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five appointed by the President and confirmed by the Senate, and two appointed respectively by the Federal Reserve Board and the Secretary of the Treasury from among their employees. SIPA section 78ccc(c).

Most broker-dealers are required to be SIPC members and to pay assessments to SIPC. SIPA sections 78ccc(a)(2), 78ddd(c). If SIPC's funds should be inadequate to carry out its purposes, the Act authorizes a loan of up to one billion dollars from the United States Treasury. SIPA section 78ddd(f)-(h).

Although SIPC is vested with considerable independent responsibility (discussed below), it is subject to supervision by the Congress, the President and the Commission. It must make annual reports of its operations to the Commission which transmits them to the President and the Congress, with such comments as it deems appropriate. SIPA section 78ggg(cX2). Commission exercises substantial

The

supervision over SIPC with respect to SIPC's responsibilities in numerous areas such as the protection of public customers, SIPC's bylaws and rules, and SIPC's funds and borrowings from the United States Treasury. SIPA sections 78ccc(e), 78ddd(d)-(h), 78eee(a)(1) and 78ggg(b). In accordance with this broad oversight function, the statute also authorizes the Commission to appear and participate as a party in any SIPA liquidation proceeding. SIPA section 78eee(c).

Because of its public character. SIPC is specifically exempt from all federal, state or local taxes except ad valorem taxes on real and tangible personal property (except cash and securities). SIPA section 78kkk(e).

SIPA is an integral part of the regulatory scheme of the federal securities laws, being in part an exercise by Congress of its power to regulate commerce. Exchange National Bank of Chicago v. Wyatt, 517 F. 2d 453 (2d Cir. 1975). Among other things, SIPC is authorized (i) to adopt bylaws and rules [SIPA section 78ccc(e)): (ii) to regulate assessments imposed on its members (SIPA section 78ddd(c)(2) and (d)];

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and (iii) to exercise certain other authority with respect to its members and the self-regulatory organizations, including taking action against members which are delinquent in the payment of assessments. SIPA sections 78hhh, 78iii, 78jjj(a) and 78kkk(d).

Even SIPC's authority to initiate a liquidation proceeding is an extension of regulation under the federal securities laws. Thus, SIPA authorizes liquidation of a SIPC member which is not in compliance with applicable requirements under the Exchange Act, or rules of the Commission or a self-regulatory organization with respect to financial responsibility or hypothecation of customers' securities. SIPA section 78eee(b)(1)(C). It is even permitted if a member cannot make the computations necessary to establish such compliance. SIPA section 78eee(bX1XD). If these or other specified conditions exist (e.g., insolvency), and if SIPC determines that a member "has failed or is in danger of failing to meet its obligations to customers", SIPC may commence a liquidation proceeding. Whether and when it does depends upon its exercise of the discretion granted to it. SIPC v. Barbour, supra. SIPC Liquidation Proceeding

As noted earlier. "Congress' primary purpose in enacting the SIPA and creating the SIPC was, of course, the protection of investors." SIPC v. Barbour, supra, 421 U.S. at 421. Trustees, designated by SIPC, are appointed by federal district courts to liquidate failing SIPC member broker-dealers and are statutorily empowered to make many significant decisions, including returning customer property and selling or transferring customer accounts. SIPA sections 78eee(b)(3) and fff-2(f). A SIPC trustee has the same powers and title with respect to the debtor and the debtor's property as does a trustee in bankruptcy. SIPA contemplates that customers' claims will be satisfied to the maximum extent possible from the assets held by the debtor broker-dealer. SIPC's funds supplement these assets within the limits and in the

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manner provided by SIPA. The liquidation proceeding involves not only the claims of customers, but also the claims of general creditors. Moreover, SIPA directs the SIPC trustee to enforce SIPC's subrogation rights. SIPA section 78fff(a)(3).

The trustee is thus empowered to bring actions "to further the congressionally-mandated purpose of protecting the investors, who placed their assets with (the failed broker-dealer), and the SIPC, which insured those investors." In re Application of Executive Securities Corporation, 702 F.2d 406, 410 (2d Cir. 1983). The Second Circuit added: "Although not formally part of the federal government, the SIPC and its trustees vindicate important public interests." Id.

