existed when the broker-dealer

became insolvent. The benefits to the customers of firms in liquidation will be

immeasurable since they will no longer be deprived for lengthy periods of the use of, or

access to, their cash or securities." (Addnd., p. 71B.)

1978 Senate RepOli: The RepOli said "A principal underlying purpose of the bill

is to permit a customer to receive securities to the maximum extent possible instead of

cash, in satisfaction of a claim for securities. By seeking to make customer accounts

whole and returning them to customers in the form they existed on the filing date, the

amendments not only would satisfy the customers' legitimate expectations, but also

would restore the customer to his position prior to the broker-dealer's financial

difficulties." (Addnd., p. 79, (emphasis added).) "This section reflects one of the

essential features of the amendments, namely the delivery of securities to customers to

the greatest extent practicable in order to make customer accounts whole." (Appnd., p.

80 (emphasis added).) "A key objective of the bill is the satisfaction of a customer's

claim for securities by the delivery of securities to the greatest extent possible. SIPe

funds may be made available to the trustee to purchase securities to replace that part of a

customer's deficiency in securities whose value on the filing date did not exceed the

limits of SIPe protection provided in subsection 9(A) of SIP A as amended." (Addnd., p.

81.)

21
 1978 Senate Debate: Senator Williams said that the amendments would move

"toward a scheme of returning customers' accounts intact as they existed when the

broker-dealer became insolvent. The benefits to the customers of firms in liquidation will

be immeasurable since they will no longer be deprived for lengthy periods of the use of,

or access to, their cash or securities." (Addnd., p. 84.)

6. Theft And Missing Securities Were A Major Problem To Be

Remedied By SIPA.

1970 Hearings: Senator Muskie said, "In addition to these problems, there have

been huge thefts on Wall Street." (Addnd., p. 4.)

1975 Hearings: SIPC Chairman Owens said the proposed legislation is designed

to remedy the problem that, although customers "generally expect to receive exactly what

is in their accounts when the film stops doing business," "that is not always possible

because securities may have been lost ... misappropriated, never purchased,2! or even

stolen." (Addnd., pp. 39-40, (emphasis added).)

1977 Report: The 1977 House Report says "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 lost, improperly hypothecated, misappropriated,

never purchased or even stolen, this is not always possible." (Addnd., p. 61, (emphasis

added).) The RepOli fmiher quoted Chairman Owens as saying "customers generally

expect to receive what is in their accounts when the member stops doing business ... But

in many instances that has not always been possible because securities have been lost ...

misappropriated, never purchased, or even stolen." (Addnd., p. 67, (emphasis added).)

21 Failure to purchase securities paid for by investors is the very hallmark of a Ponzi scheme, of course.
Nor did Congress ever give the slightest indication that SIPA was not to apply full force to Ponzi schemes.

22
 1978 Senate Report: The RepOli says, "Under present law, because securities

belonging to customers may have been lost, improperly hypothecated, misappropriated,

never purchased or even stolen, it is not always possible to provide to customers that

which they expect to receive, that is, securities which they maintained in their brokerage

account." (Addnd., p. 79 (emphasis added).)

II. THE CONGRESSIONAL INTENT, NOT THE CONTRARY IDEAS OF

SIPC AND THE TRUSTEE, NECESSARILY CONTROLS THIS CASE.

Under our system, Congressional intent, not the contrary ideas of SIPC and the

Trustee, is dispositive. The use of the final statement method carries out the

Congressional intent. CICO vitiates it.

In implicit recognition of this, SIPC and the Trustee have presented, and the

Bankruptcy Comi adopted, a plethora of arguments not based on Congressional intent.

The arguments are irrelevant in the face of the contrary Congressional intent, and often

are wrong or dubious on their own terms as well.

The major argument of SIPC and the Trustee ultimately became, and extremely

large pOliions of their briefs elaborated, that CICO should be used rather than the final

statement method because the entire Madoff deal was phony -- phoniness which at this

point requires only mere statement, not page after page of elaboration apparently

intended to psychologically affect decisiomnakers. Because Madoffs trading was faked,

fmiher runs the argument, the pOliion of New Times involving real securities that were

never bought is inapplicable, and the portion involving securities which never existed in

the real world is applicable. New Times, supra.. Thus CICO, not the final statement

method, should be used. Otherwise, the SIPC fund is unacceptably exposed and the

fraudster is allowed to determine who gets how much.

23
 But Congress did not intend that investors should be denied protection because

relevant dealings were faked, never existed, or ceased to exist. On the contrary, the

legislative history explicitly says SIP A applies where securities were "never purchased

or even stolen," or were "misappropriated." (Addnd., pp. 61, 79 (emphasis added).;

Statement of Chairman Owens (Addnd., p. 67.) (emphasis added). Nor did Congress say

SIPA does not apply to Ponzi schemes -- which had been well known for decades when

SIP A and its amendments were enacted. Ponzi schemes are, after all, merely a form of

theft and embezzlement, and Congress' repeated statements that SIP A applies where

securities were "never purchased," or were "stolen" or "misappropriated" shows that

SIP A applies where there has been theft and embezzlement, as in Madoff.

Nor will the SIPC fund be unacceptably exposed or the fraudster enabled to

dictate results -- so that the argument of the Trustee and SICP is wrong wholly aside from

the legislative history. We are not, after all, talking here about the Madoff insiders, who

often were coconspirators and should therefore be ineligible for SIPC payments intended

for innocent victims, and who received huge gains ranging up to the hundreds of percent

a year (although even the insiders' accounts would be limited to $500,000 under SIPC if

they were eligible for SIPe.) We are talking, rather, of ordinary innocent investors,

whose gains were less than was made by many mutual funds. (See the charts and

infonnation at pp. 214-222 of The Club No One Wanted To Join.) As well (and as was

not brought to the comi's attention by SIPC or the SEC in New Times), it is literally an

everyday matter, both in the financial world and in litigation, to detennine what a

financial situation would have been had there been no violations of law. 22 The retums of

22See, e.g., Charles Hunter & Lawrence Melton, A Measure ofQuality and Quantity - Market Adjusted Damages
as Proof of the Broker's Failure to DiversifY -- A Causal Connection Between Malfeasance and Damages, 14

24
indexes such as the S&P 100, the returns of competitors, and statistical techniques are

commonly used to make such determinations, and here a wholly proper competitive

sUlTogate would be the returns of the Gateway Option Income Fund, which used the same

strategy as was purportedly used by Madoff. So there is no possibility of outlandish

returns being credited to ordinary, non-insider Madoff investors. 23

SIPC and the Trustee also say CICO should be used because it is not fair for

people who took out more than they invested to receive payments fi-om SIPC since this

will diminish SIPC payments to others. TIns purported fairness argument further runs

that people who have not taken out more than they put in are investors who came late to

Madoff and whose claims are therefore for principal, but those who took out more than

they put in are long term investors whose claims are for phony profits.

But the claims of many long tenn investors (such as Appellant) were extensively

for principal, and it is not true that a payment from the SIPC fund to an investor

diminishes SIPC fund payments to other investors. The SIPC fund is a separate fund

raised by assessments on the financial industry and, if necessary, from lines of credit. If

it lacks sufficient monies to pay all victims, the remedy is to increase assessments or to

PIABA BJ. 8 (2007) (advocating the use of market adjusted damages in some secmities fraud cases and
explaining how to calculate market adjusted damages); Mary E. Calhoun, Norman Padgett & Ross Tulman,
The Calculation of Damages in Securities Arbitration, 1264 PLIICorp 1061 (2001) (discussing methods to
compute damages in securities fraud claims, including market-adjusted damages). See also Rolfv. Blyth, Eastman
Dillon and Co., 570 F.2d 38,49 (2nd Cir. 1978) (advising the district court to use market-adjusted damages (based
on DJIA or some other index) in a securities fraud claim to determine the plaintiff's damages, and instmcting the
lower court, via guidelines, on how to compute the damages).

23 In fact, a major investment bank made a retroactive [mancial analysis of the plausibility of Madoffs
returns after his fraud was disclosed. And, in detennining whether Madoff s returns could be real several
years before the fi-aud was publicly disclosed, Harry Markopolos used relevant financial and statistical
techniques to test the veracity of his returns. Markopolos, No One Would Listen (John Wiley & Sons,
2010), at, e.g., pp. 34-35, 37-38.

25
create or tap lines of credit. The remedy envisioned by Congress is celiainly not to deny

SIPC payments to iImocent victims. 24

Nor does the argument of SIPC and the Trustee equate to fairness. Congress

wanted to protect small investors, and, while SIPC and the Tmstee know but refuse to

disclose numbers, it is clear that hundreds or thousands of Madoff victims are older small

investors who were with Madoff for ten to thiIiy years, and had to use their Madoff

income for their living expenses and/or to pay their taxes on Madoff income. They

planned their lives around their Madoff investments and income, had to rely on the

brokerage statements they received from Madoff to know what was in their accounts, as

Congress thought typically the case (they had no other way to know what was in their

accOlmts), and are now wiped out financially in their 70s or 80s. Instead of being

protected by receiving up to $500,000 from SIPC on which to live, these small investors

are being devastated. At the same time, every indication is that many later investors were

wealthy individuals or hedge funds from the United States, Europe and South America --

to whom $500,000 is a drop in the bucket. (Harry Markopolos has estimated that Madoff

investors includes 339 funds and 59 asset managers. 25 )

To deny SIPC payments to impoverished innocent small persons who are now in

poveliy, while allowing it to wealthy individuals or hedge TImds, is the very opposite of

Congress' intent to protect small people. And, as said, SIPC and the Tmstee possess but

24 Because the SIPC fund and customer property are two entirely separate funds, victims must be paid up to
$500,000 out of the SIPC fund even if the Trustee does not recover a dime of customer propelty.

25Markopolos, No One Would Listen, Chart and text located on unnumbered pages between pages 178 and
179 (John Wiley & Sons (2010)).

26
will not disclose the number of people in each category -- the number could, of course,

contravene their claims offairness. 26 27

Beyond this, not only are the impoverished who have negative net equities under

CICO being denied payments from SIPC, but they will also be denied payments from

customer property because only those with a positive net equity are eligible for such

payments. TIns could be a very consequential point because the Tmstee has brought suits

to recover somewhere between 13 and 15 billion dollars in customer property, and could

recover many billions of the claimed amounts. In fact, in a National Public Radio

interview of July 2i'\ the Tmstee said that 18 to 20 billion dollars of cash-in is his

"working number" of cash invested in Madoff as of December 11, 2008, and that "I'm

hopeful that we can return upwards of 50 cents or even more on the dollar to people."

(Addnd., pp. 106-107.) He is thus hopeful of recovering and returning nine or ten billion

dollars of customers property, or even more, to people. But, because of CICO, every

penny of the recovered nine or ten or more billions of dollars will go only to the wealthy,

the high earners and large hedge funds, because they did not have to take money out of

Madoff to live and pay taxes and they consequently have positive net equities under

CICO. The small investor, whom the SEC said in 1978 is the investor at whom "the

SIPC Act is most clearly directed," and who may now be pelmiless because of Madoffs

26 To try to justity hmiing the small person while helping the wealthy, SIPC and the Trustee have created
deeply rigged mathematical examples, one of which was adopted by the Banlcruptcy Court. But, as is
always the case with rigged mathematical examples, contrary examples can also be created. One such
contrary example -- one which typifies the ordinary small Madoff investor -- can be found at page 280 in
the Appellant's recently published Madoff and Not Madoff(Doukathsan Press, 2010).

27 In claiming faimess, SIPC and the Trustee ignore that any person or fund who took out all of his money
fi·om Madoff more than six years before Madoff collapsed is safe from clawbacks no matter how much he
made fi·om Madoff and no matter how wealthy he is.

27
fraud, will receive nothing from customer property if he has a negative net equity, as so

many small people do.

It also is the case that SIPC and the Trustee gave no serious thought to giving

investors up to $500,000 in securities that were in their accounts, although Congress

made clear that giving investors securities, to enable them to reconstitute their accounts

as quickly as possible, was the preferred remedy; this remedy, said Congress, would

enable investors to make decisions about their accounts, benefit from appreciation in

securities, and avoid tax problems. No reason has been adduced for this failure of SIPC

and the trustee to follow Congress' intent. The needed securities could have been

acquired, as the SEC has conceded. They were pmi of the S&P 100, they respectively

trade in the millions to the scores mld hundreds of millions every day,28 the market is not

being manipulated -- is fair mld orderly, and use of the common method of having traders

buy them in small blocs over time in order to acquire them without disturbing the market

would have allowed them to be bought without disturbing markets. 29

III. THE PROCEEDING BELOW WAS A SUMMARY JUDGMENT

PROCEEDING ON WHICH NO DISCOVERY WAS ALLOWED.

A. As previously said, the proceedings below were a summary judgment.

SIPC and the Trustee presented a host of facts on the summary judgment motion, and the

BmllGuptcy Court's 34 page slip opinion is chock full of facts taken from SIPC and the

Trustee, as well as from the allocutions of two liars and fraudsters, Bernard Madoff and

FrmU( DiPascali. But while on summary judgment a pmiy must be given a right to at

28 This was detailed in Appellant's brief below. (Addnd., (pp. 103-105.)

29 "Liquidity demanders attempt to minimize the price impact of a large order by dividing their order into
small pmts and executing it over time across multiple markets." ." Terrence Hendershott, Automated
Trading, fOlthcoming, Encyclopedia of Quantitative Finance, available at
http://faculty.haas.berkeley.edu/hender/Algo_EQF.pdf (last visited July 16, 2010).

28
least some discovery to develop facts and to test the other side's claims, the Bankruptcy

Court permitted no discovery whatever to plumb the factual claims of SIPC and the

Trustee or to leam other impOliant facts that support the appellants. Rather, the court

denied requested discovery, accepted the argument of the Trustee and SIPC that all of

their documents and information are privileged, denied a request for a privilege log, did

not require the Trustee and SIPC to engage in negotiations to narrow what they claimed

to be overbroad discovery requests, issued an order that in broad language approved all of

the contentions of SIPC and the Trustee, and in these ways made plain that there would

be no discovery to test the latters' claims or to obtain impOliant facts. 3o The lower court

then accepted and used factual assertions of SIPC and the Trustee even when they were

indisputably mistaken.

The refusal of all discovery on a motion for smnmary judgment is independent

grounds for reversal even if there had been no transgression of Congressional intent.

This is only the more true when the motion is decided by an opinion filled with important

facts.

B. Appellant requested discovery of the motive of SIPC and the Trustee in

using CICO instead of final statements. The point of the request was to plumb the

widely-held view that, even though the use of CICO was very rare, SIPC and the Trustee

used it, and thereby illegally thwmied Congressional intent, because they feared that

otherwise SIPC would have insufficient monies and would even go bankrupt. Appellant

also requested discovery to lem'n why SIPC had not given victims the securities that had

been in their accounts, as Congress intended should be done.

30 The claims of the Trustee and SIPC that no discovery was permissible were explicitly noted at Addnd.,
pp.96-100. The discovery order upholding their claims is at Addnd., pp. 101-102.

29
 The proceedings on Appellant's request for discovery have been described above.

Suffice to reiterate that SIPC and the Trustee did not file objections to discovery, or

discuss narrowing allegedly overbroad discovery requests, lest this be taken as an implied

admission that some discovery could be proper. Instead, while declining to provide a

privilege log, they requested an order that all documents and information were privileged,

and they received the order they requested. (Addnd., pp. 101-102.) This made clear that

there would be no discovery on any point. Accordingly, Appellant was foreclosed from

discovery on important facts, including facts that were used by the Bankruptcy COUli to

support its opinion. Thus:

• The Bankruptcy Court claimed that most investors had not put in enough

money to pay for the amounts of secmities they were initially credited with. (Addnd., p.

88.) This would appear to be flatly untrue for all investors except a relatively small

group of Madoff insiders. For most investors it is totally false. But there was no

discovery which would have revealed the falsehood.

• SIPC and the Trustee claimed, and the lower cOUli adopted their claim

(424 B.R. 122 (2010)), that it is unfair to allow persons who withdrew more than they

put in to receive advances from the SIPC fund. SIPC and the Trustee also claimed that

the accounts of long term investors were mainly comprised of phony profits while later

investors' accounts were mainly comprised of principal. But there was no discovery

whatever to detennine the accmacy or even the degree of accmacy of their claims

regarding the composition of accounts or regarding the relative hardship and unfairness

being visited on those who did (largely the small people) and those who did not (largely

high earners and the wealthy) have to withdraw more than they put in.

30
 • It appears that SIPC and the Trustee thwarted Congress' intent by not

purchasing securities for investors even though the market was fair and orderly. But no

discovery was permitted on this.

• A quasi govemmental agency is not free to illegally ignore and thwart

Congress' purposes in order to protect its own financial position, though a widespread

view holds that this is precisely what was done by SIPC and the Trustee in deciding to

use CICO. (The Chair of the SEC, Mary Schapiro, told Congress that "The tragic truth is

there is not enough money available to payoff all the customers' claims." (Addnd., p.

110.)) But no discovery was allowed on this matter.

• The Trustee and the Bankruptcy Court said that Madoff's monthly

statements -- which each showed a host of transactions -- showed purchases and sales of

securities outside of daily price ranges. (Addnd., pp. 88-90.) But the Trustee and the

Court could give only a single"example (in 20 to 40 years of statements (Addnd., p. 15)),

and there was no discovery to plumb the reasons behind what could have been a major

exaggeration.

• The Bankruptcy Court said the statements received by investors showed

securities of a fund that no longer existed. (Addnd., p. 89.) That was wrong. The fund

still exists. Only its name has been slightly changed, and persons who had money in it,

like Madoff, could continue to invest in it. 3l

CONCLUSION

31Velvel, Madoff and Not Madoff, supra, at 285-286 (The name of "Spartan U.S. Treasury Money Market
Fund" was changed to "Fidelity U.S. Treasury Money Market Fund," and the fund became closed to new
investors but remained open for new investment by existing investors like Madoff.).

31
 SIPC.s and the Trustee's use here of the rarely used CICO threatens the efficacy

of SIP A for all investors. For an investor cannot know in advance whether an investment

is legitimate, or instead is a Ponzi scheme under which she withdraws money on peril of

losing SIPC protection and being subject to clawback. Protection of customers, building

confidence in markets, recognition of reasonable expectations, and all the other elements

of Congressional intent which are contravened by CICO require rejection of CICO and

use of the normal final statement method.

For these reasons,32 and also because the Bankruptcy Court granted summary

judgment without allowing any discovery whatever, the decision below should be

reversed.

Respectfully submitted,

lsi Lawrence R. Velvel

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

Dated: August 3, 2010

R:\My Files\Madoff\AppellantBrief.2ndCir.lrv.doc

32 In a July 30, 2010 press release, the House Financial Services Subcommittee on Capital Markets,
extensively quoting SubcOlmnittee Chair Kanjorski and Vice Chair Ackerman, announced a September 23,
2010 hearing on SIPC and SIPA. The Subcommittee's announcement -- making several points made here
as well -- criticized SIPC for not using the final statement method of detennining net equity and said SIPC
should instead "follow[] the spirit of the existing law;" said SIPC has a responsibility to provide insurance
to investors but its response "to the Madoff fraud and other Ponzi schemes has been totally inadequate;"
said that thousands "remain destitute fi'om financial frauds because SIPC is determined to payout as few
claims as possible" (emphasis added); criticized the fact that SIPC has provided insurance to broker-
dealers "for less than most Americans pay for an auto insurance policy;" said victims of fraud should be
"better protected by the assurances SIPC was intended to provide" (emphasis added); and said confidence
in markets will increase when SIPC is "committed to placing investors' interests first" (emphasis added).
(Addnd., pp. 108-109.)

32
Federal Ru,les of Appellate Procedure Form 6. Certificate of Compliance With Rule 32(a)

Certificate of Compliance With Type-Volume Limitation,

Typeface Requirements and Type Style Requirements

1. This brief complies with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B) because:

this brief contains 1[8,189 !words, excluding the

parts of the briefexempted by Fed. R. App. P. 32(a)(7)(B)(iii), or

D this brief uses a monospaced typeface and contains

lines of text, excluding the parts of the brief
exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

2. This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the
type style requirements of Fed. R. App. P. 32(a)(6) because:

this brief has been prepared in a propOliionally slJaced typeface

using IMS Word 2003 II . .n • lin
fimes New Roman 12 pitch I or

D this
I
briefhas been prepared in a monospaced typeface using
I with
~I================~I

(s)
/s/ Lawrence R. Velvel
_P_ro_S_e___________
Attorney for

Dated: August 3, 2010

 No. lO-2378-BK(L)
10-2676, 10-2677, 10-2679, 10-2684, 10-2685, 10-2687, 10-2691,
10-2693, 10-2694, 10-2718, 10-2737, 10-3188, 10-3579, 10-3675

IN THE UNITED STATES COURT OF APPEALS

FOR THE ~ECONn CTRCTTTT

IN RE: BERNARD L. MADOFF INVESTMENT

SECURITIES LLC.

On Appeal from the United States Bankruptcy Court

for the Southern District ofNew York

REPLY BRIEF OF APPELLANT LAWRENCE R. VELVEL

Lawrence R. Velvel
Massachusetts School of Law
500 Federal Street
Andover, MA 01810
Tel: (978) 681-0800
Fax: (978) 681-6330
Email: ~~~~~
 TABLE OF CONTENTS

1. The Use Of Perfect 20/20 Hindsight By Appellees And The SEC ........ 1

2. Ignoring Congressional Intent.... .............. ...... ...... .................... 4

3. The Absence Of Discovery ...................................................... 7

4. The Claim Of Fail11ess Made By SIPC And The Trustee...... ...... .. ..... 12

5. The Argument That The Comi Should Defer To The SEC And SIPC .... 16

Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 17

Cases

In re Investors Center, Inc., 129 B.R. 339 (1991) ...................................... 2

In re Park South Securities, LLC, 326 B.R. 505 (2005) ............................... 2

Legislative Materials

Transcript of Hearing of the SUbCOlIDllittee on Capital Markets of the

House Financial Services Committee, September 23, 20 10 ........................... 5, 6, 7,
8,9,13
17
Answers of the Securities Investor Protection Corporation to Questions
Posed to it by Subcommittee on Capital Markets ....................................... 9, 12,
13, 14

Reports

SEC RepOli: Investigation of the SEC to Uncover Bernard Madoff's

Ponzi Scheme, Rep. No. OIG-509 (Office of the Inspector General of the
SEC, August 31, 2009) ..................................................................... 3

SEC RepOli: Investigation of Fort Worth Regional Office's Conduct of the

Stanford Investigation, Rep. No. OIG-516 (Office of the Inspectors General
of the SEC, June 19,2009) ................................................................. 3

SEC RepOli: Investigation of the SEC's Response to Concerns Regarding

Robert Allen Stanford's Alleged Ponzi Scheme, Rep. No. OIG-526 (Office
of the Inspector General of the SEC, March 31,2010) ................................. 3
Articles and Books

INVESTOR BEWARE: Many Holes Weaken Safety Net For Victims

of Failed Brokerages. Gretchen Morgenson, New York Times,
September 24, 2000 ........................................................................ 2, 17

Samuelson and Nordhaus, Economics, Sixteenth Edition............................. 13

Lawrence Velvel, The Information Provided To Congress

By SIPC, Parts I and II ...... ............................................................... 14

Certificate of COlnpliance .............................................................. .

11
 REPLY BRIEF OF APPELLANT LAWRENCE R. VEL VEL

1. The Use Of Perfect 20/20 Hindsight By Appellees And The SEC.

The briefs of SIPC, the Trustee and the SEC I are written with perfect 20/20

hindsight. They extensively tell us that Bernard Madoff and Frank DiPascali falced

everything, but they do not tell us how iImocent small investors were supposed to know

this before Madoff was atTested on December 11, 2008. They extensively tell us that

there were no purchases or sales of S&P 100 securities, and thus no profits from such

trading, but they do not tell us how innocent small investors were supposed to know this

before December 11, 2008. They tell us that investors were not exposed to market risk,

but they do not tell us how ilmocent investors, who thought they did have such exposure,

were supposed to know this before December 11, 2008. They tell us that at one poillt in

2002, when Madoff supposedly had $17.9 billion of securities, he actually had only $240

million of customer nmds in his account. But they do not tell us how innocent investors

were supposed to know this before forensic examination and revelation of his actual

finances after December 11, 2008. They repeatedly tell us that there are no legitimate

expectations in the proceeds of a fraud, but they do not tell us how innocent small

investors were supposed to know that Madoffwas a fraud before December 11,2008.

Failing to tell us any of these things, they say innocent investors could not rely on

the legitimate-appearing statements they received from Madoff, but they do not tell us

what investors could have relied on after Wall Street, after seeking and obtaining the

encouragement of Congress when enacting SIP A, switched from a system of physical

delivery of securities to investors who bought them, to a system of holding securities in

I Hereafter respectively "SIPC Br.," "Tr. Br.," and "SEC Br,"

1
street name, with investors dependent on statements and confirmations from their brokers

in order to know what they owned.

Such 20/20 hindsight is implemented here by cash-inlcash-out ("CICO"). It fails

to honor Congress' intent to protect investors, especially small ones, extensively

discussed in Appellant's opening brief. But it works very well for SIPC and its

repeatedly hand-picked "go-to" Trustee: 2 It will save SIPC several billion dollars at the

expense of innocent investors, while the need to go through complex, lengthy processes

to determine the anlounts in accounts, and the need to negotiate and litigate about this,

enables the Trustee and his law firm to bill at the rate of approximately one million

dollars per week. 3 But it does not work so well for innocent investors who have lost life

savings, and/or have been reduced to penury, and/or have had to sell their homes in order

to live, and/or have literally been dumpster diving to find food, and who are in desperate

need of the $500,000 advance that is now denied them because of the use of CICO

instead of the final statement method ("FSM") that was previously used in nearly every

one of SIPA's more than 320 prior cases. The FSM was used there, but not here, to

fulfill Congress' repeatedly stated intent to protect investors and to instill -- rather than

destroy, as has CICO -- the confidence in markets so essential for investments and a

sound economy, as well as to meet the legitimate expectations of investors.

Failing to tell us how innocent investors could have known before December 11,

2008 that Madoffs results were fake, and using CICO to financially benefit SIPA and the

2 Irving Picard has been SIPC's hand-picked Trustee in many large cases. INVESTOR BEWARE: Many
Holes Weaken Safety Net For Victims of Failed Brokerages. Gretchen Morgenson, New York Times,
September 25,2000; In re Investors Center, Inc., 129 B.R. 339 (1991); In re Park South Securities, LLC,
326 B.R. 505 (2005).

3 As of May 31, 2010, the Trustee and his law finn have been paid over 79 million dollars. Order
Approving Applications For Allowance Of Interim Compensation For Services Rendered And
Reimbursement Of Expenses, Exhibit A, p. 6, September 14,2010.

