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independent trustee provides an impartial and independent person who will be the focal point for devising and developing the plan that would treat properly and fairly with all interests of creditors and stockholders.

If you do not do that, then this is likely to become the function of an official creditor committee which is likely to dominate the reorganization.

Mr. KLEE. Practically, is that not exactly what happens ?
Mr. GUTHRIE. That is one very unfortunate thing, yes.

Mr. KLEE. What is your position with respect to interim fees, particularly for the debtor's attorney? I think interim fees are allowed in chapter X, but I do not know the extent to which they are allowed chapter XI as a matter of course. What would your recommendation be on that matter, especially if many large cases that ought to be filed under chapter X are filed in chapter XI just to keep the management in possession?

Mr. Levy. The general practice in chapter X is not to give the committee or committee counsel any fees or interim fees at all. They may be paid at the end of the proceedings when their services can be evaluated. But a chapter X trustee has certain duties to perform with which he is charged. It would be a hardship for him to wait 2 or 3 years in order to get paid. But committee counsel's compensation is based on the basis of what benefits he did confer.

Mr. KLEE. My final question relates to the rule 11-15 motion or the old section 328 motion to convert from chapter XI to chapter X. While you have cited statistics to show that this is seldom used, what is the impact of the threat of a rule 11–15 motion in chapter XI?

Mr. LEVY. That is a little bit hard to measure because we cannot guess what the motives may be. I would say to the extent that the possibility of a motion under section 328 or under rule 11-15 has deterred debtors from improperly seeking relief under chapter XI, that is good.

Mr. KLEE. Is it your standard practice to threaten or to talk to the debtor to try to get an alteration of the plan?

Mr. Levy. Well, we have quite a number of chapter XI cases. We try to work with the debtors and try to work out the applicable adjustments so that public investors would not be prejudiced thereby.

I do not like to use the word threat. It is not a threat. We are merely suggesting simply that if we do not reach a compromise we may

be forced into litigation.

Mr. KLEE. Thank you. Vr. Chairman, I have no further questions.

Mr. EDWARDS. Would you provide the committee in due time with your Commission's estimation of how many corporations there might be in the United States with holders of stock from 50 to 500 in number?

Mr. Loovis. I do not think we have any statistics on those that are below the statutory figures. I do not think we can tell you how many are there that have 50 or 100. We would know how many appear be at the level set in the Exchange Act.

Mr. EDWARDS. The Equity Funding case was in chapter X. What was your immediate involvement in that?

Mr. GUTHRIE. I represent the Commission in that case. It is very unusual for someone from the Washington office to operate on the west coast. But, we had a personnel problem and I was the only man around who could do it.

59-591 0-76-pt. 4



So, I personally participated in the Equity Funding case in the beginning. And it went on a good time schedule, but that is the time schedule that a case should proceed on.

Mr. LEVY. It took just 3 years to get this reorganization accomplished. We were very much involved in all of the details. I think that our involvement would best be evaluated by the extensive advisory report that we have written and we have furnished a copy to the committee counsel.

Mr. EDWARDS. Yes, it was a rather remarkable reorganization, and it has considerable promise of being valuable in that respect.

Mr. LEVY. And I might add in that case, practically all of the essential elements in the plan were built upon compromises between rival claims. The statement that chapter X does not permit compromises is just simply wrong.

Mr. EDWARDS. If there are no further questions from the commit. tee or the staff, we thank the Commissioner and his colleagues and we appreciate your continued cooperation with us.

The meeting is adjourned.

(Whereupon, at 11:45 a.m. the subcommittee adjourned subject to the call of the Chair.]




Washington, D.C. The subcommittee met, pursuant to notice, at 9:40 a.m., in room 2226, Rayburn Houss Office Building, Hon. Robert F. Drinan presiding.

Present: Representatives Drinan and Butler.

Also present: Richard B. Levin, assistant counsel; and Kenneth N. Klee, associate counsel.

Mr. Drivax. The committee will come to order.

We welcome you gentlemen. This morning we will continue the hearings on the Bankruptcy Act. The witnesses today will discuss part 3 of chapter V of the two bills, H.R. 31 and H.R. 32. This part of the bills deals with stockbroker bankruptcies.

First we will hear from Mr. Theodore Focht, general counsel of the Securities Investor Protection Corp. Mr. Focht is accompanied by Mr. Wilfred Caron, associate general counsel of SIPC.

Next we will hear from Professor Egon Guttman, professor of law at the American University, Washington College of Law. Mr. Guttman served as a consultant to the Commission on the Bankruptcy Laws in this very complex area.

Finally, representing the National Bankruptcy Conference will be Mr. William Knox of New York.

Gentlemen, if it is a greeable with you, we would like to have each of you give his remarks, and then have you constitute an informal panel for our questions.