The Use of RICO by SIPC and its Trustees

To date RICO has been used by SIPC and its trustees on six occasions. SIPC V. Vigman, Case No. CV-83-4742-AWT (TxXC.D. Cal.): SIPC v. Poirier, No. 85-1867-RE (D.Or.): Gold v. Power Conversion Inc.. 78 Civ. 4483 (VLB)S.D.N.Y.): Mishkin v. Kenney & Branisel Inc., 85 Civ. 3791 (EW) (S.D.N.Y.); Richards v. Stephens, 86 Civ. 2150 (JES) (S.D.N.Y.): Hill v. Bevill (In re Bevill, Bresler & Schulman, Inc.), Civil Action No. 85-2224 (DRD), Adversary No. 85-0180 (SIPA) (D.N.J.). In each of those instances, RICO was a necessary tool to redress the wrongs for which SIPC and its trustees seek reimbursement. I will briefly discuss the Vigman action.

SIPC v. Vigman is an action wherein SIPC and the trustees for two broker-dealers in liquidation under SIPA. Joseph Sebag, Inc. ("Sebag") and First State Securities Corp. ("FSSC"), alleged numerous violations of the antifraud provisions of the securities laws and of RICO by various individuals, corporate entities related to them, and six issuers of securities in which the two broker-dealers made markets. The Vigman complaint alleges that defendants, through various acts, transactions and practices, using the means and instrumentalities of interstate commerce including the mails, telephone, wires, broker-dealers and the facilities of OTC securities markets,

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carried out an ongoing pattern of concerted activity to manipulate and artificially inflate the prices of various OTC securities.

The complaint alleges that the manipulative scheme began in or about June, 1964 and continued by the associations and acts alleged therein through commencement of the liquidation proceedings of the two failed broker-dealers in July 1981. It was carried out by the concerted actions of issuer corporations, certain of their officers and directors, registered broker-dealers, registered representatives and employees of broker-dealers, securities traders and participating investors.

Eventually, the fraudulent manipulations of certain OTC securities caused

the net capital of Sebag and FSSC to fall below statutorily-required levels, thereby exposing their customers and SIPC to substantial risks. SIPC therefore was statutorily required to commence the liquidation proceedings of Sebag and FSSC under the provisions of SIPA.

SIPC has paid in excess of $11.5 million in the liquidation proceedings of Sebag and FSSC: (a) advancing funds necessary to satisfy customer net equity claims: (b) purchasing securities in the open market to satisfy customer net equity claims; and (c) advancing other costs and expenses of the administration and liquidation of the estates of Sebag and FSSC. SIPC and the trustees for Sebag and FSSC are seeking approximately $50 million in actual damages and approximately $150 million in treble damages in reliance on RICO's treble damages provision.

The Proposed Legislation

SIPC opposes any changes in RICO that would curtail the ability of SIPC or its trustees to use the statute as a basis for dealing with organized criminal conduct aimed at SIPC member broker-dealers or that would limit the ability of SIPC or its trustees to use RICO's treble damages provisions.

SIPC, like the federal corporations that insure savings and demand deposits.

is charged by Congress to protect the public in their investments. SIPC

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should be given the degree of power and ability to utilize RICO that is commensurate with its responsibility to the public. As noted earlier, SIPC has a one billion dollar line of credit with the United States Treasury.

The use of civil RICO actions by SIPC and its trustees is not a threat to the conduct of legitimate business activities. SIPC and its trustees have been selective in their use of RICO, invoking it on only six occasions, involving only nine of the 200 SIPC members for which we have commenced liquidation proceedings. SIPC and its trustees have utilized RICO only to redress the wrongs of organized activities which go far beyond what has been called "garden-variety securities fraud" and result in serious financial harm to the affected broker-dealers, their customers, creditors, and SIPC. Indeed, such activities have the potential for inflicting serious damage on the securities markets themselves.

SIPC and its trustees have a substantial economic and legal interest in using civil RICO actions to deter similar activity, to recoup financial losses to the SIPC Fund and to the broker-dealer's customers and creditors, and to establish significant legal precedents to help limit future illegal activity.

SIPC respectfully requests that any change in RICO not preclude SIPC and its trustees from using RICO, which can be an effective tool in protecting the interests of all those persons involved in the securities markets.

I would like to make one final comment. H.R. 2983, if enacted, will limit retroactively the ability of plaintiffs to recover treble damages in pending RICO actions, unless there is a prior criminal conviction. Section 3(b) of H.R. 2983 proposes that, in any pending action under current section 1964(c) of title 18, United States Code, in which a person would be eligible to recover only under paragraph (2)(B) of section 1964(c) as amended by H.R. 2983, the plaintiff's recovery would be limited to actual damages. H.R. 2983. if enacted, would allow two exceptions: if there had been a jury verdict or court judgment establishing the defendant's liability or if the court determines that such a limitation of recovery would be unjust. SIPC opposes this imposition of a retroactive limitation of treble damages in pending actions under RICO. SIPC and its trustees have relied on this damage recovery provision in bringing the actions noted above; any change should be prospective only.