2
Tmstee though it has and is destroying the lives of llmocent small people, SIPC and the

Tmstee also fail to tell us how i1mocent investors could have known before December 11,

2008 that the highly respected Bel1lard Madoff -- repeatedly a Chairman of NASDAQ

and a Imown adviser to the SEC -- was in fact a fraud, when the then highly respected

SEC publicly announced through the Wall Street Journal in 1992 that there was no fraud,

when the then still highly respectesl ~J:<:Q~ -- J>asicall),ignoring the confidential warnings
of Harry Markopolos -- kept giving Madoff clean bills of health in the early 2000s --

clean bills of health which Madoff used to suck in new investors, and when FINRA and

its predecessor, NASDAQ, failed to detect the fraud even though they examined Madoff

every two years since the 1960s and all parts of Madoff were parts of a single firm. 5

Additionally, briefs of the other side explicitly make clear that their use of ClCO

in the Madoff case is based on the facts of this particular case. 6 And they claim the

Tmstee has unfettered discretion to decide how to calculate net equity.7 All of this

4 Though highly respected then, the SEC is now known to have been incompetent, having now been
savaged for its incompetence in Congressional hearings as well as by its own Inspector General, David
Kotz, in his 457 page repOli on Madoff, and in repOlis on the Stanford debacle. SEC Report: Investigation
of the SEC to Uncover Bernard Madoff's Ponzi Scheme, Rep. No. 01G-509 (Office of the Inspector
Generalofthe August 31, 2009); SEC Report: Investigation of Fort Worth Regional Office's Conduct
of the Stariford Investigation, Rep. No. OIG-516 (Office of the Inspectors General of the June 19,
2009); SEC Report: Investigation of the SEC's Response to Concerns Regarding Robert Allen Stanford's
Alleged Ponzi Scheme, Rep. No. OIG-526 (Office of the Inspector General of the SEC, March 31, 2010).

5 All the points made above have become part of the public dialog on Madoffwhich is well known to those
who follow the situation. The points are made extensively in the repOlis of the SEC' s Inspector General,
in Congressional hearings, and in books -- many of these materials are cited in Appellant's opening brief
and in a recent Congressional hearing of September 23,2010, cited infra.

6 E.g., SEC Br., p. 4: "The Commission filed a brief in the bankruptcy court agreeing generally with the
Trustee that under the facts of this case net equity should be determined by the Net Investment Method ...
." (Emphases added.) SIPC Br., p. I: "SJPC submits that in these circumstances [i.e., in lengthily stated
circumstances in this case], the customer's net equity is the net amount deposited by the Customer
with the broker. (Emphasis added.)

7 E.g., SIPC Br., p. 16, "'The customer's claim must be "established to the satisfaction of the trustee. '"
(Emphasis in original.); see also the Trustee's briefseeldng great deference to SIPC and the SEC. (Tr. Br.,
pp.44-49.)

3
 means, of course, that -- directly contrary to Congress' intent that SIP A should protect

investors and build confidence in markets -- no investor can feel safe in the future. For it

is impossible for an innocent investor to know in advance whether his investment is a

fraud, whether SIPC and its Trustee will consider it sufficiently fraudulent or sufficiently

complex or problematic to warrant use of CICO instead of the FSM, or whether SIPC and

.. itsTrtlst~~wm,~s . illJheMadoff.c(,lse,1Jeli~yt;§IPC's finances would be so adversely

affected by the size of a now bankrupt scheme that they will invoke CICO in place of the

FSM in order to save SIPC's fisc, as occurred here. Congress' intent to build confidence

in markets via SIPC will be smashed because of the lmowledge that SIPC and the

Trustee, instead of having to follow standard rules, will instead invoke whatever rule they

wish whenever tlley consider it desirable from SIPC's standpoint, and will do so even

though the invoked rule crushingly hanns the innocent, as here. As an analogy, one can

just imagine the result if FDIC insurance were run this way -- if the FDIC, like SIPC,

were to say we will not cover your account because we tlunk your bank went broke, and

you lost your money, due to a large fraud.

2. Ignodng Congressional Intent.

The use of 20/20 hindsight not available to iImocent investors before December

11,2008 is one defining characteristic of the opposition's briefs. Another is the failure to

even attempt to address controlling Congressional intent. The only times the legislative

history is even mentioned or cited, apparently, is when SIPC discusses the distribution of

"customer property" on pages 18 and 19 of its brief, a matter not in dispute on this

appeal, and when the SEC says on page 8 of its brief that under SIPA customers back

4
securities and cash that should have been in their accounts, another matter not in dispute

here.

There apparently, however, are no mention of and no cites to the legislative intent

that is relevant to the dispute here and that is amply shown in the legislative history

dealing with protection of investors, building confidence in markets, fulfilling investors'

reasonable expectations, encouraging investors to leave their securities in street name,

paying investors promptly, giving investors securities whenever possible, and providing

advances when there has been theft or securities are missing. The legislative history and

the legislative intent on these crucial points in dispute here were canvassed extensively in

appellant's opening brief, and it can be no secret why SIPC, the Trustee, and the SEC

avoid these matters like the plague: they know very well that the legislative history and

intent are dead against them and that their one hope is to persuade this COUli, as they

persuaded the Bankruptcy Court, to adopt their view of what is appropriate and fair in

this case and correspondingly ignore the legislative intent amply reflected in the

legislative history. It is little surprise, therefore, that when arguing that the COUli should

defer to the SEC and SIPC, the Trustee's brief says this is desirable for several listed

asselied reasons, but the Congressional intent is not one of them. (Tr. Br., p. 49.) It is

conspicuous by its absence.

What the other side's briefs seek, of course, is that this COUli, like the Bankruptcy

Court, should violate separation of powers and engage in what in effect is judicial

legislation. 8 Under the guise of claiming that their view is the fair and appropriate one

8So avid for its desired result is the other side that SIPC's brief, amazingly, tells the Court that a contrary
decision here would perpetuate the crime, i.e., would in effect constitute participation by this Court in the
continuation of a crime: "By means of its decision in this appeal, this Court can either pelpetuate the crime
or undo it .... " SIPC Br., pp. 14-15 (emphases added).

5
that should therefore be followed (a claim vigorously disputed by all appellees), they ask

the COUli to pay no heed to the intent of the Congresses that enacted and amended SIPA,

and to instead substitute its own will -- in reality to substitute the will of the appellees --

for the will of Congress. 9

9 The actions of SIPC and the Trustee which ignore the intent of the Congresses that enacted and amended
SIPA have also inculTed the wrath of members of the current Congress -- Democrats and Republicans alike
-- whose committee has jurisdiction over SIPC matters: the Subcommittee On Capital Markets of the House
Financial Services Committee. Thus Congressmen said the following at a recent subcommittee hearing on
September 23 rd •

1. Subcommittee Chair Kanjorski (a Democrat) said SIPC has ignored the spirit of the law,
it has created a major inconsistency with regard to statements from brokers, it has
seriously eroded investor trust, and its tone must be changed and it must be refocused on
maintaining investor confidence and protection. (Transcript of Hearing of the
Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises of
the House Financial Services Committee, p. 2, Addendum (hereafter "Addnd), p. 3.)

2. Ranking member Ganett (a Republican) said SIPC and the Trustee should stop acting as
an "adversary against innocent investors" who are now being "hunted down and accused
of ... some sort of wrongdoing;" that SIPC is blaming the victims instead of meeting
their reasonable expectations; that the Trustee is refusing to turn over records that are
important for key aspects of the case and would cause "the Trustee's net equity
formulation [tal completely be called into question" if not all transactions were
fraudulent [we now know, as discussed inji'a, that there were nonfraudulent investments
in Treasuries and ShOli term instruments and that the net equity fonnulation of SIPC and
the Trustee is therefore wrong beyond dispute]; that it is "critically important" for
investors as well as SIPC to have those records; that SIPC is ignoring interest, earnings,
and the time value of money; that the IRS' taking of tax payments was a government
imprimatur on Madoff; that the Trustee may seize tax refunds; that SIPC is not
considering advances from its fund separately from distribution of customer property;
and that SIPC has "lost the trust of many investors, as well as the trust ofmany members
here of Congress as well. (Addnd., pp. 3, 4, 13, 14 (emphases added).)

3. Congressman King (a Republican) said the investors are victims who are being treated by
the Trustee "as if they were coconspirators of Madoff, rather than victims," and when
"you listen to the tactics and methods being used against them by the trustee, it's similar
to people lmder indictment or under investigation by a grand jury, by the United States
Attorney, by the SEC;" that the Trustee is being allowed "to go after them when they are
victims, as if they are guilty themselves; that the government and Trustee "are going out
of its way to make them victims again;" that victims are being treated "as if they were
criminal defendants rather than victims" and are "being subjected to the same type of
treatment that defendants are put through in massive criminal conspiracies;" that "moral
harm [is] being done here;" that the Trustee is acting towards victims in "a high handed
anogant" way, is putting victims through "incredible ravages and suffering," and is a
"runaway trustee;" that there is "almost an inherent conflict of interest" when a Trustee
recommended to the Bankruptcy Court by SIPC is now arguably "putting a tremendous
effOli into protecting SIPC's funds," and is "working to protect SIPC, rather than
protecting investors;" and that investors who withdrew funds from Madoff in reliance on
their statements are now "suddenly confronted with a massive clawback which is going

6
 3. The Absence Of Discovery.

Both SIPC and the Trustee argue that there need be no discovery in this case,

asseI1ing wrongly that no facts are in dispute. SIPC thus points to one appellant out of

many and it says that that paI1icular appellant fails to identify facts in dispute. SIPC

admits, however, that the issue of the denial of discovery can be raised to avoid manifest

injustice._(SIPCJ3r.,pp. 3-4.) ...

Citing certain appellants, the Trustee's brief says "most" appellants agree the

relevant facts are not in dispute. (Tr. Br., p. 7.)

Appellant Vel vel cannot speak for any other appellant, but he does not agree that

relevant facts are not in dispute, and he attempted to obtain opening discovery of some of

them below 1o until the Bankruptcy Court made clear, at the behest of SIPC and the

Trustee, that there would be no discovery of any type in this case. Thus, claiming that

every fact and document in their files was privileged, and on that basis refusing even to

to destroy that person, destroy their business, and also destroy any hope of financial
security for their children or grandchildren." (Addnd., pp. 5,6,9, 10, 11, 15.)

4. Congressman Ackerman (a Democrat) said the victims are guilty of no crime and trusted
a system and a government that respectively betrayed them and failed them; that at least a
thousand people were "traumatized by Bernard Madoff and are now being terrorized by
the Trustee; that the federal government bears moral responsibility for creating a climate
that allowed these things to happen; that investor confidence has been damaged at a
critical time in the country's efforts to recover economically and financially; that he
"would be willing to bet that there are people who took nothing out of their account, who
are much wealthier, much wealthier than some people who took a ISO percent out of their
account because they had to live on it" [a statement which bears on a point stressed by
appellant in his opening brief]; that people have beyond question been victimized, yet are
now "being told they're accomplices spending stolen money. I mean, that's pretty
adversarial."; that because people believed Madoffs statements, "therefore [they are]
guilty of something, and therefore the crooks are in charge of the agenda;" and that the
IRS was "delighted to rely on the bottom line" of Madoffs statements when collecting
taxes and would go after people who "didn't pay based on that bottom line." (Addnd.,
pp. 5,6,7,8,11,12 (emphases added).)

10 As an antitrust litigator for over two decades, generally in very large, sometimes multi-district cases,
Velvel was well aware of the crucial role of discovery in large cases such as this. Discovery, of course, is
often the very heart of a case.

7
discuss the narrowing of what they (wrongly) claimed were overbroad discovery requests

as -well as refusing to providing a privilege log, Appellees) as shown in Velvel's opening

brief and in documents in its Addendum, sought to have the Bankruptcy Court make clear

that there would be no discovery of any type in this case, and the Bankruptcy Court,

ruling in their favor in broad language, gave them exactly the type of order they sought.

Even without discovery, however, it already was known by the time appellants'

opening briefs were due here on August 9th that several of the supposed facts put forth by

SIPC and the Trustee, and therefore relied on by the Bankruptcy Court, were wrong.

These were canvassed in Velvel' s opening brief. I 1 And it has now come to light that

other, and very crucial, matters also require discovery here.

In his brief, when explaining that the money from the fraud was kept in the 703

account at Chase (later lP Morgan Chase), the Trustee says that "Balances in the account

at the end of each business day were transferred to affiliated overnight investment

accounts at Chase to purchase Treasuries or other short-term paper until additional

monies were needed to nmd additional withdrawal requests by customers, capital needs

of the broker-dealer operation of BLMIS, or Madoffs (and other insiders') personal

needs." (Tr. Brief., p. 15.) This disclosure made in the Trustee's brief shows that there

were legitimate earnings) from Treasuries and short term paper, that should have been

credited to investors, just as investors receive the earnings which accrue when honest

mutual nmds or hedge funds "park" their money in short-term instruments to await stock

market opportlmities. The recent disclosure thus shows that the calculation of CICO by

II Bizarrely, SIPC's brief repeats these false facts involving such matters as the number of stocks that
traded at prices different than stated by Madoff and the supposed inability to purchase a Fidelity fund.
(SIPC Br., p. to.)

8
the Trustee and SIPC is ineluctably in error l2 because they did not credit investors with

the proceeds of the earnings on these Treasuries and short-term instruments, proceeds

which ineluctably were part of investors' investment, ineluctably had to be credited to

investors as a defacto part of their "cash-in, " just as at mutual funds and hedge funds.

In other words, not only is their a dispute here over whether to use CICO or the FSM, but

there is even a dispute over the calculation of Clc;Qby(he Trustee andSlfc;,now that

they have disclosed the existence of investments in Treasuries and short-term instruments

with whose earnings they did not credit investors.

The amount of money with which they have not credited investors is hardly likely

to be peanuts. It is more likely a very substantial sum -- even in the billions of dollars, or

perhaps likely in the billions of dollars. In tIns connection, nearly one year after the

Banluuptcy Court made clear that there would be no discovery here to obtain crucial

facts, the Kanjorsld Subcommittee, which has authority over SIPC, sent a list of questions

to SIPC on August 20,20 I 0. SIPC sent back its answers on September ih. The answers

(which also state the questions themselves) contain much of relevance here. I3 In

particular, the answers make clear in a chart that billions upon billions of dollars flowed

tlu'ough Madoffs accounts from 1992-2008. There were years when the "Cash In"

exceeded 9 or 12 or 17 or 25 or 37 billion dollars. (SIPC Answers, Response to Question

10, Addnd., p. 24.) By the end of a given year, the cash-out was generally close to the

cash-in (ibid.), but in the meanwhile interest was being earned on huge sums of money.

12 Just as Congressman Garrett said, supra, n.9.

13
The answers can be accessed at http://www.sipc.orglpdf/201O%2009-
07%20Cong.%20Kanjorski%20Garrett%20reply%20to%2008-20-1 O%201etter.pdf, and have been placed
in the Addendum to this brieffor the Court's convenience. (Addnd., pp. 17-24.)

9
The eamings on such huge sums over 18 years might well have been in the billions of

dollars (especially since short term rates were sometimes quite high in given years), but

in the absence of discovery we have no idea how much the eamings were and therefore

we have no idea how much should have been (but was not) credited to investors by SIPC

and the Tmstee under CICO. 14

The Tmstee seeks to elide this, and to elide all other cmcial matters that would

likely come out in discovery,15 by arguing that no appellant sought discovery as part of

the briefing schedule, and that only appellant Vel vel served discovery and his request was

directed at the motives of SIPC and the Trustee in using CICO. (Velvel also sought to

learn why SIPC did not attempt to provide victims with securities rather than cash, as the

legislative history shows was intended by Congress, but the Tmstee's brief chooses to

ignore this.)

The Trustee's argument based on a briefing schedule seems quite disingenuous.

The briefing schedule was arranged, in New York City, in quite a short period of time: it

was arranged by the Tmstee, apparently in consultation with a small group of New York

City lawyers, and the Trustee then submitted it to the Bankruptcy Court, which quickly

accepted it. Velvel, like many others, played no role in this and had to accept the briefing

14 The possibility that SIPC and the Trustee have undercalculated investors' net equity by a total of billions
of dollars (or at least hundreds of millions) when calculating their version of CICO -- a possibility revealed
by the statements in the Trustee's brief of September 20,2010, just a few weeks ago -- certainly raised a
dispute here ofthe first order (and shows a "manifest injustice," in SIPC's words).

15 One imagines that, as experienced lawyers, the Trustee and his counsel are well aware that discovery can
uneaJih the most remarkable and peliinent facts, facts no one could even have guessed at in advance.

10
schedule set by the lower court in conformity with the Trustee's wishes. Velvel sought

discovery sh0l1ly after the briefing schedule was ordered by the lower com1. 16

As well, the discovery Vel vel sought was totally appropriate unless a motive to

use ClCO to protect SlPC's finances is il11lTIlme from disclosure even though this motive

destroys the intent of Congress, and unless the motive behind not providing securities, in

order to protect SlPC'sfinances, is likewise immune from disclosure even though this too

destroys the will of Congress. Surely it cannot be that motives that destroy the will of

Congress are immune from disclosure through discovery, any more than the motives

underlying tax shelters, or underlying anticompetitive acts that may violate the antitrust

laws, or underlying acts of discrimination can be immune from disclosure through

discovery. 17

Beyond this, appellant reiterates that appellees, as said in Velvel's opening brief,

sought to and succeeded in closing down all possible discovery by claiming privilege for

virtually everything in their files and by obtaining the desired judicial order upholding

their argument. Appellant filed a brief arguing strongly against this in the Bankruptcy

Com1,18 but the Bankruptcy Com1 issued the order sought by appellees. This made it

16 The Trustee submitted, on August 27,2009, a motion for a hearing on net equity and a proposed briefing
schedule. He asked for this motion to be heard on September 9 th , and said it "has been disseminated in
advance of filing" to three law finns, "each of which has demonstrated an interest in the litigation of this
issue." (Addnd., p. 42.) It was not disseminated in advance of filing to Velvel, though the Trustee knew he
too had demonstrated exactly such an interest by filing a paper (and, one believes, filing the only paper) in
support of a prior request for a hearing on net equity that was made in 2009 by a victim's lawyer but was
not granted). The Trustee's motion filed on August 27'h was heard on September 9th , and the Bankruptcy
Court granted the motion and adopted the Trustee's proposed briefing schedule on September 16 th • (The
documents showing this are at Addnd., pp. 39-51.) Vel vel then requested discovery on September 29 th •

17 As well, could the IRS refuse to give lawfully required refunds because it wants to protect its fisc?
Could the Antitrust Division refuse to prosecute per se illegal price fixing because it wants to protect its
fisc?

18 Addnd., pp. 53-67.

11
certain that, unlike in a normal case, the discovery requested by Appellant could not be

followed up by other requests for discovery. That this too had bad consequences is

evidenced by the very fact that it was only with the Trustee's brief of August 20, 2010,

nearly a year after all discovery was foreclosed below, that Appellant and others

obtained indubitable information showing that there were short-term investment earnings

l1!ithwhich_irzy(!:j!orshad not been credited by§IfC and the Trustee under CICO. 19

4. The Claim Of Fairness Made By SIPC And The Tmstee.

As discussed, SIPC and the tmstee claim that their CICO method is the only way

to look at fairness. They therefore say it should be followed, and we should do so though

it flies in the face of relevant Congressional intent -- a result which they do not mention.

But under our system of government, they and the courts are not free to decline to adhere

to Congressional intent because of a belief that their own views are better or more fair --

not in general, not when they claim that their method is for this case only, not ever. But

beyond all that, their method is not the fairest or most appropriate one, at least not in a

country which holds that the 11lU11bers of dollars a person has is not the summum bonum

of his wOlih, is not the measure of all things, and that contrary positions (such as

progressive taxation or medical care for the poor) are not impermissible.

Once again SIPC and the Tmstee make clear that in their view fairness can be

measured solely in tenTIS of dollars -- a Wall Street view, one presumes. SIPC therefore

presents complex chaIis and calculations showing the differing dollar results under CICO

and the FSM, and it says these differences prove that CICO should be used. (SIPC Br.,

19 Given the scores upon scores of billions of donars that moved through Madoff's accounts over a long
period of time (SIPe's Answers to the questions of Congressmen Kanjorski and Garrett, Addnd., p. 24), it
is at least conceivable that the from Treasuries, etc. over nearly 20 years were sufficient so that
some, or even many, investors were not paid with funds invested by other people. This would drive a
significant hole in the underlying theory put forth by SIPC and the Trustee.

12
pp. 19-24.) But at no point -- at no point -- do the appellees evince the slightest concern

over potential differences in the economic situations of differently situated people. To

them it is fair if a small person who is now impoverished gets no advance from the SIPC

fund because, in order to live, he iml0cently withdrew more than he put into Madoff,

while a person who still has 50 million dollars gets $500,000 from the fund because he

diclIl9tl1aveto withdraw any moneyinor~~r to live. Because of their anti-human focus

only on the numbers of dollars involved in the hypotheticals they have conjured up, they

say CICO rather than the FSM should be used in order to give more protection to the 50

million dollar man even though CICO is a disaster for the small person -- for perhaps

thousands of small persons. 20 21

It is hard to believe that SIPC and the Trustee are oblivious to such results of their

actions in adopting CICO for this case. Yet they have adopted it here even though it flies

in the face of Congressional intent, including Congress' intent to help the small investor,

as was discussed in appellant's opening brief. Likewise they support CICO by focusing

extensively on distributions of customer property, whereas Congress, as a reading of the

legislative history shows, was far more concemed with what it considered the insurance

aspect of SIPA -- the advances provided from the SIPC fund. Those advances were the

20Not for nothing did Congressman Ackerman say at the September 23 rd hearing that he was willing to bet
that there are people who took nothing out of their accounts who are much wealthier than people who took
out 150 percent of their investment. (See supra, n.9.)

21 Moreover, the purely dollar driven concept of alleged faimess is not only contrary to many national
polices which take account of the differences in people's economic situation, as alluded to above, but it is
in certain respects contrruy to principles of economics as well. In economics terms, people maximize their
utility. See Samuelson and Nordhaus, Economics Sb:teenth Edition, p. 83, Equimarginal Principle: Equal
Marginal Utility Per Dollar For EvelY Good. The person who took out putative profits from Madoff in
order, for example, to pay for food, housing, children's education, etc., maximized his utility that way at
the time. The person wealthy enough to not have to take out money from Madoff, and who therefore left it
invested, maximized his utility that way at the time. So each did what would maximize his utility at the
time, and it is untrue that the person who took out money received benefit at the time from doing so while
the person who left all his money in did not receive benefit at the time from doing so. Each maximized his
utility at the time.

13
subject of continuous legislative history, since it was through them that the small person

would be aided, while distributions from customer property were hardly even mentioned.

The Trustee and SlPC have reversed tlns priority.

The reversal of priority is self evidently of enonnous consequence. But now that

SlPC has provided answers to the Kanjorski subcommittee -- which SlPC obviously was

afraidtodefyaltl1Qugh it had no compunction about refusing discovery in court and

claiming there that everything was privileged -- it is to some extent possible to attach, to

some of the consequences, numbers which sometimes, or even often, could not be

attached before the subcommittee demanded and received answers. Thus:

• Whatever might have been the situation when SlPC first decided to use ClCO,

a decision apparently made in order to save SlPC's fisc (a matter about which

SlPC refused discovery), the situation now is that the SlPC fund has been

built up to the point where SlPC has access to $3.7 billion. The SlPC fund

stood at $1.2 billion as of August 1, 201 0, with access to another $2.5 billion

in a line of credit, for a total of $3.7 billion. Furthermore, in 2010 and 2011

SlPC will take in another $500 billion for its fund, so that it will have $4.2

billion available. Under the FSM, SIPC would have to pay $2.01 billion in

advances. So the funds which SlPC possesses or to which it has access are far

more than enough to pay the $2.01 billion in advances required under the

FSM. Furthermore, by using ClCO, SlPC is trying to save itself $1.13 billion

that it will not have to pay in advances under ClCO but would have to pay in

advances under the FSM?2

22 The numbers and calculations discussed above, as well as those irifra, are taken from SIPC's answers
and a two-part essay (by this writer) which analyzes those answers. (The essay is entitled The Information

14
 • Although the celebrity-driven media have focused on the rich and famous who

lost money with Madoff, a large percentage of investors with Madoff were

small investors. 1,204 accounts of 2,319, or over half, are less than one

million dollars under CICO, with these 1,204 accounts having an average

account value of only $318,000. (In other words, half these accounts are

worth less than $318, 000.)_

• The average claim which has been allowed is $375,671 -- or more than 20

percent less than the maximum permitted amount of $500,000.

• Only 2,175 claims have been allowed under CICO by the Trustee and SIPe.

Under the FSM the mmlber of allowed claims would be 4,459, or 2,284 more.

So, by using CICO, SIPC has shed itself of2,284 claims, or over half.

.. The Trustee is considering a possible 1,000 avoidance actions against

innocent people who had no knowledge of the .fraud. SIPe's answers do not

say how many of these iImocent investors are small people, but there can

hardly be any doubt that it is a large munber.

.. The Trustee has been quoted on NPR radio as saying he hopes to recover

"upwards of 50 cents or even more on the dollar" -- or nine or ten billion

dollars or more -- in customer property23 (whereas here he tells the Court only

that he has recovered about $1.5 billion and does not mention the expected

future recovery of many billions more (Tr. Br., p. 5)), and he has said in a

Provided To Congress By SfPC, Parts 1 and 2, September 23,2010 and September 24,2010; it appears at
http://tinvurl.com/3xftwgz, http://tinyurl.com127ecS27, and OpEd News.) For the convenience of the
Court, both SIPC's answers and the essay are in the Addendum to this Reply Brief. (Addnd., pp. 17-24,
26-37.)
23 Addnd. to VelveI's opening brief, pp. 106-107.

15
 report to the Banlauptcy COUli that he hopes to recover monies to give to

SlPC. 24 Under ClCO, the monies paid out in advances to victims and in their

claims to customer propeliy will be about $6.75 billion (with a host of victims

receiving nothing), leaving billions of dollars for SlPC due to subrogation.

Under the FSM, SlPC would get nothing. One does not imagine that SlPC

and the Trustee are blind to this multibillion dollar difference in financial

results for SlPC. One does not imagine that it leaves their thinking

unaffected.

Thus the answers provided to the Kanjorski subcommittee by SlPC, nearly one

year after it refused discovery, provide infOlmation that bears importantly on the

economic stahlS of victims, the extent to which SlPC is saving -- and making -- billions

of dollars by using ClCO rather than the FSM, the consequent motive for using ClCO,

and the munbers and percentages of ilU10cent victims who are receiving nothing due to

the use of ClCO. The answers also show the need for wide-ranging discovery below if

this case is not reversed outright by this COUli.

5. The Argument That The COUli Should Defer To The SEC And SlPC.

The Trustee's brief urges that the COUli should defer to the position of the SEC

and SlPC because they are "charged with enforcing and interpreting SlPA." (Tr. Br., p.

44.) The Trustee (quoting New Times), paIiicularly cites the ""'specialized experience

and broader investigations and information' available to the agency"" to which deference

was given in New Times. (Tr. Br., p. 47.)