Without objection, your prepared statements will be included in the record.

Mr. Focht, if you will proceed first please.
[The prepared statement of Theodore H. Focht follows:]


PROTECTION CORPORATION Mr. Chairman, and members of the Subcommittee, it is a pleasure to appear before you this morning and present the views of the Securities Investor Protection Corporation (“SIPC") on H.R. 31 and H.R. 32 which would make significant amendments to the Bankruptcy Act. In particular this morning I intend to comment on the necessity and desirability of amendments to section 60e of the Bankruptcy Act which governs bankruptcy liquidations of stockbrokerage firms. Before doing that, however, I believe it will be useful to discuss the origins and development of SIPC and just what SIPC does in relation to liquidations of stockbrokers.

As you may recall, SIPC had its origins in the difficult years of 1969–70 when the paper crunch in the securities industries brought on by an unexpectedly high trading volume was followed by the most severe decline in stock prices since the Great Depression. Hundreds of broker/dealers were merged, acquired or simply went out of business. There were some which were unable to meet their obligations to customers and went bankrupt. Public confidence in our securities markets was in jeopardy.

In order to protect customers of failed broker/dealers against financial loss and to restore investor confidence in the securities markets, ('ongress enacted the Securities Investor Protection Act of 1970, which is sometimes referred to as “SIPA". That statute, which was signed into law on December 30, 1970 accomplished these purposes essentially by two methods. First, it enhanced the Securities and Exchange Commission's (“Commission") powers to establish financial responsibility rules for broker/dealers and to impose on the self-regulatory organizations requirements for the financial examination of their members. As this Subcommittee knows the securities industry is self-regulated, subject to the Commission's rulemaking and enforcement powers. Second, SIPA created SIPC which is empowered to commence proceedings for the liquidation of its broker/ dealer members whose financial condition poses the threat of loss to their customers. Congress placed responsibility for its new program on SIPC, the Commission, and the industry's self-regulatory organizations.

SIPC is not an insurance company. It was conceived and created as a private, non-profit, industry-funded membership corporation which would work within the self-regulatory structure. Its seven-member Board of Directors consists of five persons appointed by the President and confirmed by the Senate, and two designated respectively by the Federal Reserve Board and the Secretary of the Treasury from among their officers and employees. Jost broker/dealers are required to be members of SIPC and to pay assessments to SIPC. Excluded from SIPC membership are those broker/dealers whose business as such consists exclusively of (i) the distribution of mutual fund shares, (ii) the sale of variable annuities, (iii) the business of insurance, or (iv) the rendering of investment advisory services to mutual funds or insurance company separate accounts. If SIPC's funds should be inadequate to carry out its purposes. SIPA authorizes a loan of up to one billion dollars from the United States Treasury.

SIPC's authority to commence a liquidation proceeding for the protection of customers is an important segment of the program under SIPA. SIPA authorizes the liquidation of a SIPC Member which is insolvent and in other circumstances including a firm's non-compliance with applicable requirements under the Securities Exchange Act of 1934, or rules of the Commission or a self-regulatory organization, with respect to financial responsibility or hypothecation of customer's securities." It is even permitted if a member cannot make the computations necessary to establish such compliance.?' If these or other specified conditions exist and SIPC determines that a member whas failed or is in danger of failing to meet its obligations to its customers," SIPC may commence a liquidation proceeding." Whether it does depends upon its exercise of the discretion granted it.

SIPC does not itself liquidate its members. It is merely authorized to commence a liquidation proceeding in the appropriate federal district court. The member involved is entitled to contest SIPC's allegations.13 Where the member consents or SIPC prevails, the court is required to appoint persons designed by SIPC to serve as trustee and counsel ” to carry out the purposes of the liquidation pro


1S. Rep. No. 91-1218. 91st Cong., 21 sess. 4 (1970) (“Senate report"), see also H.R. Rep. No. 91-1613. 91st Cong.. 2d sess. 1 (1970) ("House report").

2 Section 7(d). 15 U.S.C. $ 7885g(d). Citations to SIPA as reported in the United States Codo vill not repeat 15 U.S.C.

2 Defined in section 12(1), $ 78111(1). "self-regulatory organizations" currently consist of national securities exchanges and the National Association of Securities Dealers, Inc.

* Sections 3 (a) and 4. $$ 78ccc (a) and 78ddd.
3 Section 3(c). $ 7 Scec(c).
& Sections 3(a) (2) and 4(c), $ 78ccc(a) (2) and 78ddd(c).

* House hearings at 200-201. 219-220.
9 Sections 5(a) (2), 5(b) (1) (A) ; $ $ 7 8eee(a) (2), 78eee (b)(1)(A).
10 111.

