15 U.S.C. § 78eee — Protection of customers

(a) Deciding if a broker needs protection If the SEC or a self-regulatory organization (like an exchange) learns that a broker or dealer is in trouble or heading toward trouble, it must tell SIPC right away. If a self-regulatory organization gave that notice, it must also tell the SEC. If a self-regulatory organization has given that notice, and the broker starts winding down its business — either because the self-regulatory organization told it to, or on its own — the self-regulatory organization can help or watch over the broker to protect its customers. Giving that help does not mean the self-regulatory organization takes on any legal duty to customers, other creditors, shareholders, or partners of the broker. It also does not stop SIPC from acting. SIPC itself can file an application in court asking for a "protective decree" — a court order starting the liquidation process — after notifying the SIPC member involved. SIPC cannot do this for a member whose only customers have claims that SIPC's cash advances could never cover. SIPC can only file if it decides two things are true: the member has failed, or is in danger of failing, to meet its duties to customers, and at least one of the conditions listed later in subsection (b)(1) exists. No SIPC member with customers can enter bankruptcy, receivership, or another insolvency proceeding without SIPC's specific consent — except under the special bank-failure rules in Title II of the Dodd-Frank Act. An application filed with the court can be combined with an SEC action, if the SEC agrees, including an SEC request for a temporary receiver. It can also be filed even if a bankruptcy, foreclosure, or similar case is already pending in another court over the same broker or its property. (b) What the court does If SIPC applies for a protective decree, the court must issue one right away if the broker agrees, doesn't fight it, or if the court itself finds any of these: the broker is insolvent or can't pay its debts as they come due; a receiver, trustee, or liquidator has already been appointed for the broker by another court or agency; the broker isn't following the financial or asset-handling rules that apply to it; or the broker can't even calculate whether it's following those rules. If the broker doesn't agree to the order, the court must hold a hearing on it within three business days — or at another time the court sets, depending on urgency. Once someone files for a protective decree, the court handling it gets exclusive control over the broker and all its property everywhere, including property held elsewhere as collateral, and exclusive control over any lawsuit against the trustee. The court also gets the same powers a bankruptcy court would have, plus any extra powers this chapter gives it. While the court is deciding whether to issue the decree, it must pause any other bankruptcy, foreclosure, or similar proceeding against the broker, and any lawsuit against a receiver or trustee already handling the broker's assets — and it must keep that pause going once a trustee is appointed. The court may also pause lawsuits to enforce liens against the broker's property, or other suits against the broker, including shareholder suits that would interfere with the trustee going after former directors or employees — and it may keep that pause going too. The court may pause other kinds of enforcement as well, but it can't take away a valid right to offset debts (except as bankruptcy law allows) or a valid lien or pledge. The court may also appoint a temporary receiver right away. There's an important exception: none of these court orders can stop a creditor from using its contract rights to close out, cancel, or speed up certain financial contracts — securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements, or master netting agreements — or from netting payments under them, or from foreclosing on cash collateral pledged by the broker. But the court's order can still pause the sale or foreclosure of securities collateral, securities sold under a repurchase agreement, or securities lent under a lending agreement. "Contractual right" here includes rights under the rules of clearing organizations, exchanges, and similar bodies, plus rights under common law or normal business practice, whether or not written down. If the court issues the protective decree, it must immediately appoint a trustee to liquidate the broker's business, and a lawyer for that trustee — whoever SIPC picks, at SIPC's sole discretion. The same firm can supply both. SIPC may name itself or one of its own employees as trustee if it decides the broker's debts to ordinary creditors and subordinated lenders total less than $750,000 and there appear to be fewer than 500 customers. Nobody who isn't "disinterested" (defined below) can serve as trustee or the trustee's lawyer, except that the trustee can hire a non-disinterested lawyer for a specific limited purpose, with SIPC's and the court's approval. A trustee must post a bond as bankruptcy law requires, except SIPC and its employees don't have to. Once the court appoints a trustee (and a lawyer), it must immediately transfer the whole liquidation case to the federal bankruptcy court for that district. That court then has all the powers this chapter gives to the court that originally issued the decree. The court must approve reasonable pay and expense reimbursement for the trustee and the trustee's lawyer. SIPC and its employees don't get paid extra for serving as trustee, only reimbursed for real costs. The court can approve pay in installments as the case goes on. Anyone asking to be paid must file an application with the court, following bankruptcy law's format, and send a copy to SIPC. The court sets a hearing and notifies the applicant, trustee, broker, creditors, SIPC, and anyone else the court names — except it doesn't have to notify customers who are already paid in full or creditors unlikely to get anything. SIPC must file its own recommendation on the pay request before the hearing, and can add more afterward. If SIPC will be paying the bill itself, with no real chance of getting the money back, and nobody disputes SIPC's recommended amount, the court must award exactly what SIPC recommended. In other cases, the court weighs the value of the work done and leans heavily on SIPC's recommendation. The usual bankruptcy-law limits on splitting compensation apply. All approved pay counts as a cost of running the estate; if the broker's own estate can't cover it, SIPC must advance the money. A person or firm doesn't count as "disinterested" if any of these are true: they're a creditor (including a customer), stockholder, or partner of the broker; they underwrote any of the broker's securities, now or within the past five years; they were a director, partner, officer, employee, or lawyer for the broker or its underwriter within the past two years; or they have some other connection to the broker or its underwriter that gives them an interest working against creditors or stockholders. SIPC itself always counts as disinterested, and so does an SIPC employee who would otherwise qualify. The court must hold a hearing on disinterestedness soon after the trustee is appointed, with at least ten days' mailed notice to anyone who looks like they were a customer within the past year, plus creditors, stockholders, SIPC, and anyone else the court names; the court can also require notice by newspaper. At that hearing, or later on request, the court hears objections to keeping a trustee or lawyer who isn't disinterested. (c) The SEC can join in The SEC can, on its own, file notice that it's appearing in any proceeding under this chapter, and from then on act as a full party. (d) SIPC is automatically a party SIPC counts as a party with a right to be heard on everything that comes up in a liquidation proceeding — as if it had formally asked the court to let it join, and the court had said yes.