One hardly knows whether to laugh or cry. For the Trustee seeks deference to an

agency, the SEC, which has been revealed to be of unparalleled incompetence by

24 Trustee's Amended Third Interim Report For The Period Ending March 31, 2010 (April 14, 20] 0, p. 50).

16
Congress in extensive hearings and by its own Inspector General in extensive reports

about its shocking ineptitude in the Madoff and Stanford cases. (The IG's report

documenting this continuous years-long ineptitude in the Madoff case alone is 457

pages.) The Trustee also seeks deference to a body, SIPC, (i) which has been exposed

over the last decade,25 and most recently in a hearing of September 23 rd into its actions in

this very case,26 as having concern solely for its own interests and its own fisc and not for

the investors whom Congress charged it to protect, and (ii) which, until the very size of

the Madoff case made this impossible, is lmown to have paid in toto more money to

lawyers to fight and defeat the investors it was supposed to protect than it paid to those

investors to cover their 10sses.27

Nor should it be forgotten that the part of the advice that those supposedly expert

bodies persuaded the New Times Court to defer to and that is relied on here by SIPC and

the Trustee was wholly wrong and could have been exposed as wrong by a financial

professional. As discussed in appellant's opening brief, it is flatly untrue that reliance on

statements from fraudulent brokers would pennit customers to recover amounts "'that

have no relation to reality'" [and] leaves the SIPC fund unacceptably exposed. '" (Tr. Br.,

pp. 47-48 (quoting New Times).) There are well developed, commonly used statistical

and financial techniques which would prevent this, as discussed on pages 24-25 of

Velvel's opening brief and in the footnotes there. These well developed techniques are,

of course, not mentioned by the Trustee, SIPC or the SEC.

25 See, INVESTOR BEWARE: Many Holes Weaken Safety Net For Victims of Failed Brokerages. Gretchen
Morgenson, New York Times, September 25,2000.

26 Note 9, supra.

27 Morgenson, supra, no. 24.

17
 CONCLUSION

The decision below should be reversed.

Respectfully submitted,

Dated: October 5, 2010

R:\My Files\MadofflRepJyBrief.2ndCirLRV.doc

18
Federal Rules of Appellate Procedure Form 6. Certificate of Compliance With Rule 32(a)

Certificate of Compliance With Type-Volume Limitation,

Typeface Requirements and Type Style Requirements

1. This brief complies with the type-volume limitation of Fed. R. App. P. 32(a)(7)(B) because:

this brief contains &,295 lords, excluding the

parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii), or

this brief uses a monospaced typeface and contains

lines of text, excluding the parts of the brief
exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

2. This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the
type style requirements of Fed. R. App. P. 32(a)(6) because:

this brief has been prepared in a proport~onall~ s]2aced t~eface

using IIMS Word 2003 - , 'I ! I in

I~imes New Roman- 12 pitch 'lor

.

this brief has been prepared in a monospaced typeface using

IVs/Lawrence R. Velvel
(s)
I!pro Se
Attorney for =================------'
.='

bctober 5,2010
Dated:~~==================================~
 No. lO-2378-BK(L)
10-2676, 10-2677, 10-2679, 10-2684, 10-2685, 10-2687, 10-2691,
10-2693, 10-2694, 10-2718, 10-2737, 10-3188, 10-3579, 10-3675

IN THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

IN RE: BERNARD L. MADOFF INVESTMENT

SECURITIES LLC.

ADDENDUM
TO APPELLANT'S REPLY 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 Transcript of Hearing of the Subcommittee 1

On Capital Markets, Insurance and Government Sponsored
Enterprises Of the House Financial Services Committee:
Assessing the Limitations ofthe Securities Investor
Protection Act, September 23, 201 O.
~ --- ~ -- -~ ~------ -- - ---- - - -

B. September 10,2010 Answers Of The Securities Investor 16

Protection Corporation To Questions Posed To It By
Subcommittee Chaimlan Kanjorski and Ranking Member GalTett
of the SubcOlmnittee on Capital Markets.

C. Article by Lawrence Velvel entitled The Information

Provided To Congress By SIPC, Parts I and II.
September 23, 2010 and September 24,2010.

D. Documents Relating to Briefing Schedule Below 38

Banla'uptcy Comi Brief of Lawrence R. Velvel In Support

of Requests For Discovery Below.
 EXCERPTS FROM TRANSCRIPT OF
HEARING OF THE SUBCOMMITTEE ON
CAPITAL MAR¥~TS OF THE HOUSE
FINANCIAL SERVICES COMMITTEE
 LexisNexis'
I of I DOCUMENT

Copyright 20 10 Federal News Service. Inc.

All Rights Reserved
Federal News Service

September 23, 2010 Thursday

SECTJON: PRESS CONFERENCE OR SPEECH

LENGTH: 20646 words

HEADLJNE: HEARING OF THE SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE AND GOVERN-

MENT SPONSORED ENTERPRISES OF THE HOUSE FINANCIAL SERVICES COMMITTEE;
SUBJECT: "ASSESSING THE LlMITATJONS OF THE SECURITIES INVESTOR PROTECTION ACT";
CHAJRED BY: REPRESENTATIVE PAUL E. KANJORSKI (D-PA) WITNESSES JOSEPH BORG, DIRECTOR,
ALABAMA SECURITIES COMMISSION; ORLAN JOHNSON, CHAIRMAN OF THE BOARD, SECURITIES IN-
VESTOR PROTECTION CORPORATION; JOHN COFFEE, ADOLF A. BERLE PROFESSOR OF LA W, COLUM-
BIA LA W SCHOOL; IRA HAMMERMAN, SENIOR MANAGlNG DlRECTOR AND GENERAL COUNSEL, SE-
CURITIES INDUSTRY AND FlNANCIAL MARKETS ASSOCJATION; STEVEN CARUSO, PARTNER,
MADDOX, HARGETT, & CARUSO;
LOCATION: 2128 RAYBURN HOUSE OFFICE BUILDlNG, WASHINGTON, D.C.

BODY:
HEARING OF THE SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE AND GOVERNMENT
SPONSORED ENTERPRJSES OF THE HOUSE FlNANCIAL SERVICES COMMITTEE SUBJECT: "ASSESSlNG
THE LlMlT A TlONS OF THE SECURJTIES lNVESTOR PROTECTION ACT" CHAIRED BY: REPRESENTATIVE
PAUL E. KANJORSKI (D-PA) WITNESSES JOSEPH BORG, DIRECTOR, ALABAMA SECURJTIES COMMIS-
SION; ORLAN JOHNSON, CHAIRMAN OF THE BOARD, SECURJTIES lNVESTOR PROTECTION CORPORA-
TION; JOHN COFFEE, ADOLF A BERLE PROFESSOR OF LAW, COLUMBIA LAW SCHOOL; IRA HAM-
MERMAN, SENIOR MANAGlNG DlRECTOR AND GENERAL COUNSEL, SECURJTIES INDUSTRY AND FI-
NANCIAL MARKETS ASSOCIATION; STEVEN CARUSO, PARTNER, MADDOX, HARGETT, & CARUSO LO-
CATION: 2128 RAYBURN HOUSE OFFICE BUILDlNG, WASHlNGTON, D.c. TIME: 10:00 A.M. EDT DATE:
SEPTEMBER 23, 2010
REP. KANJORSKI: (Sounds gaveL) This hearing ofthe Subcommittee on Capital Markets, Insurance, and Gov-
ernment Sponsored Enterprises will corne to order. Pursuant to committee rules and prior discussions with the ranking
member, each side will have 10 minutes for opening statements. Without objection, all members' opening statements
will be made part of the record. And I yield five minutes to myself.
Nearly two years have'passed since the massive $65-billion MadoffPonzi scheme came to light. Since then, we
have enacted the Dodd- Frank Wall Street Reform and Consumer Protection Act. Among many other things, this law
amended the Securities Investor Protection Act, the statute that works to return money in securities to customers of
failed brokerages.
To better protect the customers offailed brokerages going forward, the Dodd-Frank Act increases cash protection
limits, and bolsters the resources of the reserve fund used to replace customers' missing cash and securities. This new
law also quintuples penalties for misrepresentations of membership in or protections offered by the Securities Investor
Protection Corporation.
 PQge :2
HEARING OF THE SUBCOMIVIITTH ON CAPITAL MARKI::TS. INSURANCE AND GOVI::RNr'v1ENT
SPONSORED ENTERPRISES OF THI::: I·IOUSE FINANCIAL SEIWICES COIVIMITTEE; SUBJECT "ASSESSING
HIE LIMITATIONS OF THE SECLlHITIES INV
Moreover. the statute makes important ch;]l1ges to prevent, rather Ih;]11 simply replace the loss of customers' prop-
eny. including new cListody safeguards for cuslomers' asselS held by cenain financial professionals. The Dodd-Frank
ACI addilionally requires the auditors of broker dealers to register wilh Ihe Public Company AccoLlll1ing Oversight
Board. And this body has the authority 10 regulale these market galekeepers. This change ought to pUI incompetent and
unscrupulous one-man auditor shops, like Ihf' one which blessed Ihe books of Ihe Madoff brokerage oul of business be-
fore investors get harmed.
~uch more, however, remains to be done to protect investors. T22.e viclims of the Madoff Ponzi scheme and tIle,
S.tanford Financial fraud include many Ilardworking families and frugal retin:,es who invested their hard-earned money
\~'Ith now-lInpnsoned or mdtcted con anlsts. Numerous press stones have relayed accounts about how these victims
who sought to play by the rules have now had to greatly modify the way they live. The victims of these frauds believe
thatSlPC hasfallenshon in meeting the responsibilities,andJhey want change. Ida too.,
We, therefore, have many questions to explore today. For example, althougll SIPA protections do not currently ex-
tend to customers of investment advisors, we III ust explore the issue of expanding Sl PA 's coverage, as investment advi-
sors may also commit fraud. In any serious effons to reform SIPA, we must also consider what responsibiliTy SIPC has
to honor the broker statements that customers receive.
SIPC has denied the claims of customers based on seemingly legitimate papenvork provided to them by the bro-.
kers. Yet sIre expects customers to use those very same statements to repon unauthonzed trading in then accounts:
i filS mconslstency IS unacceptable and we must work to resolve It. Investor trust, tor whIch SlrA was deslgned to pre-
s~rve, nas been senously eroded by SIPt's narrow mterpretatlOns of its staTutOry mandate.

While SIPC's actions may follow the lener of the law, many would argue that SIPA has ignored the spirit of the
Jaw. We therefore must conSIder the best way 10 change the tone of SJPC, and refocus this body on maintaining confi-
dence in tne finanClaJ system, and promolmg JDvestor protectJOn. ]n the extent -- to the extent posslble, we ought to a1so
explore how SIPC could learn from the success 01 the Federal Deposit Insurance Corporation in maintaining the public's
trust.
To address these questions and many others, SIPC has focused on modernization taskforce, and several members of
this panel will appear before us today in their personal capacities. I for one, expect this taskforce to compl ete its work
with great transparency, considerable outreach, and much speed. Moreover, this taskforce must view its mission as
broadly as possible, and work to provide Congress with a comprehensive plan or reform.
In closing, we can further improve SIPA by building on the reforms of the Dodd-Frank Act. The witrJesses before
us today are recognized securities experts. Their recommendations, along with those offered by the Madoffvictims, at
our hearing last December, will undoubtedly help us in our work to update SIPA and better protect investors.
The chair recognizes the gentleman from New Jersey for 10 minutes.
REP. SCOTT GARRETT (R-NJ): Thank you.
As mad as I am at Madoff, I'm even more upset at my own government, over the way I've been treated in the after-
math of this fraud. That is gist ofa quote from one of my constituents who was defrauded by Bernie Madoff, and who
feels failed by the SEC and FINRA in protecting him while tbe fraud was going on, and who now faces a SIPC trustee
who is threatening to clawback funds he withdrew from his Madoff account over the course of the last 15 or 20 years.

In a sense, these are -- innocent investors are being held to a higher standard. And both the government that was
supposed to protect them and that gladly took their tax payments, and the organization, SIPC, that was supposedly set
up to protect them by installing -- instilling greater confidence in our securities market.
We are holding today's hearing to access the limitations of the Securities Investor Protection Act, SIPA, and the Se-
curities Investors Protection Corporation, SIPC, and to identify whether there are potential reforms that would better
protect the investors. It would seem to me that one major and fundamental reform would be for them, through the ac-
tions of the trustee tbat~ been appomfed, to see ltsen as an advocate for rather than an adversary agamst mnocent de-
rrauded mvestors, so that they feel as thou gIl they are bemg asslsted by the SIPC process, rather than hunted down and
a~cused somehow of them doing some sort of wrongdoing.

So, there's one piece ofJegislation that's out there that could go at least part of the way in making things right for
once, and potentially twice vktimizing the Madoff investors.
 P~g(' 3
HEJ\RING OF THE SUBCOMMITTEE ON CAPITAL MARKETS. INSURANCE AND GOVERNJ\lENT
SPONSOlncD ENTERPRISES OF THE HOUSE FINANCIAL SERVICES COMMITTEE; SUBJECT "ASSESSING
THE LIMITATIONS OF THE SECURITIES INV
A colle(lgue ofilline, in New Jersey, Bill Pascrell, has introduced the bill. H.R. 5058. It's called the Ponzi Scheille
Victims' Tax Relief Act, and what it would do is liberalize the ability of Ihose who are victims oflheft to receive Iheir
refund for taws. lhallhey paid on gains, lilal lile SIPC trustee is now trying to lake back from them. J'm a cosponsor of
this bill, which I ferl should perhaps go a linle further than the 10-year look-back, since their trustee is going back fur-
ther than the 10 yrars in calculating the so-called nel winners and losers.
Another aspect of the trustee's handling this case are now in the process of working a way through the court system,
which matters will be decided. I'm concerned though about a looming deadline that's coming up, and that's in Decem-
ber, when the lruSlee will decide Whether 10 gu forward, wltli potenually l!iousanos of c1awoacKs l'fom111ese IIlnocent,
deFrauded IIlvestors.
S,IPC leadership and the trustee have indicated that they will not begoing after the so-caJledordinary people, peo-
ple who are nOI leadlllg a laVish lIfestyle, and who had no knowledge ot the traud. But It you hear trom my ottlCe and
stall, that's not what l'm hearmg trom my constituents and others, and the people that 1 talk to when 1 cOllle back al
home. I spoke wllh one gentleman who, years ago, WIthdrew money to pay jor college, ana who lIves a very modest
IJtestyle now.
He contacted a trustee's finn to gel clarificalion what he wouldn'l be plowed back -- that he wouldn't be plowed
back. But he was IOld that others, and for giving a small percentage of what the trustee had calculaled Ihat he owned, he
otberwise looked like he would be on the hook for the rest. In addition, he was IOld that anything he might recover in
the form ot lax refund, that 100 might be subjeci to seizure by the trustee.
So, I'm also concerned thai, while these coun cases are underway, the SIPC truslee has denied access to Madoffs
recordS lor the vIctIms and theIr attorney. So access 10 these records IS Imponanl for several key aspects of Ihe case,
incloding whe!tier or nOl, at all, transactions reponed by Madott, over the years, were actually fraudulent transaci'i'Ons.
If some of them weren't, then the trustee's net eqUlty fonnulatJOn would completely be called mto quesllOD.
1nequitable access 10 these records results in a fundamental imbalance of the scales of justice in this case, and also
calls· mlO questJOn whether ulomately there WJll be 1mr mal at the end of the day m thIS case.
So all of this, when you think about it, should make all of us feel very uncomfortable. The SIPC decal was sup-
posed to mean protection, the SEC was supposed to provide protection. The IRS taking the tax payments also serve as a
gQvernment Impnmatur. SIPe IS supposed to proVIde up to $500,000 m protectJOn based on quote "reasonable expecta-
tJ~n of customers."
In fact SIPC was created at the behest of the securities industry to encourage confidence in a more effi cient paper-
less process, where mvestors would no longer have the -- a pIece of mmd one gets from holdmg on to the actual stock
certIficate, ltke we used to do m the old days. 1n thelr place, customers grew accustomed to dependillgorrtTIlllt:tmff'ir-
matJOns and accounl statements, whIch were regulated of course by the SEC and F1NRA to set thelT reasonable expecta-
tJOns that they should have.
-~----------------
So as I said earlier though, instead of SIPe's meeting investors reasonable expectations, now it seems as though
that ey re ammg elf vlctlms mstea. nstea 0 customers em a e to re on unt statements to calcu-
late elr SIPC protection, they're basically at the mercy of the trustee's fonnulation of net equity that doesn't take into
~ccount or conslderatlOn lnterest, eammg, or the tlme value of money. Nor does the so-called customer-friendly meth-
oaoJogy take mto account the recelVmg SIPC protectlOn as separate and dlstmct from the distribution of assets recov-
ered. One of the results, uniortUriately, lS that SIPC has clearly lost the trust of many mvestors, as well as the trust of
fuany members ·here of Congress as well.
So this hearing, Mr. Chairman, is timely. SIPC clearly needs the SIPC modernization taskforce to assist in its refo-
cusing on its proper role, going forward. So I do look forward to the testimony we'l] hear and the questioning from this
panel. And with that, I yield back.
REP. KANJORSK1: Thank you, Mr. Garrett.
We'll now hear from the gentleman from New York, Mr. Ackennan.
REP. GARY ACKERMAN CD-NY): Thank you very much, Chairman Kanjorski, for calling this very important
hearuig. h's been nearly two years since Bernard Madoff confessed to masterminding the largest and longest-running
Ponzi scheme in history, and turned himself in. After that fateful day in December 2008, the Securities Investment Pro-
tection Corporation, which is tasked with ensuring victims of broker fraud or failure and recovering assets from the
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fraud of Ihose vicl illls. received over 16,000 insur,lnce cia illls from Madoers innocent victims. or Ihem, to date, S IPC
has granted only 2,200.
ThaI means Ihat right now, at this very Illlnute, ll1<lny. if not 111051 of the over 13,000 innocent viclims of Bernard
Madoff, who for years reasonably thought Ihal they were emilled for SIPC insurance on the balance in their accounls in
the unlihly event that their investments were entangled 111 a broker·dealer fraud or failure, instead are destitutes and oul
of lucie And those are just the investors who filed actual claims.
What crime did these investors commit? Tllese 13,000 people and their families like millions, and millions of peo-
ple who mveSlm our markets, put their trusl III our tmaneial system. Its reoulators, and its sateguiirds. Two ears a'tter
a 0 tume II11Selt in, two years after these 13,000 people have been turned away, time and lime again, from the
prcliection to whlcn they reasonably believed they were enlJlled. It fias become very clear thaI Madoil robbed them, our
system betrayed ihem;and our governmenttaJled them~ ".,.
Who's responsible? Who caused this problem? WllO do we tum IO? Who do the victims tum lo? Now, people
have reasonable expectations of government, its agencies, and the organizations that are created by them.
Where I come from, ift)le police don'! do their job and stand idly by when terrible things happen; if a doctor just
stands around and doesn't do what he's supposed to do; if emergency responders show up in the ambulance they just sit
and watch the accident, people wind up suing those agencies, and the city and the municipality and the government for
negligence. Someone is liable, whether it's because of incompetence or misfeasance or malfeasance, somepody is re-
sponsible
. for'not fulhlllllg the reasonable expectatIOns that people have, and come 10 rely on .
And here, in the federal government, if there's not a legal responsibility, there certainly is a moral responsibility for
creating the climate that people depended on. That we have failed these investors is heart6reakmg enough III tenns of
hUman tragedy. But the damage that has been done to mvestor confidence at thIS critical tIme m our economIC and fi-,
nanclal recovery as a result of our fmlure to safeguard and protect these mnocent Madoff vlctlms, and our country's neg-
flgence m Jeadmg them to beheve that they were msured IS as fr@nenmg as It lS self-defeatmg.
Today's hearing will focus on the Securities Investor's Protection Act, and tJle present and future role ofSIPC in
providing assurance to investors in our markets that they are protected, really protected -- not fake protected, against
broker-dealer fraud or failure.
It is my strong hope that this hearing is a prelude to the subcommittee's consideration of the Ponzi Scheme Investor
Protection Act, a bipartisan bj]] that I've introduced along with numerous members of this subcommittee in the House to
provide some reliefto many of those innocent victims ofPonzi schemes of all kinds, who have been burned by SlPC,
and to proactively assure investors in our securities market that they are protected fraud, regardless of its scope
or longevity.
Mr. Chainnan, thank you very much again for scheduling the hearing, and 1 too look forward to hearing from our
witnesses. And] yield back the balance of my time.
REP. KANJORSK1: Thank you, Mr. Ackennan.
Now, we']] hear from the other gentleman from New York, for two minutes, Mr. King.
REP. PETER KING (R-NY): Thank you, Mr. Chainnan. At outset let me thank you very much for holding this
hearing.
And I know it's important to get on to the bearing, so 1'1l keep my remarks brief. 1 want to fully identifY myself
witb the statement of Mr. Garrett, both in precise content, and also in spirit. The fact is'that the mvestors oI'~f
were let down, were failed by our government -- by SEC, by FlNRA. Desplte numerous reasons why this uaud should
pve been stoppe?, It wasn't.
So these investors made the mistake of, number one, relying on Madoff, but number two, and more importantly, re-
lying 0% our federal government. Aild now that they are victims, they are being treated by the trustee as if they were
coconspirators of Mad off, rather than victims. And I've done some practice of law over the years, and wben you listen
to the investors and realize it -- and you listen to the tacllcs and methods bemg used agamst them by the trUstee, It'S
snniJar to people under indIctment or under mvestIgallon by a grand Jury, by Omted States Attorney, by the SEc.
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There are years of records thai are being demanded. going back 10, 15,20 years. Every e.\cuse, every possibility
has be~n 'Iuoked up by trustees to try to suck people Into tillS and bnng them Ill, not giving them the benefJt 01 doUbt. bUI
agaill, trealing Illem as if they were criminal defendants ralher Ihen Victims.
And 10 me, as my good friend Mr. Ackerman said, at a time when we're Irying tll rebuild investor confidence. we
are sending the worst possible message to the -- to investors that show that not only did the government let them down.
but then in effect, the government allows the trustee to go after them when they are victims, as if they are guilty them-
selves.
And we're lalking about people who have already loslmillions of dollars because oflhis Ponzi scheme ofMadofL
now having to spend millions and millions ofdoJlars in legal fee 10 defend themselves. When our government should be
working to help them, the government isgoing out of itswayand the trustees are going out 01 lis way to make them
vltlims agalD. 1 Imd thIS entIre process wrong.
I think sometimes we can get caught in our own universe, and we start debating how many angels can dance on the
head 01 a pm, and not realIZIng that good, good people who've been llUrt once are now being hun even worse by the
tactics of this trustee.
So I think it's important to keep that in mind as we go forward, and debate the technicalities and legalities, realize
the moral hann that's being done here. And with thai, I yield back the balance of my time.
i'
REP. KANJORSKJ: Thank you, Mr. King.
The gentleman from Colorado, Mr. Perlmutter, is recognized for one minute.
REP. ED PERLMUTTER (D-CO): Thank you, Mr. Chairman. I agree with one point raised by Mr. Garrett, Mr.
King, and J disagree with another point. I'll start where we disagree. In terms of the timing of this; it was under an SEC
and under administration of George Bush, and there was really not a lot of police on WaJl Street, even though Mr.
Markopolos or Markopolos raised the red flags a dozen times. So, got to take a look at who's in office to decide
whether the system is working or not.
But it did not work well at that time. I agree with the gentleman that this is insult added to injury. And that really
is what we're talking about here. And that seems to be the unfairness of the system that individuals, who through no
real -- you know, they weren't active participants in a fraud. They were innocent victims of a fraud perpetrated by Mr.
M ad off. There should be an opportunity for them to recover either through their taxes, through claims with SIPC, or to
not have to face a clawback if they're not active participants.
And the law, I think, is a real problem in this arena, and needs to be changed. And I look forward to working with
the gentlemen on these very subjects. Thank you.
REP. ACKERMAN: The chair will recognize Mr. Childers for three minutes.
REP. TRAVIS W. CHILDERS (D-MS): Thank you. I want to thank the Chairman first for holding this important,
and very timely, I think, hearing to address the Securities Investor Protection Act. I will thank our witnesses for being
here today. This subcommittee has looked at a number of issues related to SIPA during this Congress, focusing on the
MadoffPonzj scheme, as well as the Stanford Financial Ponzi scheme.
I'm here today as an advocate oftbe victims of the Stanford Financial scheme, while the victims of the Madoff
scheme and the Stanford Financial scheme live throughout our country. I realize that, but too many of those Stanford
Financial scheme victims live in the district that I serve, the Northern Portion of Mississippi. There are North Missis-
sippi families who now live an uncertain future. They invested much of their life savings in certificates of deposit with
the Stanford group company, a SIPC member and registered broker- dealer.
It is estimated that in Mississippi alone, our families lost $68 million, that is no small matter to me, and to the state
of Mississippi. SIPC has denied coverage to the Stanford victims, when the SEC had the jurisdiction to file enforce-
ment action against Stanford in 2009.
These investors purcbased securities they didn't get. They purchased them from a SIPC member. SIPC's entire
function is to return securities to customers of a broker-dealer when a :frrm becomes insolvent. There are severallegali-
ties to the case for extending SIPC coverage to Stanford victims, and I don't want to get into all of that.
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HEARING OF THE SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE AND GOVERNMENT
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Ihal would provide any Iln~ncial restitution to Ihese people. And ii'S very convenienl 10 make SIPC the whipping boy
for what's happened
BUI if we lVanl 10 lake care of those people. Ihen I loday calion Congress 10 inlroduce legislation in addition to Ihe
lax relief that would provide a means of restitution away from the SIPC process. That's Ihe Illosl equilable and Ihe fair-
est thing to do.
I thank you for inviting me today. And I'd be pleased to answer any question.
REP. ACKERMAN: Thank you very much, Mr. Caruso.
And I thank the enl ire panel for your testimony. I know -- I think we all have some questions. And I'll begin with
my own. And we'll take five minutes each. And we'll go as many rounds as anybody wou ld like.
I'll go backwards and stan with a statement that Mr. Caruso just made and that is, seeing the mission as looking
forward. When I look forward, I see before me some of the wounded warriors of the past, the victims, at least a thou-
sand of whom were IraumalJzed by Bernard JVladoll and are now bemg terronzed 5y the trustee.