13 Senate report at 11: house hearings at 200. 236-237, 331-333: 340–341 ; Senate hearings at 259-260 : SIPC r. Barbour, 421 U.S. 412 1975).

13 Section 5(b)(1)(B) : $78eee (b) (1) (B). 14 Section 5(b) (3) ; $ 7Seee(b) (3).

ceeding which is governed by SIPA and certain provisions of the Bankruptcy Act. Essentially a liquidation proceeding is a custom-made bankruptcy proceeding similar to the usual stockbroker bankruptcy conducted in accordance with section 60e of the Bankruptcy Act.

Before briefly discussing the substance of a liquidation proceeding under SIPA, it seems appropriate to sketch the evolution of proceedings for the liquidation of stockbrokers.

Prior to 1938 the liquidation of a stockbroker in bankruptcy followed the same procedure as any other bankruptcy, thus leaving customers' rights to be determined by often divergent state laws. 18

Under proper circumstances customers of a stockbroker were entitled to the return of their traceable securities and cash which were either in the possession of the bankrupt stockbroker, his pledgee or the person to whom the broker had rehypothecated them." As to such property, their rights were superior to the claims of general creditors. But unless there actually was property belonging to them which they could trace, they had no special rights. To obtain standing other than as general creditors, customers had to identify the original assets, or trace them into other specific funds which came into the trustees' hands. It was not enough to show that the assets were converted by the bankrupt, or indeed that they may have generally enriched the estates.18

Certain inequities in the application of these doctrines prompted the passage of the section 60e of the Bankruptcy Act. While section 60e attempted to clarify the distribution procedures in a stockbroker bankruptcy, to some extent it adhered to the prior policy of priority treatment for customers who had traceable securities on deposit. Section 60e permitted "cash customers", as defined to reclaim securities which were “specifically identifiable" as their property and for which they were not indebted to the stockbroker.20 Otherwise, the section provided that cash, securities or property of similar character which was held for the account of customers, but which was not “specifically identifiable” to particular customers, constituted a “single and separate fund" to be applied in satisfaction of customers' claims (other than for specifically identifiable property) on a pro-rata basis subject only to the burden of certain administrative expenses. 21 Although the priority that this "single and separate class of creditors" enjoyed was only as good as the amount of cash or securities actually available in the stockbroker's estate for the satisfaction of their claims, it was better than under the prior law which left them as general creditors if they were unable to trace their property.“

It was the clear purpose of Congress in adopting SIPA to supplement the single and separate fund by the use of SIPC funds, but not to make basic changes in the concepts underlying section 60e. Thus, although it made some minor clarifying changes. SIPA substantially track the provisions of section 60e.” Both the House and Senate Reports on SIPA state that the Act adopts “terms defined in Section 60e with the meanings there established.

" 24 As has been stated by the United States Court of Appeals for the Third Circuit, SIPA constitutes an “... engraftment of insurance provisions upon the pre-existing section 60(e) bankruptcy provisions applicable to stockbrokers...." 25

A proceeding under SIPA is a liquidation proceeding: reorganization is specifically prohibited. The trustee has the same powers as a trustee in bankruptcy and

191 Section 6(c)(1): $ 78fff(c)(1).
14 3 Collier on Bankruptcu. ' 60.71. at 1157 (14th Ed. 1974).

1. See. 8.9. Duel v. Hollins. 241 V.S. 523 (1916); Gorman 1. Littlefield. 229 U.S. 19 (1913): Richardson v. Shaw. 209 U.S. 365 (1908): 3 Collier, 81 pra, at 60.72. 1159-65.

19 'n re Burne. 32 F 2 189 190 (211 Cir. 1929). 19 11 U.S.C. 960: see hearings on H.R. 6439 before the House Committee on the Judiciary, 75th Cong. Ist sess., at 96: H.R. Rep. No. 1409. 75th Cong.. Ist sess, 31 (1937).

21 11 1'.S.C. 96e14). Property was not "specifirally identifiable" unless it remained in its identical form in the stockbroker's possession until the date of bankruptor, or unless anch propertr or any substitutes therefor or the proceeds thereof were more than four months before bankruptcy or at a time while the stockholder was solvent. allocated to or physically set aside for such customer and remained so allocated or set aside at the date of bankruptcy." 21 11 U.S.C. 96e(2).

3 Collier, supra.' 60.73: at 1170. 27 House report at 10: Senate renort at 11. 24 House report at 9: Senate report at 10.

25 SEC v. Aberdeen Securities ('o., Inc., 480 F. 2d 1121, 1123 (3d Cir.), cert. denied, 414 U.S. 1111 (1973).

2 Sections 6 (a) and (c)(1); $$ 78fff (a) and (c)(1).

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