Bankruptcy Basics :: Securities Investor Protection Act (SIPA) ::


Before 1938, little protection existed for customers of a bankrupt stockbroker unless they could trace cash and securities held by failed stockbrokers. In 1938 Congress enacted section 60(e) of the Bankruptcy Act creating a single and separate fund concept to minimize losses to customers by giving them priority over claims of general creditors. 1898 Bankruptcy Act § 60(e)(2) (repealed). Because the fund was normally inadequate, however, customer losses continued.

Following a period of great expansion in the securities industry during the 1960's, a serious business contraction hit the industry in 1969-1970. This situation led to voluntary liquidations, mergers, receiverships, and bankruptcies of a substantial number of brokerage houses. Annotation, Validity, Construction, and Application of Securities Investor Protection Act of 1970, 23 A.L.R. Fed. 157, 179 (1975). The cash and securities customers that had deposited with these failed firms were dissipated or tied up in lengthy bankruptcy proceedings. In addition to mounting customer losses and the subsequent erosion of investor confidence, the Congress was concerned with a possible "domino effect" involving otherwise solvent brokers that had substantial open transactions with firms that failed.

Congress enacted the SIPA in reaction to this growing concern. The goal was to prevent the failure of more brokerage houses, restore investor confidence in the capital markets, and upgrade the financial responsibility requirements for registered brokers and dealers. Securities Investor Protection Corp. v. Barbour, 421 U.S. 412, 414 (1975). Congress designed the SIPA to apportion responsibility for carrying out the various goals of the legislation to several groups. Among them are the Securities and Exchange Commission (hereinafter referred to as SEC), various securities industry self-regulatory organizations, and the SIPC. The SIPA was designed to create a new form of liquidation proceeding. It is applicable only to member firms and was designed to accomplish the completion of open transactions and the speedy return of most customer property. Id.