That's what I see looking forward to some people. And I believe it was Professor Coffee who said, recalling the
Hippocratic Oath of first do no hann, to look at the situa JOn a omg tremen ous ann wJth the issue of the
claw ac to many, many peopl~.
I think one of the terrible things that we've done here is because of the way the zero-sum game equation works that
we have created classes of victims. I don't understand really -- and I know the math, net winners and net losers.
Except for the few who have yet to be identified, should there be those who are complicit with Madoff, everybody
else is'J victim. People who might have taken more money out ol money that they Ihmk IS theirs nave been victimized.
PeopJe who put their money in a bank --and I know that's a different system when you're talking about the FDIC
and not SIPC -- who are using their own money, and suddenly somebody says that wasn't really your money because
you wasn't -- weren't entitled for that 7 percent interest or whatever it was, they're victims.
If you're telling people their whole lifestyle -- not just in the future, but in the past -- has to be reversed, that they
can nO longer live m melr house or mamtam their busmess or dnve m ilielr car or contmue to pay for their children or
grandchildren s educatIOn, they are victims. I hat's traumatic. Arid to create classes of people by saymg some are rich,
wealthy entitles and some are not A guy died, and the insurance company ain't doing so well; so you say to the widow,
I know you had a policy, but you're okay, ]']J give it to someone else.
If you think the money is yours and you've paid for the premium -- and I don't know what kind of premium. By the
way, you think you get $500,000 worth of insurance for a $150 a year. And the system pretends that people had real
insurance. '

And the SEC agrees that that's real insurance after they're supposed to be supervising the agency and the U.S. Con-
gress which is comp]icit in this thing as well because we're supposed to be overseeing -- everybody is just pretending.
You know, at least during the commercials, the guy says, I'm not a real doctor; I'm just playing one on TV. Well,
this isn't real insurance -- we're just making believe to make you feel better.
My question is about clawback. Ifwe're going to move forward, how do you move backward? That's question
number one, clawback. Anybody? Everybody?
MR. CARUSO: ],ll offer a suggestion. ] think anytime you get into the issue of clawbacks, you not only implicate
SIPC and SIPA, but you also do the Bankruptcy Code. ]s it fair to go back to somebody who took out money to pay
taxes? Is it fair to go after somebody who may have taken money to pay for a grandchild's education? ] mean, I don't
think anybody in this room would say it's necessarily fair.
And I think Congress has the power to step up and say, that's not fair, that is simply not fair, whether you should be
able to go back a year or two years. Clearly for insiders, it would be different. But for other peopie, to go back five,
six, seven years, in my personal opinion, I fmd that to be stretching the limit.
But I don't think SIPC or the taskforce bas the power to cbange that. I think it rests with the Congress. And maybe
I'm wrong on that, but if --
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REP. ACKER/V1AN: And what would you suggesl as a policy Ihe Congress do? Do we have n respollsibilily to
those people?
MR. CARUSO: JlhinJ< you clearly have a responsibility 10 Ihose people. And I heard earlier, a suggestion about
distinction aboul how illuch ofa clawback would you go alier, you know, would there be a threshold lilllit. Clearly, if
there is somebody like a feeder fund who benefited by millions or billions of dollars, there should be no limitation on
the ability to get the money back.
REP. ACKERMAN: Isn't this a moral question and not a means- tested thing. I mean, I'm sure without knowing
anything -- or Illaybe J sJlOoJdn'r be sa sOle. Bot I'd be willing lO'betthlli tllere en e p"e"ople who lOOK lIotlting out ofthelf
account, who are much weaJthler, much wealtl11er than some people who took a 150 percent oul of their account Be-
cal15e they had to live on it.

Do we means-test this thing or do we make a policy decision and try to do what's right? I mean, this is a real
Solomonic question that's before us. And I think we need some policy guidance. And you all are looking at this thing
prospectively how to protect people in the future. But you know, when you come up with a cure for a disease, it's our
obligation not only to inoculate people yet who've not gotten the disease, but to treat the people who are suffering from
it at the same time. How do we deal with these people?
MR. COFFEE: May I try to address that question -- (off mike) --

REP. ACKERMAN: Professor Coffee, please. And then I'm going to --

MR. COFFEE: I would --
REP. ACKERMAN: --I'll yield to Mr. Garren because my time is up.
MR. COFFEE: ] would just suggest to you that we look at all the participants who fall into this heading of net win-
ners, who took more cash out and put more -- than they put cash in. There is a continuum.
There may be people that Congress wants to protect. You could protect them with a de minimus test saying that
only fictitious profits over dollar sign X could be recovered. You could protect them with what I call an imputed inter-
est test, because if you put this money in 10 years ago, the fact that you've made] 0 percent a year would entitle you to
take out a 100 percent or more above the money you put in.
But you do not need to protect the feeder funds and the other people who look like they behave irresponsibly and
probably corruptly. Those names are well known to the financial press whether it's Fairfield Greenwich, Mr. Merkin,
Stanley Chais, Jeffrey Picower.
Those people are cheering you on right now because if you move the standard up, any time you make the recovery
harder for the trustee, you'll reduce the settlement value of the trustee's claims against them and the trustee can get bil-
lions of dollars back from them for the net losers.
J don't think Congress should make it harder to recover by the trustee on behalf of the net losers, from the people
who I think were very culpable. And they were number of those people.
-
Thus if you would protect the people you want to protect by instead using a de minimus test or an imputed interest
test, I think you'll recover -- you'll achieve most of your objective without protecting those people who are culpable.

REP. ACKERMAN: I'll respond in a different round -- probe that a little bit in different round.

Mr. Garrett.
REP. GARRETT: Thanks.
So going forward, does anyone have a recommendation with regard to the SIPC logo? And some people have sug-
gested that we put a little asterisk by saying that -- warning you that the statements that you're receiving may be inter-
preted in a different way, and that you'll be subject to clawbacks in the future or other interpretations.
Well, J say tbat facetiously, but maybe not because couple of your comments -- everyone's comments seem to im-
ply that the investor had a misinterpretation of exactly what they were getting when they -- if they understood that SIPC
was there and what they were relying upon.
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The reason that is import3nl is because you could h3ve a Silualion -- let's take MadolT case. where you have some-
one Ihal lells you something Ih31 Crom Ihe beginning was nOI Irue. BUI the final statemenl Ihey tell you -- but guess
what. you've nothing 10 won)' about because whatever 1 gOI on Ihal final statement is what you're going 10 be protecled
1'1'0111. Thai would be Ihe only true slatement that would come out of Iheir mouth.

And what we would do is be creating an environment where the wrongdoer now gets an opportunity to set the tone
for how the government Ihen will be responsible for responding.
And so, the primary issue thai we're concerned with is making sure that whatever message that we use are going to
ensure that we're not going to allow the wrongdoer to actually sel the parameters of how we would go about making
IInal decisions, and pUl1ing Congress in a position where they end up doing something that may be unintended as well.
REP. GARRETT: Okay. But you're sort of going down a slightLy differentroadonthat, but 1 understand what
you're saying. But there is case law now that says the final statement can be used by you for the reimbursement pur-
poses. So, going forward on that case law contrary to the position of SIPC then.

MR. JOHNSON: There is case law that has said that. There is also bankruptcy rulings that have mentioned the
fact that you can look at things from a different standpoint as it relates also to not only whether or not you've got this
fictitious statement, but also whether or not you're a net winner or a net loser. And part of that calculation takes into
consideration whether or not this fictitious statement or the statement you have is one that's valid.
Now, whether or not it should be taken into consideration, it should be. But at the end of the process there has to be
some analysis to determine whether or not that actual statement is what you should end up using as the basis of how you
would go about making a payment on a claim.
REP. GARRETT: But you're going to continue to reject the use of that as a guide for your coverage in cases?
MR. JOHNSON: When we -- what we will do is we'll continue to look at the statements that come in, and then we
will continue to look at what we would call the global aspects of what happened in a particular set of circumstances.
And then if there is a conflict, we will take it to the court and allow a third party to help us to make a decision whether
or not we should move it forward or not.
All we're trying to do is hopefully, vigorously pursue the law as we understand it and interpret it. And we under-
stand that there can be reasonable minds that may differ in how you may interpret the law. But once we are told from a
third party or anyplace else that we should be operating differently, then we intent to vigorously move forward in that
vein as welL
REP. GARRETT: Mr. Caruso, I don't want to put you on the spot on that one and respond to that since -- consider-
ing where you come from. lfnot, fine.
MR. CARUSO: Well,l think clearly, there are going to be difference of -- different opinions from different cir-
cuits, from different courts. Part of the confusion that exists is that there is no well-defined standard that is universal
throughout the country. And the only way that I know ofthat that fmally could be resolved would be through the Con-
gress of the United States, because you're going to have different court opiillons on every issue.

MR. JOHNSON: 1 think one of the point that's worth mentioning regarding the second circuit case is, it also points
out the fact that where the decision regarding what those amounts on the statement are arbitrary. And in this case we're
looking at a situation where the numbers, for example, in the Madoff statements were arbitrary and that would be taken
into consideration in terms of coming to a final analysis as welL
REP. ACKERMAN: Thank you.

Next my co-collaborator and cosponsor of the Ponzi Scheme Investor Protection Act, Mr. King.
REP. KING: Thank you, Mr. Ackerman.
You know, as I'm listening to this 1 don't think we're getting the full input or impact of the reality that was SIPC
WqS set up to protect mvestors. In too many cases nght now, the trustee IS actmg as a prosecutor of victims. And we
ca!l try to explalD It anyway we want, but the fact is that these people were victims, and they are now being subjected to
the same type of treatment that defendants are put through in massive criminal conspiracies.
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And yet there's no evidence that any of these people are co- conspirators; they are victims. And you know, I look at
the SI PC weDsile ano iI says. illihough not every IIlveslor IS prolecled"by slPe no fewer [han 99 percent of pelSlIns-wTIO
;Jre eligible get lheil invbtlllents back from SIPC.
So clearly, what -- the dawning reality is different from what people would -- had every reason to expecl. They re-
lied on tlie SlaleJlleJJtS they received from Madon. I hey relled on statements from SIPC that 99 percent of investors
would be protected. And yet they -- III addlllOn to all [he money they've lost, because of'lV'radOfl,1fiey are now runnlllg
up an incredible legal fees.
They're being required 10 produce documents going back 25 and 30 years. And it's being done in, I believe, a very
arbitr31ylnTIH'liglTl1anded way, and a vety lieavy-haJJded \Vay ""hidl isjust F'-~:t:i-lig tile JmboJelJtjoslice wliiell was
inlilcied upon llie l11 in (he nrstpJace:uJ~o\'v,dsfa1as goilfg-forn::lfd ,virlF3tf>e', iJJ cooh:Jjrrsrb-e-clea1 ill 1115' JlliJld. 1'low
is the trustee, how's Ficm d appoillted?
MR. JOHNSON: Well, he is really appointed by the bankruptcy coun. They have an opportunity to review who
the potential trustees may be. There will be recommendations that'll be made. They will check to see if there are any
conflicts of interest, and then they will go forward and go through that selection process. Mr. Picard is obviously some-
one who has been involved in this industry for --
REP. KING: Let me stop you because, you know, time will be running. Did SIPC make any recommendation on
who the trustee would be?
MR. JOHNSON: Yes, we do make a recommendation regarding who we think would be a good trustee.
REP. KING: And who would you recommend?
MR. JOHNSON: Who did we recommend?
REP. KING: Yes.
MR. JOHNSON: I believe we recommended Mr. Picard.
REp. KING: Picard. So in effect, we have the court selecting a trustee that you recommended, and the argument
could be made that he is now puttmg a tremendous effort mto protectmg SIP A's funds; that rather than protect in inves-
to me, t ere's almost an inherent conflict of interest in that.
I know the court made the final decision, but the recommend ation was mad e by SIP A. And it seems to me, if we're
going forward with recommendation to the future, maybe trying to correct the investors of the present, we would find a
way to have a much more independent person appointed as trustee in which SIP A would have no input whatsoever.
MR. JOHNSON: Well, let me make one thing clear. I don't think that we need a trustee to protect SIPC funds un-
der any circumstances, because these funds from my standpoint don't belong to any of us. These are funds that should
be utilized in order to protect the customers.
What we're trying to do is to make sure that whatever the role the trustee is going to be utilizing, it's going to be in
compliance with the law. Now, we do have a certain responsibility as we manage this fund. But we're not in the busi-
ness of trying to figure out how to get as few people helped as possible, but we are in the business of making sure that
whatever policies and procedures that we use can be protected under the law.
1$EP. KING: But to me, looking at the record, what the trustee is doing is not trying to rotect as man
possibk, but he is using ]S -- a art om the fact that he has alread otten I believe $36 million in ee 0
himse ,]t s -- I Just think, you know, I've seen runaway prosecutors, special prosecutors. And to me what I'm seeingjn
this'Js a runaway trustee who is putting innocent, wounded people through increased suffering. And I know that even
the -- maybe as Professor Coffee made a statement; he said people who we might think are innocent -- well, don't we
have to assume they're innocent?
I mean, is there any reason to think that any of the people in this room who lost millions of dollars are now being
pu.!-:out in a rack, ]S there any reason to assume they're not innocent? There's almost an inference here that the trustee is
be.ing hired because -- he's been appointed or his job is to find out those who may have been involved. And we think
others are mvolved when there's no evidence that they were.
And to me, the presumption should be that these people are innocent. How do we help them and not put them
t~ough the incredible ravages and suffering as they're going through right now? Is something wrong about the system?

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lthink somehow we are standing bnck at, you l\!low. 30,000 feel and we're snying. okay, well, we dropped the bomb,
there may be coll::lleral damage, but we're not really. you know that's what h::lppens in a war.
Well, the fnci is Ihere is a lot of collateral damage right now, and ii'S from people who are alre:.ldy damaged are now
cullaieJally daJllaged agaill. And JL:Iurr'l ){now 'If we re really a1JoressIIlg Ihal-- the lIleqUlty, the IIlJuSllce. the hor-

MR. JOHNSON: ] think, Congressman K the point is well taken. And one of the things that I've tried to do as
chainl1an is 10 make sure Ihat we sian out with the proper lOne as to how we're going 10 go forward dea I ing with any of
the individuals who have been victimized.
I Ihink the role of the trustee is one that is difficult and complex in that when you begin to start to go through the
pr(lC~~~~jl':;lJncJeaLV(hQllli3ybe~~compl.ici.t, who may .haveengagedin wrongdoing, and who has not.
BUI the one thing we have made clear is that we wanted to make sure that everyone had an opportunity even if
you've got, quote, unquote, "received a service of a document" that you had an opponunity to come in and speak with
the trustee because our goal is to make sure that we are going after the correct individual.
We are nol trying to simply just go after anybody for the sake of going after anybody. We understand Ihat this is a
very sensitive issue, and we sympalhize with some ofthe horrors that individuals have gone through. And we want to
make sure that at the end of the day thai that process is taking place in a way thai we will all be comfol1able. And that's
basicaJJy the commitment that l'd like to continue to make here today.
REP. KJNG: lf Mr. Ackerman,jusl me lime for one more question or one more statement.
lfthal's the case, then J think someone should tell Mr. Picard -- because I've spoken to many of these people and
Ihex-described to me what they're going through. They are not being treated as citizens. They are bemg trealea as ae-
fend ants. They are being treated as criminals. -
And it's a highhanded l'lTTnp::olnt Ie. And J think something has 10 be done.
ifthe rn'''''''~;;-;:;~iTi1r:n;:;:;;;;''':fT;~~~;:;;:-c~~rr;-;;-:-;:;.;;-;;:t;:;;;:-;;-;:;;:;:;-~:;:;-'h,';;-;-;;n;';:;-;;tliem to knock Jt oft and treat them like

MR. JOHNSON: Point is noted, Congressman King.

REP. ACKERMAN: And] wiJ] also note for the record that there are compassionate conservatives.
(Laughter.)
REP. KING: 1'Il take exception to that.
(Laughter.)
REP. ACKERMAN: Well, you are exceptional.

Several things -- these letters that are going out aren't, "Hey, I'm from the government. I'm here and 1 want to heJp
you." These letters set the tone of a very adversarial relati onship and it's scaring a lot of people.

And you got to give it back even if you don't have it, and you've got a problem with that, come and talk to me. You
know, I mean I understand your argument, Chairman Johnson that you don't want to put the crooks in charge of setting
the dialogue by having the Ponzi scheme operator send you a statement. And -- but you know, just because the guy lied
and .put that as a bottom line on the statement, you believed it and therefore ou're uil of somethina and there
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We empowered that bOllomline uS being gospel. And telling people they had 10 pay based 0111/1;]t bOllOI11 line be-
cause thai bottom line was the bOllom line. And why didn't the government invest Why didn'lthe government do?
ImEnn this whole thing is iI's KClllwesque.
J mean "first do no harm" should be the rule. I mean it was cited here nnc] properly so. But inslend of the Hippo-
cratic Oath, we've taken the hypocrilicnl. And we're saying first do no harm and then we're after these people.
The whole notion is weird. You know, my colleague, Mr. Garrell, you know, talked about the SIPC logo. This is the
SIPC logo.
People look you know, people look in shol1hand. They look for symbols, they look for things and they·· this is
the way we conduct our lives fonunately or not. And we all get those lillie statements, you know, from Our rinancial
institutions 15 times a week with all Ihat fine print and it's folded in ]6 pieces, and we don't read it and we throw it out.
Andsomelimesl saywhomade these peopleselid thisdtit;ahd IScfarthfhyheadand I what have we
done.
But we don't read those things. We do Ihe shorthand. You know, and il says, you know, people go into the bank.
It says protected by the FmC and people believe they know what that is. It's the government standing behind and they
got insurance up to a certain amount that we just increased in this last Congress.
And they know they got insurance and the government standing behind it. And then they go to their broker and
they see this and it looks kind oflike the same kind of deal. And you go 10 your guide and make an investrnent, and he
hands you his business card and we just pull two out of the fish bowl thaI we got, and on it, it says he's a member of the
NASD and he is a member ofSIPC.
And everybody's business they're proud they are a member of SIPC. That's code for you're protected and Un-
cle Sam and the government is behind. And you go .- you go into the guy's shop, and you go to your broker-
dealer and you got this on the door. And if you've looked him up like] used to do not too many years ago, and those of
us who were technologically challenged, and you go to Yellow Pages. His ad has this in it; his stationery has this on it.
His radio ad tells you. His TV ad tells you.
You go to the Internet and he's advertising he's a member of S]PC. And you see what it says right under the logo,
security investor, that's me; protection, that's what] need; cooperation, that's what I got. And instead of a dot on the 'I;
guess what we got? We got the American eagle. Just like on my stationery and on the shield, the president of the
United States and the Supreme Court. That's shorthand for your government is standing behind this, and we've allowed
this to happen.
lfJ'm not a real doctor, but l'm playing one to fool you and your government is accepting it, and you got insurance
for $500,000, except you ain't got norhing. And we got a J1iOlallespWlSibiHty mth-ese-J5eople, do we not? Or am I
missing sOllledliJlg~ Question mark.
MR. JOHNSON: ] think we do have a responsibility to these people. And] think: when we look at things, we have
a responsibility to every victim that was pan of the scheme. And one of the things that we have to figure out how we
balanced and whether we do it the right way or do it the wrong way is, how do we ensure that we are not simply going
to benefit those that by the luck of time got out at the right time. As opposed to those individuals they may not have
been that fortunate.
REP. ACKERMAN: Well, if you got a transfusion, first we should take out the blood to give it to somebody who
is a pint short?
MR. JOHNSON: Well, I wouldn't take out the blood, Congressman, in order to have somebody take their life
away, but we do give blood to others from time to time who are in need. And one of the things that we're simply trying

REP. ACKERMAN: But shouldn't that be a collective decision that we do as a society, and not have a trustee de-
cide to who to go after and take that blood back?
MR. JOHNSON: Well, and I think maybe the role that Congress will end up taking is to help us to get more spe-
cific guidelines as to how that needs to take place. And 1 think we']] be more than happy to vigorously follow that rule
in whatever way Congress decides to move forward.
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REP. ACKERMAN: Yeah, bUI we're looking to you. I mean. Ihis is not you Know King Solol11on's coun, and you
know, none o/"us prelend 10 be Ihal. And it's an awesome responsibililY. And you. by virtue orlhe faci thallhe roles
Ihal you h<Jve looking forward, which I agree is your role. and somelimes we have 10 see how 10 fix the problem looking
forward. what we'd do aboulthe collaleral damages Pele King said thai we've left behind, the carnage here. We should-
n'l be Irampling 011 Ihe bodies of those who are injured in order 10 help people ill the future.
We have to try 10 help everybody. And you don't do that by further wounding those people who are suffering. You
know, ii's Ilottaking away -- you know, we are where we are. II's a static situation right now. You go in and further
probe the wounds of those people who mayor Illay not have the wherewithal 10 do anything 10 give the people who are,
quote, "net losers" who Jllay be richer than Ihe net winners.
1 mean, I don'l know how you figure Ihis thing OUI. 1 mean, you know, we have some legislation on the people who
wenlthroughbroker- dealers and third parties and all that, you know, give them up 10 $]00,000 insurances. And we
have to -- you know, as a society, maybe we who are complicit in it which is society and us and you and everybody else
for lening this happen. To say, okay, this is -- you know, this is the help we have to give people. And we all bore the
responsibility and we have to pay for it.
It's not just voter education. You know, we all know you can't go over the speed limit, but we still put cops out
there. And people rely on the cops to enforce the law and our cops haven'l done that. Everybody thought they were
doing what Ihey were supposed 10 be doing and then find out that their whole world is topsy-turvy. And my time is up.
REP. GARRETT: Thank you.
REP. ACKERMAN: (Off mike.)
REP. GARRETT: So I wasn't sure where you were going with this King Solomon's reference. But you know in
the case of Kmg Solomon of course -- we all know the story from the Old Testament -- at the end of the day of course,
he didn'l slice the baby in halfand the baby survived.
I thought he was going to go and suggest that in this case we are slicing the baby in half and making that wrong de-
cision, and then the penalty is on both the mother and the dead child. So just to file along, and also where Peter -- the
gentleman from New York, excuse me -- was saying with regard to the trustee, just two quick questions there.
One question that we get oftentimes is do we know -- do you know what the trustee has billed SIPC so far? And
where do those funds come from actually? .
MR. JOHNSON: Yeah. I think he's billed the court about $39 million.
REP. GARRETT: Thirty-nine million dollars. And where --
REP. : Does he get paid on time and --

REP. GARRETT: Yeah, okay. The question is from the -- (off mike) -- from my colleague here is that does he get
paid on time, and where do those funds come from?
MR. JOHNSON: They come from fees that are paid by SIPC members.

REP. GARRETT: Okay. So same -- in that sense it has to be right from the same pot of -- the same pot of money.
And Peter was --I'm sorry. The question was asked by the gentleman from New York with regard to the appointment
of the trustee, and I understand your answer.

But uyer time, not just in this case, is it just a norm with regard that SIPC makes the recommendation for a trustee,
and is it the norm that the Judge would approve that --
MR. JOHNSON: It's the norm for SIPC to make the recommendation and it's simply up to the judge. I can't say
that I know alJ the circumstances where the judge may not have accepted that recommendation, but at the end of day,
it's completely in the judge's discretion.
REP. GARRETT: Because do we know in -- as in other cases, does the investor class or anyone else make recom-
mendations to the court as to how they would --
MR. JOHNSON: Well, we make the designation basically by statute. So if the statute was different, then it would
allow others to be able to make the call. But we're designated by statute to do so. So that's why we realJy don't have
any other third parries that are involved.

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REP. GARRETT: You haven't--
MR. JOHNSON: I don't believe investors would have the right to propose their own Irustee at least initially.
REP. GARRETT: Okay. Andjust as an -- quick queslion, does anyone--
w·

MR. CARUSO: Your stalement was correct. II is SIPC who makes the recomlllendaliOIl orthe trustee; the coun
simp}y decldes d the proposed trustee lS quahhed. So there's a strong presumptlon III lavor oj the slPe nommee.
REP. GARRETT: Does anybody here on the panel suggest that that is good, bad or should be changed?
MR. CARUSO: I think SIPC is very much overseen by the SEC in this regard, and it's the SEC who has asked
SIPC to generate a Iist of potential trustees in advance. So I think this is a combinat ion of Ihe SEC and S I PC that has
developed this approach of developing a list of potential trustees in advance.
REP. GARRETT: Okay. And does anybody suggest that that is not the appropriate -- yes, some of you said look-
ing forward, so looking forward is something that we should be looking at.
MR. JOHNSON: Well, in terms of that whole process, I mean that's on the table in tenm of what we're looking at
during the taskforce. The way we're looking at the taskforce is we want to take a look at everything that we're doing
from top to bottom.
We juSt went and had a complete full view of the operations of the staff, which was something that I wanted to
have an opportunity to take a look at. So we've got everything on the table in terms of how we think we can best prolect
investors and customers when this is all said and done.

, GARRETT: Okay. Would -- one of those other things and anybody can answer this question is -- and this
REP.
was in my openmg statement, it was the question regarding how net equity should be calculated. And the question as
far as access to the records to the mvestor class m order to help make those deterrmnatlOns I understand that -- well,
ObvlOusly 1t w1ll be cnt1cally 1mportant for the mvestor class to be able to make - have those mformation as welhrS
SIJlC to have them. But right now, I guess, they're not done.
I understand that SIPC trustees -- SIPC's formulation, it could be called into question if you were to look at the --
have accesS to those records. And to look at those records and to say, you kilow, the examples that some of you are
ra1smg that, well, yes, some of these transactions over the last -- how many years -- couple of decades - were actually
legitimate transactions, right.
And so when I got my statement, they'd put in $0.5 million dollars on and said $3 million, maybe 750,000 of them
were actually legitimate transactions, right. So when you all figure out the net evaluation on that, you want to know
that, right. But if the investor folks don't have access into the information, they are not in a position to argue that. So
what are we doing with those records?
MR. JOHNSON: Well, that point is we]) noted. And I think, from my standpoint, I don't really see a reason why
they shouldn't have access to that documentation. And that's one of the issues that we'll be looking at and making rec-
ommendations potentially with the taskforce.
REP. GARRETT: And but where are we right now on that, I mean --
MR JOHNSON: I'm sorry.
REP. GARRETT: It's in the court right now. I mean, is this something that can be changed for with regard to that's
going on right noW or is this just -- and I'm not talking about -- Mr. Caruso's fme comment of saying what do we do in
the future on the next Madoff?
We're taking about the situation right now. I guess for some of the folks behind you, can we say that, you know,
tomorrow these -- this information is available or where are we?
MR. JOHNSON: We]), in terms of where we are right now--
REP. GARRETT: Yeah.
MR. JOHNSON: -I'm not sure jfwe've got the authorization to make that available, but that's something that we
can take a look at, and if we have the authorization to do so, we will.

