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Securities Investor Protection Act

The Securities Investor Protection Act (SIPA) was designed to create a new form of liquidation proceeding. SIPA created the Securities Investor Protection Corporation (SIPC), a nonprofit, private membership corporation to which most registered brokers and dealers are required to belong. The SIPC fund constitutes an insurance program. The fund is designed to protect the customers of brokers or dealers subject to SIPA from loss in case of financial failure of the member. The fund is supported by assessments upon its members.

Generally, when a brokerage firm fails, the SIPC will arrange to have the failed brokerage’s accounts transferred to a different securities brokerage firm. If the SIPC is unable to arrange the accounts’ transfer, the failed firm is liquidated. In that case, the SIPC will send investors either certificates for the stock that was lost or a check for the market value of the shares.

Although the Bankruptcy Code provides for a stockbroker liquidation proceeding, it is more likely that a failing brokerage will find itself involved in a SIPA proceeding rather than a Bankruptcy Code liquidation case. Brokerage firms may be liquidated under the Bankruptcy Code if the SIPC does not file an application for a protective decree with the district court or if the district court finds that customers of the brokerage firm are not in need of protection under SIPA.

The essential difference between a liquidation under the Bankruptcy Code and one under SIPA is that under the Bankruptcy Code the trustee is charged with converting securities to cash as quickly as possible and, with the exception of the delivery of customer name securities, making cash distributions to customers of the debtor in satisfaction of their claims. A SIPC trustee is required to distribute securities to customers to the greatest extent practicable in satisfaction of their claims against the debtor. The Bankruptcy Code seeks to protect the filing date value of a customer’s securities account by liquidating all non-customer name securities. SIPA seeks to preserve an investor’s portfolio as it stood on the filing date. Under SIPA, the customer receives securities whenever possible.

The following are the purposes of a SIPA liquidation:

* to deliver customer name securities to or on behalf of customers,

 

* to distribute customer property and otherwise satisfy net equity claims of customers,

 

* to sell or transfer offices and other productive units of the debtor’s business,

 

* to enforce the rights of subrogation, and

 

* to liquidate the business as promptly as possible.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.

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