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have innocent people who took the money oul relying on the statemenls. which they thought 11';15 guarallleed by the
government.
And they Ihen get clawed back, and then olhers who left Iheir money and also and that -- Ihey're in a terrible situa-
tion too. I mean, but are we -- is there anything that's coming oul of this hearing or any ofille review Ihat would make it
any -- the situation any better 10 years from now for innocent people in a Madoff-like scheme?
MR. JOHNSON: That would be the hope. The idea is, is that, you know, when you look back 10 when the first
Ponzi scheme came into play, we would have hoped that we would have never had to see that happen again. And our
primary goals is, hopefully trying to put in place some modernization that will make our statute nexible enough to be
able to deal with those things that we can imagine.
The biggest issue tl1at we have is the 1970, the current staTute we had--
REP. KINC: Right.
MR. JOHNSON: -- could not have anticipated this. And we're hoping we're going to put something in place that
will be --
REP. KINC: But now that we know, I guess what J'm saying is besides hope, is there any reasonable expectation?
MR. JOHNSON: Well--
REP. K1NC: -- for the bope that we would be able to protect a person who took his money out, or say, systemati-
cally relying Oil [lie statement, tOok me money out over the years, and now lS suaaenly=tOnfi'onted wnh a maSSlve claw-
back whlch lS gomg 10 destroy that person, destroy their family, destroy their business, and also destro'y an
ho e of

Is there any -- do you see anything coming out of the discussion so far which would protect those people in the fu-
ture; in a large PL (ph) scheme such as this?
MR. BORG: I think -- and I listened to Professor Coffee's idea. I don't think -- I don't think that under the current
system, if another Madoff happened in 10 years, you would be any different. I think where you would be different is if
you do set the limitations on the clawback that Professor Coffee has suggested, because that -- from point of view, there
is always a limited pool of money.
And historically, in the cases that we have -- again, the non- SIPC, because that's where most of our experience is,
we always have, for example, $10 million. That's what I've got. That's every asset, we've taken the houses and the land
and whatnot, and J've got $100 million for the claims.
The only fair way I've been able to do it without having any SIPC coverage is to say if you put in $100,000 and you
took $50,000 out, yes, I know that you were expecting that was interest. But J've got somebody over here who put
$100,000 in and never took anything out. Therefore your loss has got to be $50,000, and their loss is 100 (thousand dol-
lars). And then when I do the mathematics pro rata, you're all going to get the same sort of share of the loss, as opposed
to trying to make your whole.
If you have an unlimited fund or a fund of $500 billion or something like that, then of course you can do different.
If you have that expectation and you can cover everybody's expectation, I don't think it's practical to cover everybody's
expectation for the full amount without some limitation -- 10 years, 5 percent, 10 percent, whatever it is.
Well, I do think 10 percent is high in the current economy. I'd love to get 10 percent on a CD at a bank ifJ could.
But whatever the number is, I think the important thing is that we have a finite number to start with, and that's a finite
number that has to be divided.
IfI've got five people in my family and there is a lemon pie, I can cut it into five pieces. But if somebody has al-
ready got a piece, I'm not sure they are entitled to a full piece the next time around. And --
REP. KING: Let me just follow-up with Professor Coffee on that. Have you done any of the math if that reason-
able expectation was built in over the years, how that would --
MR. CARUSO: Let me take Mr. Borg's example and take it one step further.
REP. KING: Sure.

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SEPTEMBER 10, 2010 ANSWERS OF THE
SECURITIES INVESTOR PROTECTION
CORPORA TION TO QUESTIONS POSED
TO IT BY SUBCOMMITTEE CHAIRMAN
KANJORSKI AND RANKING MEMBER
GARRETT OF THE SUBCOMMITTEE ON
CAPITAL MARKETS

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 SECURITIES INVESTOR PROTECTION CORPORATIO"N
805 FIFTEENTH STREET, N. W., SUITE 800
,'lASHINGTON, D. C. 20005-2215
(202) 371-8300 FAX (202) 371-6728
WWW.SIPC.ORG

September 7,2010

BY MESSENGER

Honorable Paul E. Kanjorski Honorable Scott Garrett

Cbainnan, Subcommittee on Capital
Markets, Insurance and Government
Sponsored Enterprjses
2188 Rayburn House Office Building
Washington, DC 20515-3811
Ranking Member, Subcommittee on
Caphal Markets, Insurance and
Government Sponsored Enterprises
2188 Rayburn House Office Building
Washington, DC 205]5-38] 1

Dear Cb~irrnan KaDj orski and Ranking Member Garrett:

Below is the information that you requested in your letter dated August 20, 2010. The
infonnation follows each request and, as per your request, is as of August 1, 2010.

1. A schedule that details the total balance of the SIPC Fund as defined by the Securities
Investor Protection Act C'SIP A"). Of this balance, please id~l1tify how much is
unallocated, reserved for the Madoffpro ceecling, and reserved for all other proceedings.

Response:
The SIPe Fund, as defmed by SIPA, consists of cash on band or on deposlt and amounts
invested in United States Government or agency securities.

As of August 1,2010, rounded to the nearest $100,000, the SIPC Fund consisted of:

US Government Securities maturing\\rithin 10 years

at fair value (including accrued interest. receivable) $1,204,600,000

Cash on hand or on deposit $23,600,000

Total $1,228,200,000
Honorable Paul
Honorable Scott
September 7,2010
Page 2

The SIPC Fund not have "reserves" established against it. All expendjtures by SIPC
are made out of the Fund as provided under SIPA. 1t is used to meet aU SIPC obligations
under SIPA as they occur.

2. An explanation of how SIPC Members are presently assessed armualJy and an estimate of
the aggregate assessment that will be added to the SIPC Flll1d during the of
2010 and in 2011 .

. Response:
Since April 1, 2009, the SIPC member assessment has been based on 0.25% each
member's net operating revenues as reflected on the members' financial reports filed with
the Securities Exchange Commission ("SEC" or "Commission") and the Financial
Industry Regulatory Authority.

Members must complete a General Assessment Payment Fonn at their mid-year and a
General Assessment Reconciliation Fonn at their year end. These filings and any
assessment payments are due 45 and 75 days after the end of the period, respectively.

It is currently estimated that collection of member assessments will add an

approximately $500,000,000 to the SU>C Fund during the remainder of201 0 and

3. A schedule that details all lines of credit available to SIPC, outstanding borrowings, and
remaining credit available. Also, please disclose whether any lines of credit have been
closed during 2009 and 2010 and explain why.

Response:
In the event the SIPC Fund is or may reasonably appear to be insufficient for the
purposes of SU> A, the SEC is authorized to make loans to SIPC and, in that connection,
the Commissipn is authorized to issue notes or other obligations to the St;:cretary of the
Treasury in an aggregate amount not to exceed $2.5 billion. Currently SIPC has no other
lines of credit available, There is currently no outstanding borrowing and to date there
has not been. SIPC had a $500 million revolving line of credit with an international
consortium of banks which expired effective March 1, 2009, and an additional $500
million revolving line of credit with that consortium of banks that expired effective
March 1, 201 O. Given the developing fmancial crisis, the consortium of lenders on
SIPC's commercial credit lines was unwilling to renew the.credit lines.

SIPC, by bylaw, increased the "target" for the SIPC Fund to $2.5 billion. Assessments
based upon a percentage of net operating revenue will remain in place until that higher
target is reached. Once the target is reached, together with the Government line of credit,
SIPC will have access to $5 billion offunds.

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Honorable Paul E. Kanjorski
Honorable Scott Garrett
September 7, 2010
Page 3

I would note that SIPC, under ClUTent law, has demonstrated that it has sufficient
resources for its statutory mission.

4. For cl aims related to the Madoff POTIZi scheme, please provide a schedule that details the
number and aggregate value of allowed claims and the number and aggregate value of
allowed claims at or below the statutory limits of SIPC protection, Also, include the
average disbursement per claim.

Response:
This question and those that follow use the term "claims" with respect to the informat.ion
being sought. However, SIPA provides protection per "customer," as defined in SIPA,
and not per claim. Two claims submitted by the same customer could be aggregated for
purposes of SIPA protection if that customer held more than one account in the same
capacity at the brokerage. For example, if John Jones 'had two accounts at a brokerage,
both of which were in his name and held by him in the same capacity, the accounts would
be combined for purposes of the SIPC advance.

The answers that follow are predicated upon an analysis of the customer accounts that
have been detennined, or remain to be detennined, by the Trustee and the relationship of
those customer accOlmts to the claims that have been filed. Wherever possible, the
Madoff' Trustee and SIPC encouraged claimants to file claims to preserve any rights the
claimants might have. Consequently, there are many more claims than there are
customer accounts. It also should be noted that much of the infonnation relating to
claims analyzed under a last fictitious statement approach are rough approximations at
best. The claims have not been reviewed or analyzed on that basis and some adjustments
to the information could become ne~essary upon actual review. With this background in
min~ the answer to question 4 is as follows:

The Trustee has allowed 2,175 claims related to 1,893 accounts, with a total allowed
claims value of $5,556,299,243.18. The 2,175 allowed claims include 282 amended
and/or duplicate claims. With respect to these allowed claims, SIPC has committed
$713,037,947.41 in SIPC advances to these claimants. Of these allowed claims, 1,330
claims representing 1,149 accounts were allowed for more than $500,000.00. 845 claims
representing 744 accounts were allowed for $500,000.00 or less. The average SIPC
protection committed per account with an allowed claim is $376,671. The claims review
and determination process continues.

5. Please estimate how many MadoffPonzi scheme claimants would be eligible for advances
of up to $500,000 W1der the final statement method of calcuJating "net equity" as that

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Honorable Paul E. Kanjorski
Honorable Scott Garrett
September 7,2010
Page 4

tenn was defined in the case considered by the U.S. Bankruptcy Court for the Southern
District of New York (Case No. 08- 01789-brl). Also, please estimate the aggregate value
of advances that would have been made under this method.

Response:
The last fictitious statement approach assumes that claimants should be paid based on the
last fictitious account statement issued to them by Bernard 1. Madoff Investment
Securities LLC ("BLlvrrS"). These statements reflect phony backdated securities
positions chosen by Bernard Madoff to yield fake profits pre-determined by him. Under
anapproachtbathonors thefmal fictitious statement,therecouldbe 4,459 accounts
eligible to share in customer prDperty and to. the extent not fully satisfied, eligible for a
SIPC advance. The holders of these 4,459 accDunts CDuld be entitled to. a tatal af
$2,010,467,854.23 in SIPe protectian. The' $2,010,467,854.23 includes the
$713,037,947.41 which SIPe already has cDmmitted in customer advances and an
estimated additional amaunt Df approximately $175,000,000.00 that the Tmstee expects
to. ask SrPC to advance, after August 1, 201 0, for the satisfaction of customers under the
Trustee's cash-in/casll-out methDdDIDgy. Thus, if t11e Trustee were to use the fmal
fictitious statement methDd Df calculating "net equity," an additianal $1,122,429,906.82
in SIPC advances could be made.

It shauld be nated that allawance Df claims an tllls basis necessarily would reduce the
amaunt af custamer property available to. satisfy those claimants who. have yet to recover
their principal. The SIPC advance supplements the distributian Df custamer property that
the Trustee cDllects for the benefit af custDmers. Such property is shared pro rata by
customers. DistributiDn to. claimants based Dn a last fictitiaus .statement approach means
that custamer property and a SIPC advance will be used to pay not anly custamers who
have yet to. recaver the amount deposited with BLWS, but those customers who, while
the firm was in business, took out more than they put in. Enlarging the PDDI Df claimants
sharing in custDmer property necessarily means less property for thDse who have yet to
recover their principal and mDre property for thase who., while the fInn was in business,
withdrew their principal and received Dther investors' mDney:in the fann of fake prafits.
In other words, the fake profits Df the investDrs who. already recDvered their principal
cantinue to. graw when the firm is in liquidatiDn to the continued detriment af tbDse
investDrs still Dwed their principal.

6. Please estimate the tatal number and value Df distributiDns made to. Madaff investors in
excess of tbeir investments. Of these distributians, please estimate haw many
avoidance actians that the trustee has braught ar expects to bring and the amaunt the
trustee has recavered and expects to. reCDver in the future. Further, please break aut
the number Df and expected recDveries from aVDidance actians between investDrs
who may have lmawn abaut Dr participated .in the PDnzi scheme and those who were
likely to be unaware af the Panzi scheme.

--20--
Honorable Paul E. Kanjorski
Honorable Scott Garrett
September 7, 20] 0
Page 5

Response:
There were approximately 90,000 disbursements totaling $18.5 billion made to Madoff
investors in excess of their investments.

The Trustee has brought 19 avoidance actions under the Bankruptcy Code seeking to
recover approximately $15,000,000,000.00.

The Trustee advises that he anticipates bringing avoidance actions in two categories. One
category would involve customers who received other customers' money, withdrew more
thanlheydeposited With Ma.dbif, and as to whoriiknowledge is not a factor. At this time,
the Trustee is reviewing the facts of approximately 1,000 possible avoidance actions that
could result in the recovery of approximately $4,800,000,000.00 for the benefit of
customers who have yet to be repaid their principal.

The other category consists of avoidance actions in which the Trustee alleges that the
customer had enough infOlmation to be on inquiry notice of the fraud. At this time, the
Trustee is considering the commencement of about 100 avoidance actions seeking the
recovery of at least $2,000,000,000.00 for the benefit of customers who have yet to
recover their principal. .

7. For all Madoff-related SIPC claims, please provide a schedule stratified by claims ofless
than a million dollars, between one and three million dollars, between three' and five
million dollars, between five and ten miJljon dollars and in excess of ten million dollars
that details how many claims would be eligible under both the [mal statement method and
the cash-inlcash-out method of calculating not equity. Further, please provide the
aggregate amount that could be clawed backed from claimants under each method.

Response:
Under the Cash In/Cash Out Methodology, below is a stratified schedule of accounts
potentially eligible for SIPC protection:

Category Accounts Total Combined Amount

Less Than $1,000,000 1,204 $381,921,324.59

$1,000,000 to $2,999,999 626 $1,096,526,388.57
$3,000,000 to $5,000,000 198 $754,646,856.41
$5,000,000 to $9,999,999 153 $1,027,403,169.73
Greater Than $10,000,000 138 $14,026,555,101.15
2,319 $17,287,052,840.45

--21--
 Honorable Paul E. Kanjorski
Honorable Sc011 Gane11
September 7, 2010
Page 6

The foJ1owing is a stratified schedule of accounts that potentially would be allowed W1der
a last fictitious statement approach: I

Category Accounts Total Combined Amount

Less Than $1,000,000 1,485 $670,889,986.09
$1,000,000 to $2,999,999 1,372 $2,522,097,200.08
$3,000,000 to $5,000,000 569 $2,172,486,413.62
$5,000,000 to $9,999,999 529 $3,690,585,075.03
Greater Than $1 0,000,000 499 $48,055,627,602.00
2
Dec 2008 Accts 5 $76,905,772.00
4,459 $57,188,592,048.82

For the answer to the final part of question 7 as to the transfers that the Trustee might
seek to avoid lmder the Bankruptcy Code, please see the answer to question 6 above.

8. Please estimate the number of Madoff- related claims not yet determined and estimate the
timeframe for when those claims will likely be determined. Also for all claims filed since
the liquidation proceedings started, please calculate the average time period expressed in
months between the filing of the claim a.I)d the trustee IS determination of the claim.

Response:
Of the 16,374 filed claims, 13,189 have been determined and 3,185 claims remain to be
determined. The Trustee has advised that he expects to have all claims detennined before
the end of this year. For the 13,189 determined claims, the average time period between
the filing of the claim and determination is 7.55 months.

In analyzing the foregoing information, there are certain facts that are very important for
a complete understanding of these statistics. First, this is not a typical SIPC proceeding
in which securities or cash were on hand at the time of the failure of the brokerage house.
As is well known, this was a Ponzi scheme in which the only assets were other people's
money or assets derived from such funds.

Furthennore, tms was a Ponzi scheme of long standing, go:ing back over at least 30 years.
Since the traditional approach in all Ponzi scheme matters and the one consistent with
SIP A is to return to the investor what the investor put into the scheme, the TTlliitee was

1 This analysis excludes the potential results of settlements negotiated by the Trustee.

2 This category relates to accounts that were opened after November 30, 2008. These accmmts
did not receive a November 30, 2008 Customer Statement.

--22--
Honorabl e Paul Kanjorski
Honorable Scott
September 7, 2010
Page 7

required to do a full forensic analysis of all the books and records of the debtor, going
back to at least the early 1980s in order to fUlly determine the amount of money which
mjght be due to each customer based upon the customer's investment.

This forensic analysis included not only a complete review of the books and records of
the failed brokerage house, but also documents received from third parties, such as
banking institutions, clearing houses and other brokerage houses, as well as documents
received from the customers themselves. There are literally millions of dOClunents that
have been reviewed by the Tmstee and his staff in connection with the evaluation of each
of the··· customer claims~filed.Furthermore,-access-to·· books and .records required
coordination sharing with law enforcement authorities which complicated and, in
some instances, necessarily delayed the review.

Moreover, in order to reach out to customers who might be in financial distress, the
Trustee instituted a Hardsrup Program early in the case which gave every customer the
opporturuty to advise the Tmstee of rus or her financial circumstances so that the claim
could be processed as quickly as possible. Hundreds of customers filed hardship
applications, and as a result ofthe Tmstee's actions, many of these hardship applications
were granted and the Trustee determined those claims as promptly as possible.

In addition, it should also be noted that due to the long term nature of this Ponzi scheme,
many ofthe customer accounts presented multiple generational investments by customers
with Mr. Mad off. Thus, it was not simply a matter of examining a single account for a
short period of time, but in many instances, it required an analysis of multiple accounts
going back several decades in order to fully determine the amount of money invested by
the customer and whether the customer had invested more money than he or ' had
received from Mr. Medoff.

Notwithstanding these extreme difficulties, the Trustee has determined over 80% of the
customer claims filed. review and determination of customer claims is an ongoing
process. The remaining claims include the most difficult ones, such as those of members
of the Madofffamily and extended family, insiders (former employees), feeder fimds and
others.

9. For all Madoff- related claims, please detail how many claims have been disallowed
because the investors were not directly invested with Mr. Madoff s finn.

Response:
There are 8,489 detennined claims submitted by claimants WIlD had no account at Madoff
that were disallowed. 'There are an additional 2,094 undetermined claims that tentatively
are in this category but may be fe-categorized upon further review.

--23--
 Paul Kanjorski
Honorable Garrett
September 7,2010
8

10. each year, from 1992 lUltil the liquidation of Bernard Madoff Investment Securities,
detail the aggregate funds that flowed into the flrm and out to investors.

Response:
each year from 1992 througl) 2008, the follmving represents the funds that
flowed into and out ofBLMIS:

:
Year Cashln----- -- ----------- ............•.
Cash Out·····
---

1992 ($2,097,318,423.98) $2,077,513,621.46

1993 ($2,018,244,086.4 1) $2,127,095,135.34
1994 ($2,784,953,707.68) $2,784,003,353.00
1995 ($4,346,500,359.97) $4,407,047,285.35
I ($6,669,384,242.44)
1996 $6,549,481,308.31
1997 ($9,046,919,591.00) $8,636,920,182.65
..........-

1998 ($12,826,039,594.36) $11,697,071,675.76

1999 ($17,917,907,439.09) $17,094,507,049.12
2000 ($25,629,825,795.12) $25,702,346,740.45
2001 ($37,404,909) 13.36) $37,580,315,488.37
2002 ($3,315;517,149.06) $3,564,299,618.83
2003 ($3,162,410,682.31) $3,667,760,430.70
2004 ($4,045,509,142.92) $3,528,053,488.39
2005 ($3,616,828,561.93) $4,803,025,580.01 i
2006 ($5,951,217,967.82) $4,403,608,692.87
2007 i ($7,284,216,531.24) $4,488,987,554.54
2008 ($6,308,482,583.89) $1 0,556,145~532.S4

Respectfully submitted,

s~~
President

SPH:ved

cc; Hon. Barney Frank

Han. Spencer Bachus
ARTICLE BY LAWRENCE VELVEL
ENTITLED THE INFORMATION
PROVIDED TO CONGRESS BY SIPC,
PARTS I AND IL

--25--
 September 23,2010

The Information Provided To Congress By SIPC

PaJiI.

As many of you know, this lawyer asked for discovery before Judge Lifland in the
Bankruptcy Court. Lifland denied the requested discovery in tenus that made clear he
would allow no discovery on anything, although a complete denial of any and all
discoveryon-
what call a "§ll11}11}81")'jlldgment" proceeding is, I thiJ'ik:,llJlb.eard of
........_,--------------------------.....

-- literally un11eaJ'd of. The purpose of discovery is, of course, to find out what the actual
facts are, so that neither an opponent nor the court will have to depend upon a party's self
interested, unplumbed claims of what the facts are.

After making clear that there would be no discovery to learn what the actual facts
are, Lifland then accepted and used versions of the facts put forth by SIPC and the
Trustee. This too has been discussed in blogs and briefs, as has the fact that, even
without discovery to learn the truth, we already know that various of the factual claims of
SIPC and the Trustee are flat wrong and others are dubious, and that there is other vital
infOlmation that we do not yet know because SIPC, the Trustee and the U.S. Attomey are
keeping it secret.

To my embalTassment, however, I must say that I failed to identify what is one of

the most impOliallt points yet mentioned in regard to matters that could have been
brought out by discovery. Thankfully, David Bemfeld identified it. The monies that
CaJue in from his SCalU were in Madoff's Chase (and then JP Morgan Chase (JPMC))
bank. aCCOlmt. monies were sometimes invested in Treasuries alld money market
funds, which earned interest. (They may have obtained interest from Chase and JPMC
also -- I do not know.) The interest should have been credited to Madoff's investors.
Because these monies belonged to investors, they were defacto -- and even de jure, I
think -- the equivalent of cash-in, of cash put into Madoffby investors. But in calculating
investors' cash-in, SIPC aJld Picard did not credit investors with these monies which they
had a right to be credited with. To make it simple, think of it this way: had Madoff
actually invested investors' monies in stock which paid dividends and appreciated in
value, the dividends alld appreciation would have to be credited to investors. The same is
true of ealnings from Treasuries, money mal'ket funds, and interest from JPMC.

Almost a yeal' after Liflalld, in serious violation of law, denied discovery, the
Kanjorslci Subcommittee submitted questions to SIPC. MallY of those questions not only
elicited what Congress needs to IG1ow, but also bore on what litigants wanted to IG10W
and to present to cOlllis, since it is quite common for Congress and the courts to need and
to seek the sanle information in order to properly perfoIDl their duties and make proper
decisions. (Think Watergate.) The Subcommittee sent its questions to SIPC on August
30th . SIPC answered them on September ih. SIPC's allSWerS, which also state the
subcommittee's questions Call be accessed by clicking here: http://bit.ly/9HwWCZ

1
 As you will see by reading them, SIPC's answers are filled with self justifying
verbal explications -- often identical to what SIPC and the Trustee have said in briefs --
intended to put a gloss on facts it has presented. As well, the answers omit certain
impOliant infonnation -- sometimes because the questions it received did not request it --
and make it clear that additional infOlTIlation is needed with respect to some of the
answers SIPC gave. Nonetheless, the answers do provide significant, important, often
previously undisclosed information that should be discussed in presentations to Congress,
to the courts, and to the media. I

A. To begin with, SIPC's answers show that it has, or has ready access to,
nearly double the amount of money it would need to pay direct investgf§'llndert}:le final
.. state111ent··lnetllocfCFSM). SIPC's ftmd:~s of August 1 (the date as of which the
subcommittee sought answers), stood at $1.2 billion. It also had access to a $2.5 billion
line of credit. So its total available ftmds were $3.7 billion. Under the FSM it would
have to pay $2.01 billion in advances. So it has access to $1.6 billion more than, or about
180 percent of, what it would have to pay in advances lmder the FSM.

Moreover, SIPC expects that dll1ing the remainder of 2010 and 2011 it will take
in another $500 million for its fund from the industry. This will bling its available
monies to a total of $4.2 billion, or precisely double what it would have to pay directs in
advances.

When the imbroglio with SIPC and the Tmstee began, some of us thought they
were using cash-inicash-out because of fear that otherwise SIPC would not have enough
money for advances. Our view mayor may not have been hue, but in any event it has
now been ovelialcen. SIPC already has and/or will have nearly twice the amount or twice
the amOlmt (depending on the date one uses) that it would need under the FSM to pay
advances to all direct investors.

Moreover, by continuing to use cash-in/cash-out (CICO) even though it has way

more than enough to cover directs under the FSM, SIPC is attempting to save itself
another $1.130 billion. For the anlount of advances to which it has already committed
under ClCO is $713 million, and it expects to pay another $175 million in advances for a
total of $888 million. $888 million is $1.130 billion less than the $2.01 billion it would
have to pay under the FSM. SIPC appears to be trying to emich itselfby tIns amount
instead of paying it to devastated investors: as discussed in an email of August 26 t \
Picard said, on page 50 of Iris Tlnrd Interim report, that he is trying to recover money to
give to SIPC. This is further discussed below.

(I do not know what the changes in the numbers would be if indirect investors
received advances lmder the CICO or FSM. All I can say for sure is that SIPC's answers
say it disallowed 8,489 claims of "claimants who had no account at Madoff," and an
additional 2,094 claims (or a total of 10,583) are tentatively in tIris category, but

I Parts I and II of this posting were both completed before the Kanjorski Subcommittee hearing of
September 23 rd • If that hearing requires any additions or changes to the post, I will try and discuss such
points in a later posting after receiving the transcript oftlle hearing.

2
conceivably could be recategorized. (Anybody wanna bet on that?) Since there were
"only" 4,459 claims by direct investors, the changes in numbers would likely be dramatic
if indirects are eligible for advances from SIPC. But the infOlmation needed to know the
anlounts of the changes was not asked for by the subcommittee nor given by SIPC.)

B. Although the celebrity-driven media has focused on the rich and famous
who lost gazillions with Madoff, it is clear that a significant percentage of Madoffs
investors were small investors. Many of them are being hrni tenibly. Under ClCO,
1,204 of 2,319 accounts potentially eligible for a SIPC advance, or over half, are than
$1,000,000, with an average account value of about $318,000. (A combined value of
$382 million divided byl ,204 accOlultsegllEils_about $318,OQQper ElCC~lllltJ iillother
o266t the 2,319 accounts, or another 25% of them, are between $1,000,000 and
$3,000,000, with the average account value being approximately $1,751,640. (A
combined value of $1.96 billion divided by 626 accounts.) There are only 138 potentially
eligible accOlU1ts wOlih more than $10 mj}}ion. So plainly, as said, most investors were
small or reasonably small, with averaged figures showing that half are wOlih $318,000 or
less.

The same story is told if one looks at the numbers of accounts potentially eligible
for an advance from SIPC under the FSM. Here 1,485 accounts out of a total of 4,450, or
about one-third, are worth less than $1,000,000, with an average value of about $456,000.
(A combined value of $670,889,986 divided by 1,485 accOlU1ts.) Another 1,372
accounts, or about another 30 percent, had a value between $1,000,000 and $3,000,000,
with an average value of about $1,860,129 dollars. (A combined value of $2,552,097,
200 divided by 1,372 accounts.) Thus a total of 63 percent, or nearly two-thirds, were
small or reasonably small investors, with one-third the accounts on an averaged basis
being WOlih $456,000 or less. Only 499 accounts are larger than $10 million.

Thus it is plain, as said, that most accounts were those of investors who ranged
from velY small to what might be considered the upper edge of small ($3,000,000), with a
reported average per all allowed claims, according to SIPC, of $375,671 -- which means
that on average SIPC is not paying out even the full maximum of $500,000 per claim. Of
the allowed claims under CICO, 1,330 were for more than the maximlU11 payment of
$500,000 and 845 were for less. The average allowed claim, as said, is $375,671, or over
20 percent less than the maximlU11 allowed advance from the SIPC fund.

As well, the allowed claims number only 2,175 under ClCO. Under the FSM
they would number 4,459, or 2,284 more. So in addition to paying, under ClCO, more
than twenty percent less than the maximU111 allowable, by using CICO rather than the
FSM SIPC has shed itself of over 50 percent of the otherwise allowable claims of direct
investors.

C. SIPC says there were "approximately 90,000 disbursements totaling $18.5

billion made to Madoff investors in excess of their investments" (P. 5). It says the
Tmstee has brought 19 avoidance actions seeking to recover about $15 billion, and it then
says, in answer to the subcommittee's inquiry about future avoidance actions, that the

3
--28--
Trustee (i) is considering "approximately 1,000 possible avoidance actions," against
persons who had no lmowledge of the fraud, "that could result in the recovery of
approximately $4,800,000,000.00 for the benefit of creditors who have yet to recover
their principal," and (ii) is considering another approximately "100 avoidance actions,"
against persons who "had enough information to be on inquiry notice of the fraud,"
"seeking the recovery of at least $2,000,000,000.00 for the benefit of customers who
have yet to recover their principal." (P. 5.)

These statements have some crucial implications. One is that, despite any past
protestations indicating the possible contrary, the Trustee is thinking about going after
small investors whohad no idea that there could be a fraud here .. For as said above, very
large percentages oftheacc()ul1tsare small fry, arid it wassmall fry who were most likely
to not have a breath of suspicion that there could be a £i·aud. Also, although the Trustee's
figures play hide-the-ball on the question, I think it is possible that someone more adept
at mathematics than I could pierce the ball-hiding and, by putting together various figures
which appear in different places, could calculate how many of the 1,000 potential
avoidance suits against im10cent people would involve small investors. We can feel
pretty confident it would be a lot.

Of course, it would be very valuable to have exact figures from SIPC, figures
such as precisely how many of the 1,000 people who are im10cent had accOlmts of less
than one million dollars, how many had accounts of between one and t1n'ee million
dollars, how many had accounts of t1n'ee to five million dollars, and ditto for five to ten
million dollars and over ten million dollars. SIPC could produce this with the touch of a
computer button, and it is probably a sure tIling that the results would show that a major
preponderance of the 1,000 persons are small fry.

As well, if the same exercise were perfonned for Congress by SIPC with regard to
the possibly non im10cent 100 who may have avoidance suits brought against them, it is
dollars to doughnuts that the result would show that a large percentage of them are big
investors: are hedge funds or banks or wealthy individuals with tens to scores of millions
of dollars that were invested. It is after all, large players -- hedge funds, banks, etc. --
that had the capability to figure out that something must be wrong.

All of tllis brings up a curious point. SIPC says that £i'om the 1,000 innocent
people whom the Trustee may sue and who are likely to be small investors, he could
recover $4.8 billion dollars; wllile from the 100 persons with possible knowledge, many
of whom are likely to be large investors, he may recover at least $2 billion -- or only a bit
over 40 percent of what he could get from the smaller investors. Even understanding that
the Tmstee's 19 avoidance actions to date are mainly or exclusively against large
investors, the imbalance between seeking another $4.8 billion from mainly small people
but only another $2 billion £i'om mainly large people, when coupled with the idea that
very large investors were often so wealthy that they did not have to talce cash out of
Madoff to pay taxes, to live, etc., gives credence to those who have said in recent months
that the Tmstee, contrary to Robin Hood, is taleing money from the poor to give to the
rich.

4
--29--
 is another maher of consequence stemming from SlPC' s points about
additional avoidance actions. Picard is cunently seeking $15 billion in such actions and
may seek another $6.8 billion (or a total, rounded off, of $22 billion). What would
happen he obtained all this? Or even if he obtained only half of it? -- he has said he
thinks he'l1 get 9 or 10 billion. Well, one thing that would happen is that SlPC might get
filthy rich (or filthier rich). Picard has said that his working number of the amOlmt of
cash-in to Madoff from victims was, at the end, $19 or $20 billion. call it $20
billion for ease of figuring. SlPC's answers say that the already allowed claims under
(ClCO) total 4.55 billion. (P. 3.) The Tmstee, SlPC says, expects to ask SlPC to give
him money to pay another $175 million in advances, but as near as I can see does not tell
us the total amouiifofthe claims for whichhew1I1see!($T15 rnInlon But
we know that 2,175 allowed claims had a total account value of $5,556,299,243, and
involved a total of $713 million in advances. For horseback pUIposes we can figure that
advances of $175 million will involve roughly $1.2 billion in total claims, since $175
million in advances is roughly one-fourth of $713 million in advances and 1.2 billion in
total claims is roughly one-fourth of $5.55 billion in total claims. Thus, the total claims
lmder CICO will be about $6.75 billion ($5.55 billion plus $1.2 billion).

$6.75 billion is considerably less than the nine or ten billion Picard said he
expects to recover, and even considerably less to a far greater extent than the amounts he
could recover under SlPC's figures, amounts ranging up to $22 billion. What will
happen to the extra money? Well, SIPC will get a bundle of it. Under the statute,
customer propelty is allocated first to SIPC "in repayment of advances ... to the extent
such advances recovered securities which were appOliioned to customer property." I
long thought SIPC was very dubiously interpreting this provision defacto to mean SIPC
recovers advances even when the advances were not made "to recover securities," but
only to pay victims in cash. But SIPC's brief in the Second Circuit does not interpret it
this way, at least not now. If the first allocation provision were to be interpreted as I
thought SIPC previously was doing, then, out of the recovered customer property that can
range anywhere fl:om about $6.75 billion to $22 billion, SIPC would get $888 million
dollars that it will have paid in advances.

Next in line under the statute - - the beneficiaries of the second allocation
provision - - are customers who have a positive net equity. Their claims will amount to
$6.75 billion ($5 billion plus $1.2 billion) minus the amount they would already have
received in advances (or $888 million), or $5.862 billion.

So, thus far $6.75 billion in customer propelty is accounted for ($888 million in
advances plus another $5.862 billion to cover the remainder of the total value of the
accounts having positive net equities), What about the remainder of the nine or ten
billion dollars Picard expects to receive (or the ammmts up to $22 billion that he could
conceivably recover)? Well, I gather SIPC would obtain either $6.75 billion to cover all
the money it paid to customers if it did not get money under the first allocation provision,
or another $5.862 billion if it did (for a total of $6.75 billion). For lmder the statute, after
the customers are repaid, SIPC now gets money as "subrogee for the claims of

5
customers." I assume this must mean the claims of customers who received money --
i.e., those with a positive ClCO net equity -- because how could SlPC be a subrogee to a
claim of someone who did not receive money? So SlPC will, as said, get either $6.75
billion or another $5.862 billion.

SlPC is also fourth in line, for allocations though tIlls time its position seems
meaningless. Here SlPC is reimbursed for delivering "customer name" securities (I
presume as opposed to street name securities) to a customer. But SlPC hasn't delivered
any customer name securities to anybody as far as any of us lmow, so being fOUlih in line
is ilTelevant.

Any money remammg fromcustomerpropeliy will then g()into the general

estate. Who will get tms money from the general estate is unlmown to me and, as far as I
lmow, neither SlPC nor Picard have ever said. Customers (i.e., investor victims) can
share in it only to the extent they have unsatisfied net equities. So the general estate is in
this regard ilTelevant to directs because they either have negative net equities under ClCO
or, if they have positive net equities, their entire claim will have been satisfied under
ClCO. So who will get the money?

I lmow no bankruptcy law, wmch I presume would govern the question, but,
though admittedly ignorant in the field, would assume the money would go to creditors to
the extent that there are creditors. Would the indirects have claims as creditors although
they are not cUlTently regarded as customers? Would directs have a claim as creditors
even though they have a negative net equity? And if indirects or any or all directs have
claims against the general estate as creditors, is the claim for the amount shown on their
final statements? After all, Madoff owed them the amounts on their statements, as was
shown by the fact that before the fall he would pay the amount shown on the statement to
an investor who closed ms account.

The bottom line is that who may get what fi'om the general estate is unknown.
But, ·with regard to recipients of money in categories that come before the general estate,
SIPC will get a bundle while penurious, wiped out small investors will get, as it is said,
bupkis.

Of course, if the FSM were used instead of ClCO, then SIPC would have to pay
$2,010,467,854 in advances, and might recoup that as first in line for customer property if
SIPC can recover for advances not used to recover securities. If tIlls assumption, wmch I
thought was previously indulged by Picard and SlCP is wrong, as SIPC's brief seems to
implicitly admit, then SlPC might very well get notlllng rather than two billion dollars.
For the customer propeliy would go to victims - at least it would go to direct investors;
the direct investors may represent a very large dollar amount of the $57 billion that
SIPC's analysis says is the total amount owed to customers (wlllch "excludes the
potential results of settlements"); and there might therefore be nothing left for SlPC. (P.

6 --31--
6, n.1.) So SIPe's situation would be far less favorable to it under the FSM than under
ClCO, a/act which you can bet has not escaped either Harbeck or Picard. 2

R:\My Files\Blogspot\Blogltr.lnfoProvided2CongTcssbySIPC.doc

2 SIPC's figure of 57 billion dollars in potentially eligible claims under the FSM does not in terms include
indirects. For the claims of indirects are not cun'ently eligible for SIPC benefits. The questions asked of
SIPC by the subcommittee inquired as to how many claims were disallowed because they were indirect
(Question 9), but did not ask what the size of those claims is. On the other hand, to the extent
that claims were submitted to Picard by the banks, hedge funds, pension plans, etc., in which the in directs
invested, the indirects' claims are part of the 57 billion dollars because the claims submitted by each of the
investment vehicles (each fund, bank, etc.) would presumably include all the indirect monies invested in
the vehicle, turned over to Madoff, and lost when the Ponzi scheme collapsed.

7 --32--
 September 24,2010

The Information Provided To Congress By SIPC.

Part II.

D. SIPC was not asked, and nowhere does it say, how much money was
earned in interest from Treasuries and money market funds into which Madoff put the
money in the Chase/JPMC accolmt, or how much, if any interest, was earned fi'om Chase
and JPMC themselves. To learn these numbers is essential because the interest, as
explaiiledab()ve;isthe eqi.1ivaleiifbfcash':'inandinusfbe credited ·to investors' accounts
under CICO, which Picard has not done. If the Second Circuit upholds the use of CICO,
there should be attempts to obtain these numbers via discovery. If Lifland again denies
discovery, as he denied it previously, this would form one basis for appeal from his next
decision on the net equity question.

The amount of interest could, in toto, be a very significant sum. Though the chart
of annual cash-in and annual cash-out provided by SIPC fi'om 1992 onward gives rise to
celiain speculations discussed below, it nonetheless makes clear that there sometimes had
to be many billions of dollars -- even tens and scores of billions of dollars -- in Madoff s
account, especially from 1995 onward. The total amount of interest earned could have
been quite large (and was smely stupendous if Chase and JPMC were themselves paying
interest on the account). If the Second Circuit decides in favor of SIPC and Picard on the
net equity question, and Congress does not enact a provision that net equity must be
gauged by the FSM, it will be essential to seek discovery on this question upon remand to
Lifland's cOUli. If Lifland refuses discovery, which seems to be his want (he is after all
deeply biased in favor of SIPC and Picard \ tIllS could, as said, be a basis for appeal. (In
fact, the interest earned fi'om Treasmies, money market accounts, etc. should be added to
investors' accOlmts Ullder the FSM too, because it was earned with their money. Victims
could justifiably demand tIllS money fi'om customer property, and seek discovery about it,
if the FSM is used, just as they can under CICO.)

E. SIPC says there were "90,000 disbmsements totaling $18.5 billion made
to Madoff investors in excess of their investments." (p. 5.) Whether this means dUling
the entire comse of the scam, or only during the six year period prior to December 11,
2008 -- the maximum possible period for avoidance actions -- is not said. If the latter,
tIllS would mean that on average there were 15,000 such disbursements per year, or an
average of 1,250 per month. If the fonner, it would mean there were on average about
5,300 per year, averaging about 450 per month. I find it hard to say which is more likely,
and, if SIPC is referring only to the last six years before December 2008, there also
would obviously be many disbursements above investment before the last six years.

I Thus, Lifland instantly approved Picard's staggeringly huge requests for fees and expenses. Fees are now
up to somewhere around 88 or 90 million dollars as of four months ago (as of May 31,2010).

1 --33--
 Thus, regardless of which SIPC means, there are likely to be many CUlTent or
prior Madoff investors who, by December 11, 2002 (six years before the fraud was
disclosed) had taken out more than they put in. Yet, because of statutes of limitations this
"excess" is beyond the reach of avoidance suits unless the investors were negligent or
complicit -- and it is probable that only wealthy investors and/or institutions were
negligent because they had sufficient money to do due diligence that would have
uncovered the fraud, and therefore can be sued for "excess" monies they took out before
December 11,2002.

It is quite impoliant to try to find out just how much in "excess withdrawals" were
made before December 11, 2002 and are not subject to avoidance suits. For SIPC and the
c l a i n l c r i l e a s t theh~cl:abbed,71al:1:ow-mindeaconcepto/it, under
which fairness requires that advances and customer property be denied to people now
living in poverty so that more from customer property can be given to the rich -- requires
the use of CICO, which, as just indicated, denies advances and customer property to the
small person so that more customer property will be available to wealthy persons and
rich institutions. SIPC and the Trustee are thereby placing a major financial burden of
the fraud on small innocent investors who withdrew more than they put in, while leaving
untouched investors who did the same and got out of Madoff more than six years before
Decem bel' 11, 2008. In other words, their concept of "faimess" is that if you got out in
time you're safe, and if you didn't get out in time you're screwed -- and this in addition
to their anti Robin Hood conduct of taking from the poor to give to the rich.

In combating tIns distOIiion of values arising fi-om the use of CICO, it would be
useful to leam how many investors took out all their money before December 11, 2002
and by how much did their withdrawals exceed the amOlmts they put in. If necessary -- if
the Second Circuit rules for SIP A and Picard on net equity and Congress does not enact a
statute mandating that net equity be determined by the FSM, the infOImation should be
sought in discovery.

F. There are a number of points in SIPC'S answers that relate to the

adequacy of its plruming. To wit: SIPC says that since April 1, 2009 it has been
assessing members one-quarter of one percent per year to build the SIPC fund. (TIns
after a decade of assessing them only $150 per yeru' -- even if they were Goldman Sachs
or Merrill Lynch.) Its "target" is to build the fund to $2.5 billion dollru-s, and
"assessments based upon a percentage of net operating revenue will remain in place
lmtil" then. (p. 2.) When the fund is built to $2.5 billion, SIPC will have access to $5
billion by combining the $2.5 billion :ft.md with another $2.5 billion line of credit
available from the Govemment. Before Mru"ch 1, 2009, SIPC had two revolving
commercial lines of credit of $500 million dollars each (or a total of $1 billion) available
from a consortium of banks, but the banks, says SIPC, were "'unwilling to renew the
credit lines, due to the developing fInancial cIisis." (P. 2.) And SIPC says that "SIPC,
under CUlTent law, has demonstrated that it has sufficient resources for its statutory
mission." (P.3.)

2 --34--
 Many questions arise from this. Just how and why does SIPC calculate that a
$2.5 billion fund, combined with an equal sized Govemment line of credit is enough? In
2003 some impmiant Congressmen told SIPC, after a GAO repmi, that it should think
about increasing the funds available to it, but it declined to do so, claiming privately, as I
gather it, that achmries had told them it had access to enough money. Did actuaries tell it
in 2009, after Madoff and Stanford, that $5 billion in available money was enough? If so
(or even if not), were the requisite calculations based on a continuation ofSIPC's now 40
year old policy of attempting -- successfully until now -- to screw investors by fighting
tooth and nail against paying them -- by pulling out all the stops in negotiations and
litigation to successfully avoid paying all but a small percentage of claimants? What if
SIPCis somehow forced by thecOluis orCongress to change this fight-theln-to-tbe-death
policy which destroys the intent of Congress? Will $5 billion still be enough?
(Personally, I think that, if there is to be a change in SIPC's conduct, its entire
management and Board must be replaced. They have all been complicit in SIPC's
conduct, and, without a clean sweep, one must fear that nothing the comis or Congress
can do will cause those who have been pmi of SIPC for 35 years -- or have been
associated with and influenced by such persons -- to drmllatically change their mindset
and conduct. Unfortunately, though, in Government or quasi govenmlent people don't
get fired for performing their jobs telTibly or destroying Congressional intent.)

Moreover, if $5 billion is sufficient, why does half of it have to come from the
Government, which already has lots of calls for money? Why shouldn't it come entirely
from the fabulously wealthy investment business, which may have benefitted to the hme
of hundreds of billions or even mmly trillions of dollars from the existence of SIPC
insurance -- for which industry members paid the farcical sum of only $150 per yem' per
member for a decade or more? How big would the SIPC fund itself get if, say,
investment houses were required to pay one half percent of net revenues into the fund, or
one percent of net revenues into it, for, say, ten yem's?

And just how has SIPC "demonstrated" that it has "sufficient resources for its
stahltory mission"? Hasn't any such demonstration been dependent upon the policy of
screwing investors out of advances, so that relatively little money is paid out? Moreover,
has SIPC told us the full story of why a consortium of banks refused to renew a line of
credit to it? Did the bmllcs possibly have concems over what might happen in the markets
and over SIPC's ability to repay them if disaster struck?

G. Here are two quick "semi-logistical" points.

SIPC says the average time period between the filing of a claim and the
determination of the claim, for the 13,189 claims that have been detennined already (out
of a total of 16,374) is 7.55 months. It then gives a bunch of excuses for taking 7Y2
months. But as you can see for yourself by reading the excuses (on pp. 6-7 of its
mlswers), the lengthy time period, which contravenes Congress' intent for prompt
payment, is due to use of CICO. CICO requires extensive calculation and work that is
unnecessary lmder the FSM.

3 --35--
 Moreover, to a certain extent -- actually to a major extent SIPC is lying with
figures here. It says it has detelmined 13, 189 claims. But it also says later that there
were 8,489 claims (of the 13,189) that were denied because the claimants had no
accounts at Madoff, i.e., were indirects. It should have taken about one day to detelmine
an indirect claim, since they are denied out of hand. Since the average period for a
determination is 7Y7. months, and the indirect claims that are cUlTently deniable out of
hand -- in a day -- are roughly two-thirds of all the claims that have been detemlined, this
fUliher evidences how much delay there has been in detelIDining direct claims -- even
where they have been detemllned. And one would bet that most of the 3,185 claims
remaining to be determined are directs' claims.

Beyond this, SlPe' sanswersgivethe average period between ofa claim

and tlle determination of the claim, not the time between the filing of a claim on which
SIPC admits it owes some amount and the payment of the claim. If we were to leam the
average time between filing and payment, you can bet it would be more than 7Y2 111onths.
Ultimately it is likely to be years. This is what Congress meant when it said it wanted
SIPC's payments to be prompt?

SIPC also says, in an eff01i to show how caring it is towards people who are
suffering greatly, that "Hundreds of customers filed hardship applications" seeking quick
payments, and 'many" of these were granted. (p. 7.) "Many" is a lawyer's weasel word.
(Twenty would be "many.") SIPC does not say how many were It does 110t give
a specific number, wIllch it obviously 1010WS. Instead it weasels. This is a sign that the
number of hardship applications it granted isn't very high.

Finally, SIPC has set f01ih a chart showing the annual cash put in and tlle
annual cash taken out for each year from 1992 through 2008. Most of the time the annual
cash-in and cash-out are pretty close, although there were a few years when cash-out
exceeded cash-in by (usually) a small amOlmt, so that a certain amOlmt of the cash-out
had to come from "reserves" from prior years. But discrepancies between annual cash-in
and cash-out appear to have become significant, sometimes in one direction and
sometimes in the other, from 2003 onward, with about $2.8 billion more in cash-in in
2007 and $4.25 billion more in cash-out in 2008.

But eyeballing the chart as a whole (eyeballing, rather than carefully comparing
all 11umbers), one gets the impression that much of the tinle the cash-in and the cash-out
were reasonably close. TIllS likely indicates that in the years of reasonable closeness
Madoff was taking out for Illmself and IllS cronies -- Pic ower, Chais, probably Norman
Levy an anlount that was approximately equal to the difference between the year's
cash-in and the [mal total of cash-out for tlle year. Otherwise, could there have been the
degree of cOlTespondence which often existed between rumual cash-in ruld annual cash-
out?

I don't know what tills never-previously disclosed infonnation in the chart tells us
of importance about Madoff's scrun, except perhaps that it reinforces a point that is
prevalent throughout tlle Madoff case, is very important, and is almost never remarked.

4 --36--
It could well by my own ignorance, but I don't ever remember another major crime as to
which so little underlying inf01111a1ion has been publicly disclosed and was publicly
kl10wn nearly two years after the crime and over a year afier the major culprit went to
jail. The Trustee, SIPC, and the U.S. Attomey are keeping secret as much as they
can, sometimes claiming secrecy is necessary for their success, a bovine defecation claim
that government and quasi govenU11ent bodies often make, usually falsely. But victims
are being really hm1 by tllls conU110n bovine defecation because they do not have access
to inforn1ation they need to further their eff011s to recover lost funds -- as shO\;I[n by the
usefulness to victims of other information discussed here that was revealed only in
SIPC's (sometimes hide-the-ball) answers of September 7, 2010. I have written many
tiI11~~jl1J:JlQgs,Q()()1~§ClI!(:1~~~lseVv'11el"e.that secrecy .. ((lnd associated is the most
serious problem human beings face, since people are usually able to figme out what to do
when they know the facts. It is no different here.

R:\My Files\Blogspot\Blogltr.lnfoProvided2CongressbySIPC.Part2.doc

5
DOCUMENTS RELATING TO BRIEFING
SCHEDULE BELOW

--38--
Baker & Hostetler LLP Hearing Date: September 9, 2009
45 Rockefeller Plaza Time: 10:00 a.m.
New York, New York 10111
Telephone: (212) 589-4200 Objections Due: September 3, 2009
Facsimile: (212) 589-4201 Time: 4:00 p.m.
David 1. Sheehan
Email: dsheehan@bakerlaw.com
Marc E. Hirschfield
Email: mhirschfield(a)bakerlaw.com
Semma R. Brown
Email: sbrowli@bakerlaw.com

Attorneys for Irving H. Picard, Esq., Trustee for the

Substantively Consolidated SIPA Liquidation of
Bernard L. Madoff Investment Securities LLC
and Bernard L. Madoff

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRlCT OF NEW YORK
SECURITIES INVESTOR PROTECTION
CORPORATION,
Adv. Pro. No. 08-01789 (BRL)
Plaintiff,
SIPA Liquidation
v.
(Substantively Consolidated)
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,

Defendant.
In re:

BERNARD L. MADOFF,

Debtor.

MOTION OF TRUSTEE FOR AN ORDER TO

SCHEDULE HEARING ON "NET EQUITY" ISSUE

Irving H. Picard, Trustee ("Tmstee") for the liquidation of the business of Bemard L.

Madoff Investment SecUlities LLC ("BLMIS") and for Bernard L. Madoff ("Madoff')

(collectively, the "Debtors"), hereby moves this Court to enter the scheduling order proposed

--39--
herein regarding the "net equity" issue, as more fully described below, and in support thereof,

states as follows:

BACKGROUND

1. On December 11, 2008, the Secmities and Exchange Commission ("SEC")

filed a Complaint in the United States District Court for the Southern Disnict of New York

against defendants BernardL. Madoff and Bemard·L.Madoff.Jnvestment Securities LLC (No.

08 CV 10791).

2. On December 15, 2008, Judge Stanton entered an order pursuant to the

Secmities Investor Protection Act of 1970, 15 U.S.C. § 78aaa et seq., as amended ("SIPA"),l

which, in pertinent part:

(a) Appointed Irving H. Picard as trustee for the liquidation of the

business ofBLMlS, pursuant to section 78eee(b)(3) of SIPA;

(b) Appointed Baker & Hostetler, LLP as counsel to the Tlllstee

("Counsel") pursuant to section 78eee(b)(3) of SIP A;

(c) Removed the case to tbis Bankruptcy Court pursuant to section

78eee(b)(4) of SIPA; and

(d) Authorized the Trustee to take immediate possession of the

property of the debtor, wherever located.

3. On December 23, 2008, tbis Comt entered an order (the "Claims

Procedures Order") that, inter alia, specified the procedures for the filing, detelmination, and

adjudication of customer claims ("Customer Claims") in this proceeding.

I For convenience, future reference to SIPA will not include "15 U.S.C."

2
--40--
 4. The Claims Procedures Order provides for the written determination by the

Trustee of customer claims, and allows any claimant who opposes the Trustee's determination to

file an opposition in this Court.

5. The Claims Procedures Order also provides that upon the filing of an

objection, the Trustee shall obtain a hearing date and time and shall so notify the objecting party.

STPA;the Thlstee is respOllsible fcirreccivering-a:nd distributing

customer property to BLMIS's customers, assessing claims, and liquidating any other assets of

the finn for the benefit of the estate and its creditors.

7. The statutory framework for the satisfaction of Customer Claims in a SIPA

liquidation proceeding provides that customers share pro rata in customer propel1y to the extent

of their Net Equity (as defmed in section 78111(ll) of SIPA, 15 U.S.C. §78111(Il)), and to the

extent that a customer's Net Equity exceeds his or her ratable share of customer property, SIPC

shall advance funds to the SIPA trustee up to $500,000 for securities for that customer.

8. Certain claimants disagree with the Trustee as to the construction of the

term Net Equity and how that term should be applied to determine the amount of the valid

Customer Claim of each claimant.

9. It is the Trustee's position that for purposes of determining customer

claims, each BLMIS customer's Net Equity will be determined by crediting the amount of cash

deposited by the customer into his BLMIS accmmt, less any amounts already withdrawn by him

from his BLMIS customer account (the "cash inlcash out approach").

10. Various claimants have asserted that Net Equity should be determined on

the basis of each claimant's balance as shown on their November 30, 2008 account statement

provided by BLMIS or, alternatively, that the calculation should reflect the time value of money

3
deposited by each claimant and/or interest, unjust emichment or other factors as desclibed in the

objections that have been filed in the above-referenced action.

11. Fwihelmore, the following two adversary proceedings were filed

challenging the Tmstee's definition of "net equity": Less, et aZ. v. Picard, Adv. Pro. No. 09 CV

1265 (Bankr. S.D.N.Y.) (BRL) (seeking class action relief); and Peskin, et al. v. Picard, Adv.

Pro;No;09CVI272 (Banla. S:D;N.Y.) (BRL).

12. This Motion has been disseminated in advance of filing to the following law

finns, each of which has demonstrated an interest in the litigation of this issue: (a) Lax & Neville,

LLP, (b) Milberg LLP, and (c) Phillips Nizer LLP

RELIEF REQUESTED

13. In furtherance of the requirement under the Claims Procedures Order that

the Tmstee obtain and notify an objecting paIty of a hearing on all objection, the purpose of this

proposed scheduling order is to establish an orderly procedure for this Cowi to resolve objections

involving the proper determination of Net Equity. The Trustee proposes the following schedule:

A. On or before October 16,2009, the Trustee shall file motion(s) to

affum certain customer claims determinations as to which

objections have been filed, specifically with regard to the Trustee's

Net Equity determinations (the "Motion(s)"). In the attached

Exhibit A, the Trustee has set forth the various categories of

claimants that he intends to include within the Motion(s).

B. In accordance with the Claims Procedures Order, the Motion(s)

shall identify those claimants who have filed objections to his

determination of their customer claims for which he intends to

--42--
 schedule a hearing on the Net Equity issue (the "Objecting

Claimants").

C. In support of the Motion(s), the Trustee shall file a memorandum of

law and supporting papers setting forth the factual and legal bases

for the Trustee's construction of the term Net Equity on the same

date.

D. SIPC shall file any brief with reference to the Motion(s) on or

before October 16, 2009.

E. The Objecting Claimants shall file their responses to the Motion(s)

on or before November 13,2009.

F. Any Interested Parties (as fhrther defined below in paragraph 14)

who wish to file a brief in opposition to the Trustee's Motion(s)

shall file their briefs on or before November 13,2009.

G. Any Interested Parties who wish to file a brief in support of the

Trustee's Motion(s) shall file their briefs on or before December 11,

2009.

H. To the extent that Interested Parties who filed briefs in accordance

with paragraph G above raise issues, factual or legal, that have not

been previously raised, Interested Parties who filed a brief in

opposition to the Trustee's Motion(s) in accordance with paragraph

F above may file a reply brief addressing such issues on or before

December 21,2009.

I. The Trustee and SIPC shall file any reply papers on or before

5
--43--
 January 15,2010.

J. The Court shall hold a hearing on the Motion on February 2, 2010,

at 10:00 a.m., or such other time as the Court detelmines.

14. Interested Parties that are permitted to file briefs regarding the Motion in

accordance with this proposed scheduling order shall be limited to claimants who have filed a

timely customer claim with the Trustee, or any governmental unit or division. Such briefs may be

filed without seeking leave from the Court.

15. Any claimant who files a brief regarding the Motion in accordance with this

proposed scheduling order shall submit a copy of or otherwise identify their timely filed customer

claim at the time of filing their blief. Counsel filing a brief on behalf of any Interested Party shall

identify all such Interested Parties they represent.

16. Any party, other than governmental units, who did not file a timely

customer claim but wishes to file a brief regarding the Motion in accordance with this proposed

scheduling order must seek leave of court prior to filing such a brief and must identify their

interest in tins matter, including, but not limited to, whether they had an account at BLMIS. If

any such party had an account at BLMIS, or if cOlmsel is representing one or more persons who

had an account(s) or an interest in an account(s) at BLMIS, they must identify all holders of the

BLMIS accounts in their motion for leave to file briefs in accordance with this paragraph.

NOTICE

17. Notice of this Motion has been provided by U.S. mail, postage prepaid,

email, or by to (i) all parties that have filed a notice of appearance in this case; (ii) the SEC;

(iii) the Internal Revenue Service; and (iv) the United States Attorney for the Southem District of

6
--44--
New York; (collectively, the "Notice Pm1ies"). The Trustee submits that no other or fl.ll1her

notice need be given.

WHEREFORE, the Trustee respectfully requests that the Court (a) enter an order

substantially in the form attached hereto as Exhibit B, granting the relief requested herein; and (b)

grant such other and further relief to the Trustee as the Court deems proper.

Dated: New York, New York Respectfully submitted,

August 27, 2009 BAKER & HOSTETLER LLP

By:/s/ David 1. Sheehan

Baker & Hostetler LLP
45 Rockefeller Plaza
New York, NY 10111
Telephone: (212) 589-4200
Facsimile: (212) 589-4201
David J. Sheehan
Email: dsheehan@bakerlaw.com
Marc E. Hirschfield
Email: mhirschfield@bakerlaw.com
Seanna R. Brown
Email: sbrown@bakerlaw.com

Attorneys for Irving H. Picard, Esq. Trustee for

the Substantively Consolidated SIPA
Liquidation of Bernard L. Madoff Investment
Securities LLC And Bernard L. Madoff

095879,300027883

7
--45--
UNJTED STATES BANKRUPTCY COURT
SOUTHERN DlSTRJCT OF NEW YORK

SECURITJES JNYESTOR PROTECTJON

COR PORA TJ ON,
Adv. Pro. No. 08-01789 (BRL)
Plaintiff,
SJPA Liquidation
v.
(Su bstantively Consolidated)
BERNARD L. MADOFF JNYESTMENT
SECURJT1ES LLC,

Defendant.
Jn re:

BERNARD L. MADOFF,

Debtor.

ORDER SCHEDULING ADJUDICATION OF "NET EQUITY" ISSUE

This matter came before the Court on September 9, 2009 on the motion (the "Motion")!

ofJrving H. Picard, Esq. (the "Trustee"), as trustee for the liquidation of the business of Bernard

L. Madoff Jnvestment Securities LLC ("BLMJ S" or "Debtor") under the Securities Investor

Protection Act, J 5 U.S.C. §§ 78aaa, el seq., and as trustee for the estate of Bernard L. Madoff

("Mad off'), for entry of an order to schedule a hearing on the Net Equity issue, as more fuDy set

forth in the Motion; and the Court having jurisdiction to consider the Motion and the relief

requested therein in accordance with section 78eee(b)(4) of the Securities Investor Protection

Act, J 5 U.S.C. §§ 78aaa, et seq. ("SIPA"), and the Protective Decree, entered on December J 5,

2008 by the United States District Court for the Southern District of New York in Case No. 08

CY J079J, and 28 U.S.c. §§ ]57 and ]334; and it appearing that the relief requested by the

Motion is necessary and in the best interests of the estate, its customers, its creditors, and all

J Capitalized terms not otherwise defined herein shall have the meanings given to them in the Motion.

--46--
parties in interest; and upon consideration of the responses and objections filed in this Court in

response to the Motion, including those filed by the following parties: the James H. Cohen

Special Trust and its nine beneficiaries; Mary Albanese, Brow Family Partnership, Allan

Goldstein, Laurence Kaye, Suzanne Kaye, Rose Less and Gordon Bennett; Martin RappapOJ1,

Paul J. Robinson, Judith Rock Goldman, Anita Karimian, and Albel1 J. Goldstein, U/W FBO

RuthEGoldsteinTTEE; and Marsha Peskin JRA,Michael Mann, andB3ITyWeisfeld

(collectively, the "Objections"); whereas the Objections raised various issues, such as (l)

reducing the time allotted for the briefing of this issue for those supporting the Trustee's

position; (2) requesting that the order specifically consider of the value of transfers between

accounts in the net equity determination; (3) exclusion of certain issues, including (a) the manner

by which customer claims should be determined when the account of a current BLMIS customer

was acquired by assignment, transfer, succession, or otherwise from a former BLMIS customer;

(b) where a single BLMJS customer account has two or more co-owners, beneficiaries, partners,

or other interested persons, whether there is more than one customer claim for purposes of the

SIPC advance pursuant 15 U.S.c. § 78fff-3(a) and allocations of customer property pursuant to

15 U .S.c. § 78fff-2(c)(1 )(B); (c) where a single customer account is held in the name of a feeder

fund, fund of funds, or other similar entity, whether beneficial owners of interests in or claims

against such entities have customer claims under 15 U.S.c. § 78fff-3(a); (d) the effect, if any, of

any knowledge a customer may have had about the operation of BLMIS; (e) any avoidance

power or other claims the BLMIS trustee may have against a customer; (f) how customer claims

should be determined when the account of a current BLMIS customer resulted from the division

of or transfer from another BLMJS customer; and (4) requesting that the net equity dispute be

decided within the class action adversary proceeding captioned Albanese, el af. v. Picard,

2
--47--
(Banrk. S.D.N. Y.) (09-1265) (BRL).

Due notice of the Motion having been given, and it appearing that no other or fUl1her

notice need be given; and upon a hearing and the proceed before the Court and after due

deliberation, it is hereby:

ORDERED, that the relief requested in the Motion is granted as set forth herein; and it is

fUJiher

ORDERED, that on or before October J6, 2009, the shall file motion(s) 10 affirm

certain clIstomer claims determinations, specifically with regard to the Net Equity

determinations (the" Net Equity Motion(s)"); and it is fU11her

ORDERED, that the Net Equity Motion(s) shall identify those claimants who have filed

objections to his detennination of their customer claims for which the Trustee intends to

schedule a hearing on the Net Equity issue (the "Objecting Claimants"); and it is fmiher

ORDERED, that in support of the Net Equity Motion(s), the Trustee shall file a

memorandum of law and supporting papers setting forth the factual and legal for the

Trustee's construction of the term Net Equity on or before October 16,2009; and it is further

ORDERED, that SlPC shall file any brief with reference to the Net Equity Motion(s) on

or before October 16, 2009; and it is further

ORDERED, that the Objecting Claimants shall file their responses to the Net Equity

Motion(s) on or before November J3, 2009; and it is ful1her

ORDERED, that any Interested Parties who wish to file a brief in opposition to the

3
Trustee's Net Equity Motion(s) shall file their briefs 011 or before November 13: 2009; and it is

[UJiller

ORDERED, that any lnterested Parties who wish 10 file a brief in supporl of the

Trustee's Net Equity Motion(s) shall file their briefs on or before December] ], 2009; and it is

furth er

ORDERED, that to the extent that Interested Parties who filed briefs in accordance with

the preceding paragraph raise new issues, whether fact~al or legal, that have not been previously

raised, Interested Parties who filed a brief in opposition to the Trustee's Motion(s) may file a

reply brief addressing such issues on or before December 21,2009.

ORDERED, tIle Trustee and S]PC shall file their reply papers on or before] anuary ] S,

2010; and it is further

ORDERED, that, consistent with the record of the hearing held on September 9, 2009,

the briefing to be submitted to the Court pursuant to this Order shall be limited to discussing the

proper interpretation ofUnet equity," specifically the following hvo issues:

]. Whether a customer's "net equity" under SJPA is equal to "cash in/cash

out"; or

2. Whether a customer's "net equity" under SJPA is equal to the value of the
securities positions and credit balance reflected in the customer's last
statement.

The Trustee and Interested Parties shall reserve all rights, claims, and defenses as to any issues

and/or arguments not resolved by the Court in connection with the briefing described herein on

the Net Equity ]ssue.

ORDERED, the Court shall hold a hearing on the Net Equity Motion(s) on February 2,

4
--49--
20 J 0, at 10:00 a.m., or such other time as the COUl1 determines; and it is fllliller

ORDERED, tl1al Interested Parties that are permitted to file briefs in accordance with

this Order shall be limited (0 customers of BLM1S who have filed a customer claim with the

Trustee, or any governmental unit Or division. Such briefs may be filed without seeking leave

from the Court; and it is further

ORDERED, tllat any claimant who files a brief regarding the Net Equity Motion(s) in

accordance with this proposed scheduling order shall submit a copy of or otherwise identify their

filed cllstomer claim at the lime of filing their brief. Counsel filing a brief on behalf of any

Interested Party shall identify all such Interested Parties they represent; and it is fUJ1her

ORDERED, that any party, other than governmental units, who did not file a customer

claim but wishes to file a brief regarding the Net Equity Motion(s) in accordance with this

proposed scheduling order must seek leave of court prior to filing such a brief and must identify

their interest in this matter, including, but not limited to, whether they had an account at BLMIS.

]f any such party had an account at BLMIS, or if counsel is representing one or more persons

who had an account(s) or an interest in an account(s) at BLMlS, they must identify all holders of

the BLM1S accounts in their motion for leave to file briefs in accordance with this paragraph;

and it is further

ORDERED, that the Trustee's proposed form of notice is approved. The Trustee shall

serve the notice by mailing to all persons who have filed customer claims in the above-captioned

action, and shall place the notice on his web site; and it is further

ORDERED, that the Objections are denied, to the extent not adopted above or

5
--50--
withdrawn at the hearing; and it is fUliller

ORDERED, that the Trustee shall confer with counsel regarding the other issues that

should be the subject of separate scheduling orders, and shaJ] propose a conference or hearing 10

set schedules for such issues; and it is fUliller

ORDERED, that this Court shall retain jurisdiction with

the interpretation or implementation of this Order.

Dated: New York, New York

Septem ber 16, 2009 /S/ Burton R. Lifland
:;-;;;H-=O:;-;N:-;;;:O=RA~BLE
BURTON R. LJFLAND
UNJTED STA TES BANKRUPTCY JUDGE

6
 BANKRUPTCY COURT BRIEF OF
LA WRENCE R. VEL VEL IN SUPPORT OF
REQUESTS FOR DISCOVERY BELOW

--52--
 Lawrence R. VeJveJ Hearing Dale: Nov. 24, 2009
MassaclJUsetls School of Law Hearing Time: ] 0:00 a.m.
SOO Federal Street
Andover, MA 0]8] 0
Tel: (978) 68]-0800
Fax: (978) 68]-6330
Email: velvel@mslaw.edu

UN]TED STATES BANKRUPTCY COURT

SOUTHERN D]STRJCT OF NE'V YORK

)
In re: ) S]PA LJQUJDATJON
) No. 08-0] 789 (BRL)
BERNARD L. MADOFF INVESTMENT )
SECURJTJES LLC, )
)
Debtor. )
)

RESPONSE OF OBJECTOR, LAWRENCE R. VEL VEL,

TO THE MOTIONS OF SJPC AND THE TRUSTEE
FOR PROTECTIVE ORDERS DENYING DISCOVERY

]. Discovery Relating To The Intent, Or Motive, Or Purpose Underlying

Actions By Governments Or Private Bodies Is Now A Staple Of The
American Legal System.

In case after case, in Jegal subject after legal subject, the "intent," or "motive" or

"purpose" underlying an action makes all the difference as to whether an action of a

private or governmental body is legal or inegal.

In discrimination law, the question often is, and the case wiJl tum on, whether an

action that disadvantages a person because of her race, her sex, or her age was taken

because she was, for example, an inept employee on the one hand, or because she was

1 --53--
 blacle a woman, or, say, over 6S years old on the other J1and. Jntent, or motive, or

purpose, lS the a]] impoI1anl factor in detelmining legality. ]n constitutional cases

involving religion, the case wi]] tum on whether an action was taken to further a goal

applied to all persons, regardless of religion or irreligion, on the one hand, or with the

intent to haml a particular religious group on the other. The intent, or motive, or purpose

behind the action is all important to detemlining legality. Jn antitrust law the case will

tum on whether an actio11 was taken in order to complete more effectively, anc:I/or

produce a better product or service at a cheaper price, on the one hand, or with the intent

to injure or destroy a competitor on the other. Jntent, or motive, or purpose is all

important in determining legality. ln tax law involving tax shelters, the question whether

there was an intent to make a business profit, on the one hand, or only to avoid taxes on

the other, is the critical factor in determining legality. In fraud cases, the question of

whether there was an intent or purpose to defraud can be the question on which legality

will tum. Intent or motive or purpose is again al] important. l

The list goes on and on, throughout much of American Jaw. And wherever the

question of intent or purpose or motive arises, there is discovery on the issue because the

issue is critical in determining legality. The Jist of relevant fields, and the discovery,

reflect the inevitable fact that smart lawyers always can come up with innocent sounding

justifications for anything, and it is thus crucial to learn via discovery the real reasons for

I In regard to the intent, or motive, or pmpose underJying the actjons of private or governmentaJ bodies, see
Tellabs, inc. v. Makar issues & Rights, Ltd., 551 U.S. 308, 319 (2007); Church a/the Lakumi Babalu, Aye,
inc. v. City 0/ Hialeah, 508 U.S. 520, 540-41 (l993); Wisconsin v. Mitchell, 508 U.S. 476, 485-86 (l993);
Rogers v. Lodge, 458 U.S. 613, 617-19 (l982); Board a/Education v. Pica, 457 U.S. 853, 870-71 (l982);
Epperson v. Arkansas, 393 U.S. 97,107-109 (l968); Rice's Toyota World, inc. v. Commissioner, 752 F.2d
89, 91 (1985). There are now hundreds, if not many thousands, of cases in which intent or purpose or
motive was the cruciaJ factor.

2 --54--
 an action -- the real intent or motive or pUTJ)ose underlying i1 .. jn order to judge its

lega]jty.

Yet, according to the Trustee and SlPC, the intent, the motlve, the purpose

underlying their determination to use cash·inJcash-out is completely irrelevant. lt can

therefore be the subject of no discovery, they say. lt does not matter jf their files were to

contain smoking gun documents, or collections of documents, establishing the following

set of propositions: They were aware that, in the past, brokers' statements received by

investors were the measure of net equity, that this was true even in fraud cases such as

New Times when rea] though unpurchased securities were involved, as in Madoff too.

They were aware that Mr. Harbeck and Ms. Wang had respectively testified and/or

publicly said that securities would be acquired for investors whose statements showed

they owned securities. They knew that the statements investors received from Madoff

were the measure of investors' legitimate expectations regarding the ownership of

securities and the do]]ar value owned. They knew or suspected that using cash-in/cash-

out would provide less protection than Congress intended and would frustrate investors'

legitimate expectations as Congress thought of legitimate expectations. But they

nonetheless desired to use cash-inlcash-out because otherwise SIPC would be bankrupted

by the huge do]]ar size of the Madoffmatter, SIPC's management might be fired for not

baving taken sufficient precautions against a huge loss, and the onJy way to avoid these

resu1ts, if cash-inlcash-out were not used, would be to assess the brokerage industry for

huge sums of money, which would create a frrestorm of protest in the industry, or to ask

Congress for bi]]ions of dollars, which would create a firestorm in Congress. They also

knew that their lawyers would be able to put forth (as occurs in discrimination,

3 --55--
 constitutional, antiTrust, tax, and other cases) perfectly innocent sounding, perfeclly

legitimate sounding, pJausible reasons for using cash-inJcash-oui, so that the reaJ intent,

the rea] motive, tl)e reaJ purpose behind using cash-inlcash-out might never come out and

would 1herefore never undennine its JegaJity (as they undennine legaJity in other fields).

As said, even if smoking gun or collections of documents in their files were to

establish aJJ these propositions, SJPC and the Trustee say there can be no discovery of

those documents because they supposedJy are irrelevant and are privjleged. The

complete, continuing of all such documents is the burden of their briefs -- which,

perhaps curiousJy, do not deny that documents pertinent 10 the above proposjtJOns exist,

but instead say they cannot be discovered no matter what.

According to SJPC and the Trustee, then, their actions are not subject to, and are

lawful despite, the that governs judicial assessment of the legality of actions of

private and public bodies across vast swa1hs of American law: their actions, they

maintain, are lawfuJ despite the possible intent or motive or purpose with which they

were taken. They are lawfuJ even if taken with intent to thwart the wj]] of Congress in

order to save SIPC's coffers and management. But judicial disregard of underlying

intent, purpose or motive is emphatically not the state of American law and should not be

the position foHowed here.

2. The Remaining Arguments Of SIPC And The Trustee Do Not Justify

Denial Of Discovery.

A. When Objector filed his first request for production of documents, he

simultaneously filed a Notification To The Court explaining his reasons for doing so.

The Notification made explicit that the request for production onJy "seeks documents

relating to whether SIPe and the Trustee, to any extent, decided to use the casb-in/cash-

4
 out method 10 delemline nel equity m order to advance or save SJPC's economic

position." Notifiea/ion To The Court OJ Request For Production OJ Doeumenls, p. ]

(Exhibit ], infra). The Notification went on to expJain why already was evidence

this could have occurred, citing the testimony of Mr. Harbeck in Ne'w Times that

securities wouJd be provided, the statement 10 the same effect reportedly made by Ms.

Wang to an internet publication when the Madoff fraud was disclosed, and then the later

size of

Madoff's fraud, and the size of SIPC's liabiJity ifit had to provide securities or use the

November 30 lh statements, began to sink in. The Notification then said, ''In sum, the

question is whether a desire to save SJPC's economic position, and conceivably the jobs

of management, played any roJe in the decision to use cash-inJcash-out rather than the

standard method, and to do so even though use of the cash-inJcash-out method wouJd, for

the benefit of S]PC, resuH in enormous hardship to victimized investors whom it was

Congress' purpose to help." Notification, p. 3 (Exhibit]).

The Notification thus made clear that, oppositely of what is chimed in the briefs

for a protective order filed by SIPC and the Trustee, Objector seeks no discovery of legal

analyses of counsel -- which are avaiJable in final form anyway in the briefs on net equity

filed by SlPC and the Trustee on October 16, 2009. Objector has no interest, for

example, in documents discussing the holdings or facts of cases relied upon or

distinguished in the briefs. Objectors' only interest, the Notification made clear, is in the

underlying intent or motlve or purpose that caused the cash-lnJcash-out position to be

adopted in the first place, not in lawyers' analyses used to defend it.

5
 B. Counsel for the Trustee and for SJPC caJJed Objector on October J 6 111 to

confer, and advised him that tlley would be seeking a protective order. Objector asked

why they were seeking a protective order rather than simply filing objections 10 the

requested discovery. TJle answer was that the filing of objections impJjcitJy preslJmed

that discovery could be had jf it were properly framed, but there can be no discovery

whatever here. The answer that there can be no discovery here was memorialized in
.............................. - ...... -.

three emails written 10 counseJ for the Trustee and SJPC and was never denjed or

th
gainsaid by them. In an email to David Sheehan on October 16 , it was said, "J

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." (Emaj] of October 16th to David Sheehan, Exhibit 2, infra.) In an

email of October 27 th , it was said, "l know that you do not wish to file objections before

Judge LifJand rules on your request for a protective order because you feel, Mr. Sheehan

has said on the phone, that objections presume a right to discovery, but you deny any

such right can exist here." (Email of October 2ih to Marc Hirschfield, copies to counsel

for SJPC, Exhibit 3, infra.)

Also, in view of SlPC'sand the Trustee's broad denial of any right to discovery

th
on any subject, in an email of October 28 to Marc Hirschfield it was said, with regard to

a then forthcoming and now filed second document request that seeks materials on why

securities were not purchased for investors, "No doubt your forthcoming motions for a

protective order will implicitly cover this matter, since your position, as I understand it, is

that no discovery can be had on any question. 11 would be perfectly understandable,

however, and perfectly alright with me, jf you were to choose to explicitly say that your

6 --58--
 posilion also covers discovery about acquiring securities to satisfy CUS10mers' claims."

(Email of October 28 lh to Marc Hirschfield, copies to counsel for SJPC (emphasis in

original) (Exhibit 4, infra).) The motions filed by SIPC and the Trustee have said this,

again evidencing the motions' uncabined scope.

Naturally, because the position of SJPC and the Trustee was that there can be no

discovery on any question here, when conferring by phone with Objector on October] 61h ,

the sole agreement they were interested in reaching was an agreement that they would

never have to produce any documents, or, at minimum, that they would not have to do so

until the motion to deny aJl discovery is rejected by the Court: As counsel for SJPC says

in his affidavit filed with SJPC's brief:

J have requested that Vel vel withdraw his requests for production
of documents served by him on, and directed to, SIPC in the
above-captioned proceeding or, in the alternative, that he agree that
SIPC need not respond to those requests until the Trustee's motion
to uphold his determination of Velvel's claim is finalJy resolved
and that it need not do so if the Trustee's motion is granted. 2

Being interested only in complete withdrawal or deferral of Objector's request for

production of documents, SlPC and the Trustee evinced no interest in the usual subject of

discovery conferences such as the one on October] 6th : they showed no interest whatever

in pursuing whether, if they thought the document request overbroad or that there were

documents subject to privilege, it would be possible, at least as a first crack, to reach an

agreement that would result in some but not all documents being produced. Nor did they

offer to produce any documents even jf the foregoing type of agreement were not

2 After saying the foregoing, in his affidavit, which was of course sworn to under penaJty of peIjury,
counsel for SIPC says, "Velvel has indicated that he is unwilling to take either of these actions." This is
incorrect, as admitted in SIPC's own brief, which says that Objector "has indicated that SIPC need not
respond to the First and Second Production requests until after the Court rules on the instant motion." SIPC
brief, p. 2. The Trustee's brieflikewise concedes that "VelveJ bas agreed that the Trustee need not respond
to the Document Requests until this motion bas been decided by the Court." Trustee's brief, p. 7.

7 --59--
 Their posi1ion was unvarnished and unmitigated: as was the only agreemenl

they were wi]Jing to en1ertain. t}Jeir position, and consequen1ly the agreement they would

en1er, was that Objector should give up all right to discovery of any docurnenls

whatsoever by withdrawing his document requests,3 or should, at minimum, agree that no

responses to his requests need made unless and until after the Court were to rule 3n his

favor.

Naturally, Objector could not and did not agree to the (arrogant?) demand that he

give up all right to discovery and withdraw his document requests. Now, therefore, SJPC

and the Trustee, in their briefs, seek an order barring all discovery relating to net equity.

Seebng a bar against all discovery, the Trustee's brief says, "Many of the documents

sought by Velvel are confidential commurucations prepared by the Trustee's counsel for

the purpose of providmg advice. 111ese documents reflect the anaJysis and advice

of the Trustee's counsel regarding the appropriate manner of determining a customer's

net equity and thus fa]] squareJy within the protection provided by the attorney-client

privilege. To the extent the Trustee has in ills possession any responsive documents that

were not prepared by his counsel, those documents are also protected, as described

below." Trustee's brief, pp. 8-9. SIPC's brief says that, "Nearly aJI of the documents

that Velve] seeks are either protected from disc]osure by privilege or other doctrine (~

documents reflecting SIPes internal communications with or among its in-house

counsel, communications between SIPC and the Trustee, etc.) or aJready available to

Ve]ve] in the public record (~, pleadings and memoranda fiJed in the BLMIS

liquidation)." SIPC brief, p. 5. SIPC and the Trustee seek an order barring aJ] discovery

without any effort to seek narrowing of the discovery requests jf they consider them too

3 Some might think this a somewhat arrogant, cocksure position.

8 --60--
 broad, and wi1hoU1 providing any privilege log 1ha1 enables Objec10r 10 assess and Ihe
4
COur110 knowledgeably de1ermine whelher privilege does or does nOl exis1.

Ye1 Objec10r has made clear 1ha1 he seeks only a narrow class of documents and

does not seek 10 intrude on privilege. As said above, Objector is not interested in legal

analyses; he is not interested in the lawyers' conceptions of cases such as New Times, or

in legal exegeses of the Bankruptcy Act, for example. He seeks only materials on the

underlying intent, or motive, or purpose that caused those legal analyses and exegeses to

be brought into being or resulted from them -- he only seeks materials showing the intent

or motive or purpose to use cash-inlcash-out to benefit SIPC financially, and/or to save

its management -- an intent or motive or purpose that could and likely did arise because

providing securities or using the November 30 th statements instead of cash-inlcash-out

would injure or bankrupt SIPC financially and/or wouJd injure its management.

It is very hard to accept that documentary materiaJs on such purposes number in

the thousands, as proc1mmed by SIPC -- unless every document authored by SIPC, the

Trustee, or their counsel said something to the explicit or implied effect of «We have

researched and prepared this document in order to carry forward the goa] of saving

SIPC's fisc and its management from the harm or destruction that would be wrought by

th
use of the November 30 statements." It is far more probable that most of the supposed

thousands of documents referred to in the Trustee's brief are straight Jegal anaJyses of

4]tis possible that SJPC and the Trustee are in violation of Fed. R. Civ. P. 26(b)(5)(A)(ij) (made applicable
to adversary proceedings in bankruptcy by Fed. R. Bankruptcy P. 7026), which requires them to "describe
the nature of the documents ... in a manner that ... will enable other parties to assess the claim" of
privilege. As said in 6-26 Moore's Federal Practice at § 26.90[1J in a segment authored by the esteemed
former Federal trial judge and now 5 th Circuit appellate judge Patrick E. Higginbotham, SIPC and the
Trustee must provide sufficient information to "enable other parties to assess the applicabmty of the
privilege or protection." 6 James WID. Moore et al., Moore's Federal Practice § 26.90 (3d. ed. 2009). As
further discussed, irifra, they have not done so here.

9
--61--
 problems. But SlPC and the Trustee llave never evinced, either in conference witll

Objector Or in their briefs, the slightest desire to reach an accord under which they would

not have to produce documents that are straight legal analyses, and instead would

produce only documents which evince intent to use cash-inJcash-out to benefit S]PC -- to

the injury ofMadoffs victims, whom Congress wished to protect. SlPC and the Trustee

evince no wish to narrow what they consider overbreadth in the document requests or to

confine discovery to unprivileged documents. Rather, their only goal appears to be to

5
prevent any and aJJ discovery of anytmng.

At this point in time, one cannot know whether, but neither can one overlook the

possibiEty that, the desire of SlPC and the Trustee to avoid discovery stems from

knowledge that the kind of documents sought here do in fact exist and would prove

disastrous to their cause if disclosed. Better, then, to claim overbreath and across the

board privilege: let those be the grounds of battle lest narrowing, or a privilege log, lead

to the disclosure of injurious documents. One equally cannot at this point disregard the

possibility that the very failure of S]PC and the Trustee to deny the existence of the

damaging documents is itself revelatory. After aJJ, if there are no documents expJicitly or

implicitly saying that a desire to save SIPC and its management was the reason for

switcmng to cash-inlcash-out, why not say so? It is commonplace to answer djscovery

requests by saying that the recipient has no documents responsive to the request, where

tllls is true. (Some even say it where it isn't.) And it couJd only be helpfuJ, not hannful,

to SIPC and the Trustee to say, jf they truthfully can, that the question of saving SIPC

5 They do not, of course, wish to produce documents with privileged materials redacted if a document were
to contain both privileged and unprivileged materials, a kind of combination of materials wbjch sometimes
occurs. Rather than redact privileged materials, they wish to produce nothing.

10 --62--
 and i1s management from haml or cri1icism did not play any role in 1he decision to use

casl1-inJcash-ou1. Yetlhey haven't said this.

With regard to privilege, moreover, SJPC and the Trustee, as indicated, provide as

little information as possible relating to the attorney-client, worl< product and joint

defense privileges. In particular, they ask the Court 10 grant their requested order without

suppJying a privilege J to enable Objector 10 assess aIJdt~~_CoUr1 to detennjne what

might in fact be privileged and what might not be. Jt is very rare for a Court to preclude

6
discovery on the ground of privilege without a priviJege Jog being provided. SJPC and

6 ln Horace Mann 1ns. Co. v. Nationwide Mut. 1ns. Co., 240 F .R.D. 44, 46-47 (D. COM. 2007), the court
said:

They are, or should be, aware that 'the burden is on a party claiming the protection of a privjJege
to establish those facts that are the essential elements of the priviJeged relationship.' von Bulow v.
von Bulow, 8J J F.2d 136, J44 (2d Cir.1987) (quoting 1n re Grand Jury Subpoena DId. January 4,
1984,750 F.2d 223, 224 (2d Cir.J984».

'ThaI burden cannot be met by mere concJusory or ipse dixit assertions in unsworn m01ion papers
authored by attorneys.' OneBeacon ins. Co. v. Forman in/'I, Ltd., No. 04 Civ. 227J(RWS), 2006
WL 377]OJO, at *4 (S.D-N.Y. Dec.15, 2006). An essential step in meeting the burden of
establishing the existence of a priviJege or an immunity from discovery is the production of an
adequately detailed priviJege log 'sufficient to enable the demanding party to contest the claim.'
Fed.R.Civ.P. 45(d)(2)(A); in re Application/or Subpoena to Michaell. Kroll, 224 F.R.D. 326, 328
(En.N.Y. DcL27, 2004) ....

An invocation of a claim of privilege without producing an accompanymg priviJege Jog can be an

unfair discovery tactic that increases delay in the resolution of lawsuits, fosters excessive motion
practice, increases the costs of Jjtigation, and greatly increases the work of the court ....

lf a party is clairnmg privilege, a full privilege log must be supp]jed along with the objection or
within a reasonable time thereafter. Jd A party failing to produce a priviJege log fails to perfect its
claim of privilege and, therefore, may not rely upon it to forestall discovery. Ruran v. Beth EI
Temple 0/ W. Hartford, inc., 226 F.R.D- 165, ] 68-69 (D.Conn.2005); accord Chase Manhattan
Bank, N.A. v. Turner & Newall, PLC, 964 F.2d ]59, ]66 (2d Cir.J992); Animal Legal Dif. Fund,
lnc. v. Dep'l 0/ the Air Force, 44 F.Supp.2d 295, 303 (D.D.C.J999); OneBeacon, 2006 WL
377]0]0, at *4.

Also, it is said in Moore's Federal Practice, in the segment written by Judge Higginbotham, supra, at §
26.105[2][a), "the courts seldom order that discovery not be taken at all {Footnote omitted.J Instead,
discovery is expected to go forward, with the parties asserting their objections to particular matters during
the course of discovery." Judge Higginbotham also srud, at § 26.90[2J, that a privilege Jog -- whkh is
almost always required -- must give "sufficient detan to pennit the court to detennine whether each
document or communication is potentially protected from disclosure." Here, however, SlPC and the

]]
--63--
 the Trustee seek this unusual order, however, strictly on their own unsupP0r1ed assertions

that one or another kind of privilege is applicable. Plus they tel] us il would just be too

much work for them [0 go through documents 10 compile a Jog .. il would be just 100

much work for them, with their armies of lawyers, to compile a privilege log as virtually

all parties to all cases are required to do when claiming privilege. 7

-"_ ....................'-'.......e......v. e.n Cl.P.P]i~:Sjl1.tll~.c:C!~~()Ll11.CiTlY<:l oc urn en ts of

enormous relevance to the question whether the intent or motive or purpose of SJPC and

the Trustee in using cash-inJcash·out was to save SJPC's fisc and management despite the

effect on victims whom Congress intended to protect. The fact that one is a lawyer does

not mean he always acts as a lawyer. There are many instances when a person with a

legal degree acts as a businessman or an executive official or in some other non legal

capacity. Discovery of documents can be had and depositions taken in such

circumstances. s (Otherwise, there could never be discovery of documents when a person

sues a law firm or a law school, since almost everyone connected with such organizations

is a Jawyer and every document was created, sent, received, or passed on by a lawyer.)

Here there can be no question that persons such as Mr. Picard and Mr. Harbeck

are respectively acting as Trustee and as President of SIPe, not as lawyers. Objector

Trustee provide no logs doing this,' but instead, as said in text infra, offer only their own, whol1y
unsupported assertions.

7 As a fonner antitrust litigator who has been in cases involving literally mi11ions of pages of documents
sought in discovery, Objector can only say that the claim of SIPC and the Trustee that creating a privilege
log involving too much work seems the ultimate in chutzpah. This is only the more true when one
considers the narrowness of what is being sought in discovery and how much of what SIPC and the Trustee
claim is being sought is in fact not being sought.

8See, e.g., in re Grand Jury Proceedings in re Browning Arms Co., 528 F.2d 1301, 1303 (8 th CiT. 1976);
NXlVM Corp. v. O'Hara, 241 F.R.D. ]09, 126 (N.D.N.Y. 2007); Hardy v. New York News, Inc., 114
F.R.D. 633, 644 (S.D.N.Y. 1987); Mission National Insurance Co. v. Lilly, 112 F.R.D. 160, 163 (D. Minn.
1986).

--64--
12
 does not even understand this to be denied by S]PC and the Trustee. And many

documents relating 10 the underlying intent llere are very likely to have been sent by one

of these to the other. Not to mention that depositions would plumb the extent to which

they discussed with each other -- as Trustee and as President, not as lawyers -- the

desirabiJity or need of protecting SIPC or its management by using cash-inlcash-out

th
instead of providing securities or using the November 30 statements. The matter could

also have been discussed by them -- again as Trustee and as President of SIPe, not as

lawyers -- with members of SIPC's Board of Directors. They could have discussed it,

individual1y or together, as Trustee and President, with financial analysts who would

advise on SIPC's financial state if securities were provided to victims or the November
th
30 statements were used; with members of the brokerage community to :find out what

the reaction would be if securities were provided or the November 30 th statements were

used, and the brokerage community had to be assessed to cover the costs; with banks to

Jearn the extent to which lines of credit might be obtainable to cover the costs; with

experts on (or in) Congress to learn what Congressional reaction to SIPC would likely be

if money had to be sought from Congress. None of these discussions would be

privileged.

But a]] of these possibilities, in wmch no privileges would apply, are concealed by

wholesale claims ofprivilege that are made without providing a privilege log.

Also concealed by the failqre to provide a log is the extent to which individual

lawyers within SIPC, or within the Trustee's law firm, might also have been acting as a

"businessman" rather than in the capacity of a lawyer when making the S3D1e inquiries or

assessments for the S3D1e purposes. Some of the highest ranking people in SIPC are

13
--65--
 lawyers (e.g., Harbeck and Wang), close associales oflhe Trustee in Baker, HOsletler are

lawyers, and il simply is nol credible, just as it would not be credible in cases against law

firms or law schools, to asseJ1 that every single thing these people in SlPC and Baker &

Hostetler have done in connection with the Madoff matter is legal rather than business in

nature. But the truth on these matlers is concealed by the failure to provide privilege logs

.~nd bylllereglJ~stt()ll~\lea]]clj~~()\I~~y denied without logs, on th~J)a.si?oflInsuppor1ed

generalized assertions made by SlPC and the Truslee. 9 ]0

3. Conclusion.

Under American law, the intent or motive or purpose underlying an action makes

all the difference in determining the action's legality or illegality. It is not the law that, if

lawyers can invent legitimate sounding reasons for a private or governmental act, the act

is therefore legal. The underlying intent, motive or purpose must also be proper.

Discovery to detennine the underlying intent or motive or purpose for choosjng cash-

in/cash-out is therefore necessary here, as elsewhere.

9 There are other points too that are hardly self evident with regard to SIPC's and the Trustee's unsupported

claims of privilege. For example, it is claimed that documents were created in anticipation ofIitigation. All
of them? Every one of them, going back to, say, December 2008 or early January 2009 when Etigation was
on no one's mind? Also, what are the community of interests shared by SIPC and the Trustee? The
Trustee is appointed by the bankruptcy judge and represents the estate, while SIPC is responsible to itself.
That SIPC Trustees make their Jiving by pleasing SIPC, domg what it wants, and therefore continuously
being chosen by it to be Trustees is not the necessary community of interest.

lOThe desire to have an order denying all discovery granted in order to spare S]PC and the Trustee the work
of compiling privilege logs is also very ironic in view of the exceptional workload the Trustee has put on
others by virtue of recent subpoenas that make extraordinarily broad and time consuming demands for
documents. Some of these subpoenas have been provided to Objector. Merely descDoing the materials
demanded by them would take excessive space. Suffice to say that the subpoenas rival document requests
in antitrust cases. The Trustee is not stickling at placing huge burdens of work on elderly victims who have
received subpoenas, but is unwilling to have his army oflawyers even prepare a privilege log.

--66--
14
 As well, tlle remainder of the reasons put fortll by SlPC and the Trustee 10 ev::]de

all need to produce documents or even to file objections and a privilege log are

insufficient to achieve this highly unusual result.

For the foregoing reasons the motions for protective orders denying discovery

must be denied_

_RespeclfuJlj'spbmilled,_

/ f.'-
L'3wrence .- _)<1 elvel
J I -
JVlassachlljs,ens School of Law
/500 Fedef~d Street
fAndovef", MA 018] 0
Tel: (978) 68] -0800
Fax: (978) 68] -6330
Email: Velvel@mslaw_edu

Dated: November 1],2009

R:\My FiJ es\M adofi\ResponseObjectoLProtectiveOrders_doc

--67--
]5
EX IBIT 1

--68--
 lJN}TED STATES BANKRUPTCY COURT
SOUTHEHN D1STRJCT OF NEvV YORK

)
]n re: ) S]PA L]QU]DAT]ON
) no. 08-0] 789 (BRL)
BERNARD L. MADOFF ]NVESTMENT )
SECURJT]ES LLC, )
)
Debtor. )
)

NOTInCATION TO THE COURT OF

REQUEST FOR PRODUCTION OF DOCUMENTS

Objector Lawrence R. Velvel is takjng the unusual step of providing a brief

notification to the COUT1 of the filing of a shOri document request.] Velvel is doing so

because of the circumstances existing in thjs case -- a briefing and argument schedule has

. recently been established on the vital issue of net equity, with the briefing to begin two

weeks from now, and appeals by one side or the other likely to be taken aJ] the way to the

Supreme Court. Nonnally, of course, one would simply file the document request and,

when its recipients object to it, would then file a motion to compeL Here the recipients of

the request, the SIPC Trustee Jrving Picard and SJPC itself, are certain to object to the

request. And, while a motion to compel wi]] fo]]ow, it seemed wise, because of the

compressed amount of time avaiJabJe on the net equjty issue, to provjde a brief

notification to the Court of the request and the fundamental reasons for it.

The request seeks documents relating to whether S]PC and the Trustee, to any

extent, decided to use the cash-inJcash-out method to detennine nel equity in order to

advance or save SIPe's economic position. There already is evidence of this possibility

J Objector's claim has been designated by the Trustee as "Combined Claim" numbers 10963 and] ] 245.

--69--
 because SJPCs PresidenL Slepllen lJaJbecJc lesliDed in a prior case - . lD the New Times

case - - lha1 viclims would receive the full value of Iheir purpoJled securiljes posllions

even if the securities had never been boug111 for l11e victim, and SJPC's Genera] Counsel,

Josephine Wang, is reponed to have publicly assened exactly the same posilion in mid

December 2008, saying lhal SJPC would have to purchase securities which Madon's

slalemenls showed that a cuslomer owned even if lhe securilies had not in fact been

purchased previously. Yet, when SJPC began 10 beller undersland the full scope of lhe

huge amounts lhal il would owe viclims under lhis lradilional posilion if lhe November

30'h SlalemenlS were used 10 determine nel equity, SJPC and lhe T ruslee changed their

lune and began 10 asserl 111al cash-inJcash-oul, no! the November 30'h slalemenls, were

lhe measure of nel equilY.

In addition, il seems obvious lhat using olher melhods than cash-infcash-oul to

determine nel equilY (e.g., use of the November 30'h stalements) would result in SJPC

having to payout sums of money so large lhal lhey are in aJJ likelihood far more than il

possesses. This would require SJPC 10 have 10 request more money from Congress, 10

assess the investmenl industry, to draw down Jines of credil, and/or to take other

nonstandard sleps to raJse the needed momes (and avoid bankruptcy). Such

consequences, of course, aJmos1 sureJy were deeply unwan1ed, and cash-in/cash-ou1

could 10gicaJly have been adop1ed - - is likely 10 have 10gical1y been adop1ed - - to avoid

lh
the consequences once i1 was realized that use of the November 30 s1a1ements would

bring them on. This is only 1he mOTe probable because the consequences of using the

November 30 th statements were so dire that they would probably have required the

replacement of curren1 management, which had failed to foresee and guard agrunst the

--70--
2
 consequences and would therefore lose J paying sever;)] 10 many hundreds oj

lhousands of dolJars per year.

]n sum: Ihe question is whelher a 10 save S]PCs economic posilion, and

conceivabJy 1he jobs of managemeDl, pJayed any roJe m 1he decJsion 10 use cash-jnJcash-

out ra1her 1han 1he slandard me1hod, and 10 do so even though use of Ihe cash-inJcash-ou1

method wouJd, for lhe benefil of SJPC, resull in enormous hardship 10 vic1imized

jnveslors whom il was Congress' purpose 10 heJp_ (Congress' inlent, one nOles, was 10

help injured inveslors, nol 10 help S]PC.) If a desire 10 aid or save lhe economic posilion

of SlPC, and conceivably the jobs of its managemeDl, played a role in lhe decision to use

cash-inJcash-oul, lhen lbis would make such use entirely inapproprime in this case. Jl

wouJd do so, moreover, even jf one could envision extraordinarily unusual cjycumstances

when cash-in, cash-out might otherwise be proper. 2 For even if cash-jnJcash-out could be

proper in the appropriate circumstances, it cannot be used to benefil or save the economic

posjtion of SlPC, much Jess to benefit or save SJPC at the expense of investors -- whom

Congress iDlended to be helped. ]f B desire to aid or save the economic position of SlPC

(or its management) played a role here in the decision to use cash-jnlcash-out, that should

be the end of the quest jon of whether it might have been JawfuJ to use cash-inJcash-ou1.

On the other hand, jf such a desire played no roJe in the decision to use cash-

inlcash-out, then the Trustee and SlPC have nothing to fear from the requested discovery.

For the documents would show that the improper purpose under discussion played no roJe

in the decision to use cash-inlcash-out, and the question of the proper method of

:z E.g., circumstances where a fraud is exposed after only one month, no interest or profit has yet been
credited to investors, nO statements have been received by them, some of them withdrew part of their
money during the one month that the fraud was in existence and cash-inlcash-out js not used to benefit or
save SlPC or its management. In such a case, cash-:inlcash-out would seem appropriate.

--71--
3
 delerrnining nel egully m 1Ile I'v1adoff could decided on olher grounds
. Jy.-1
enlne

ln arguing in a memorandum of AugUSl 27'h lhal the nel equity quesljon should be

decided nOI in a case broughl by only a few viclims, bUI rather m a proceeding lhal

includes all viclims, the Truslee receDl]y said, "Moreover, m resolving the Nel EquilY

DispU1e, the (oun as well as alJ the panies wouJd benefil from the submissi On of a full

and comp/ele record. Rep/y To P/ainrifjs' Opposition To Defendant Irving H. Picard,

TrUSTee's, Molion To Dismiss Complaint, Or In The AlTernaTive To STrike, p. 6 (emphasis

added). Though the Truslee doubllessJy did nOl think lhal, as would occur in a more

slandard case, "a fuJJ and complete record" wouJd mcJude informalion, on h]s and S]PC's

motive, thai is obtained in discovery, his own slatemenl nonelheJess is applicabJe here.

For the record here cannol be "fuJ] and complele" wilhom discovery on the potentia]]y

dispositive queslion of the motives underlymg the use of cash-inJcash-ou1. Such

mformatjon is nol only vital in thjs Coun, but wjJJ be imponanl in, and to, appe]]ale

tribunals.

Also, in an order dated September 10, 2009 establishing that there would be one

overall procedure for alJ 10 participate in with regard to the question of net equity,

(Memorandum Decision And Order Granting Trustee's Motion To Dismiss Plaintiffs'

Complaint): this Court said, when speaking of the benefits of having aJJ victims

participate in the procedure rather than just a few, that thls "wjJJ provide everyone

J That SlPC and the Trustee would have nothing to fear from the documents if they were 10 show that the
improper purpose under discussion played no role in the decision to use cash-inlcash-out, makes one
wonder why SJPC and the Trustee would object to the requested production, whkh would benefit them, at
least to the extent of eliminating a dispositive point against them. One understands, however. that
wholesale objections to any and all discovery. no matter how warranted the discovery may be, is the way
the "game has been played" jn "big time litigation" for at least 45 to 50 years.

4
 ved W11]1 the benellls from a submission of a comprehensive and camplelE record on

I}m Issue." (ld 31 p. J3.) There cannol be a "comprehensive and complete record on Ihis

issue: of nel equily wilhoUl discovery of informalion on why SJPC and the ee

decided 10 use cash-inlcash-oul to de1ermjne nel equily, includjng whelher a reason for

using i1 was 10 save the economic position of SJPC and, possibly, its managemem.

Respectfully submilled,

/ ..- I
a "nee R. Velvel
/~a1sachusells School of Law
}'Sod
! J
Federal Street
. Andover,MA 01810
Tel: (978) 68] -0800
Fax: (978) 68J -6330
Emajl: ye]ve]@ms]aw.edu

Dated: September 29,2009

R:\My Fijes\MadoffiNo\ificalionRequestForDocumen15.doc

--73--
5
EXHI IT 2

--74--
 Page J of 1

Lawrence Velvel

From: Lawrence Velvel [velvel@mslaw.edu]

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

Dear Mr. Sheehan:

This will confirm that] orally agreed on today's phone call that; rather than produce, object, or
file a profecfiVeofderoi16:f"pD6:ft6 Novembef3 rd "wjthregard 10 my request for production of
documents, you can have until November] oth to do so. ] understand that your filing wi]l in fact be of a
protective order taking the position that, for whatever reasons you choose to the Trustee can
never be required to produce the requested documents. ] also understand that you are required to and
will set up a conference cal] with Judge Lifland to discuss with him, and obtain his approval for, the
procedure you request.

Please either confirm that what 1 have said in this emaj] is correct, or teJ] me what] have said
that may be mistaken.

Thank you.

Sincerely,

Lawrence R. Velve]

cc: Marc Hirschfield

EXHIBIT 3

--76--
 Dear Mr Page 1 of2

Lawrence Velvel

From: Lawrence Velvel [velvel@msJaw.edu]

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

Dear Mr. Hirschfield:

Having had an opportunity to thinJ< more about your proposal, I have some thoughts that should
..... be selhefQIey_oll.

11 seems to me that a schedule should be arranged so that, jf Judge Lifland rules that there shouJd
be discovery, the discovery can be had and briefed in time to be part of the February 2nd argument? (Do
I correctly remember you affirming this, or is my reco1Jection incorrect?) This does not seem to me to
be possible, however, under your proposed schedule. For it would seem that, under your proposed
scheduJe, you wiJl be filing objections to my dlscovery requests only after the Judge rules there should
be discovery (ifhe were in fact to rule that way). J would then have to fiJe a second motion to compel,
there might have 10 be an argument and decision, that decision would probably not come until January
sometime, only after ThaT would documents be produced, and still later would there be depositions. The
bot1om Jine is that information Jearned in discovery could not be used assuming, of course, that it is
usable -- until welJ after the February 2 nd 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, jf desired, althe February 2 nd hearing. The proposed
schedule is this:

]. The Trustee and SJPC would file their protective order and their objections by
November] Oth.

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

3. The Trustee and SlPC wilJ file their replies by December] st.

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

5. If the Court allows discovery, documents wil1 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.

l1mow that you do not wish to file objections before Judge Lifland rules on your request for a
protective order because you feel, Mr. Sheehan has said on the phone, that objections presume a right to
discovery, but you deny any such right can exist here. Nonetheless, 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 simuHaneously, 1 would not argue that the filing of objections is an
implicit admission that the position taken in yOUT protective order -- that there can be no discovery here -
- is incorrect. I would make such argument for other reasons only.
Dear Mr Page 2 of 2

Please Je1 me know if YOll are willing 10 10 1he schedule] have proposed.

Sincerely,

Larry VeJveJ

cc: Christopher 1-:L LaRosa

Amy E. Vanderwal
EXHIBIT 4

--79--
 Page 1 of 1

Lawrence Velvel

From: Lawrence Velvel [velvel@mslawedu)

Sent: Wednesday, October 28,2009957 AM
To: 'mhirschfield@bakerlaw.com'
Cc: 'clarosa@sipc.org'; 'Vanderwal, Amy E.'
Attachments: Clerkltr.RequestProdOocs.Second.doc; RequestForProductionofDocuments.1 O.28.09.doc

Dear Mr. Hirschfield:

1 have enclosed a second document request. h seeks documents relating to the reasons for or
against satisfying investors' claims by acquiring and providing investors with the securities shown in
their statements of November 30,2008.

As you surely are aware, SlPA -- a name which, like SlPC, 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 net equity question by SlPC and the Trustee, and learning it from their own briefs,
that 1 learned that SlPC 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 SlPC 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, 1 appreciate the fact that the recent briefs made this clear to
those of us who are novices with regard to SlPC.

Having now become aware from their recent briefs that S]PC 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, 1 am
seeking discovery on why it was not done here. No doubt your forthcoming motions for a protective
order wi11 implicitly cover this ma11er, since your position, as ] understand it, is that no discovery can be
had on any question. 1t would be perfectly understandable, 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 Velve]

cc: Christopher H. LaRosa

Amy E. Vanderwal

--80--
Lawrence R. Velvel B Nov. 24, 2009
M assachuset1s School of Law Hearing Time: 10:00 a.m.
500 Federal Slreel
Andover, MA O} 8 J 0
Tel: (978) 68J-0800
Fax: (978) 68} 0
Email: ~~~=:==c.=:.

UNJTED STATES BANKRUPTCY COURT

SOUIHERNDJSTIDCTOFNEW-YORK--------

)
In re: ) S]PA LIQUIDATION
) No. 08-01789 (BRL)
BERNARD L. MADOFF INVESTMENT )
SECURITJES LLC, )
)
Debtor. )

CERTIFICATE OF SERVICE

1 hereby certify that J have caused the foregoing Response of Objector, Lawrence
R. Ve]vel, to the Motions of SJPC and the Trustee for Protective Orders Denying
Discovery, to be served on persons listed below by first c]ass mai], postage prepajd, on
this 1]th day of November, 2009. .

!
/
I

J osepbine Wang, Esq. Jonathan M. Landers, Esq.

Securities Investor Protection Corp. MilbergLLP
805 15 th Street, N.W., Suite 800 One Pennsylvania Plaza
Washington, DC 20005-2207 New York, NY 10119

Stephen P. Harbeck Brian NevjJ1e, Esq.

President Lax & Neville LLP
Securities Investor Protection Corp. ]412 Broadway, Suite 1407
805 15 th Street, N.W., Suite 800 New York, NY 10018
Washington, DC 20005-2207

--81--
1
Christopher LaRosa, Esq_
Securities Jnveslor Protection Corp_
80S 15 til Street, N. W., Sujte 800
Washjngton, DC 20005-2207

David J_ Sheehan, Esq.

Baker & Hostetler, LLP
45 Rockefeller Plaza
New York, NY 1OJ]]

Marc E. Hirschfield, Esq_

David J. Sheehan, Esq.
Baker & Hostetler, LLP
45 Rockefel]er Plaza
New York, NY ]0]]]

Helen Chajtman, Esq.

Phmips Nizer, LLP
666 Fifth Avenue
New York, NY 10]03

--82--
2