SECurITIes InVestor ProteCTIon CorporatIon ANNUAL REPORT 2011 SECURITIES INVESTOR PROTECTION CORPORATION 805 FIFTEENTH STREET, N.W., SUITE 800 WASHINGTON, D.C. 20005-2215 (202) 371-8300 FAX (202) 371-6728 WWW.SIPC.ORG April 30, 2012 The Honorable Mary L. Schapiro Chairman Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 Dear Chairman Schapiro: On behalf of the Board of Directors I submit herewith the Forty-first Annual Report of the Securities Investor Protection Corporation pursuant to the provisions of Section 11(c)(2) of the Securities Investor Protection Act of 1970. Respectfully, Sharon Y. Bowen Acting Chair Contents SIPC shall not Message from the Acting Chair 3 be an agency or Overview of SIPC 4 establishment of the United States Directors & Officers 5 Government . SIPC shall be Customer Protection Proceedings 6 a membership Membership and the SIPC Fund 8 corporation the members of Litigation 11 which shall be all Disciplinary and Criminal Actions 15 persons registered as brokers or Financial Statements and Auditor’s Report 16 dealers* . .” — Securities Investor Protection SIPC Fund Comparison 27 Act of 1970 Sec. 3(a)(1)(A) & (2)(A) Appendix 1: Distributions for Accounts of Customers for the 28 Forty-One Years Ended December 31, 2011 * Except those engaged exclusively in the distribution of mutual fund shares, the sale of variable annuities, Appendix 2: Analysis of SIPC Revenues and Expenses for the 29 the insurance business, Five Years Ended December 31, 2011 furnishing investment advice to investment companies or insurance company separate accounts, and those whose Appendix 3: Customer Protection Proceedings 30 principal business is conducted outside the United States. Also excluded are government A: Customer Claims and Distributions Being Processed 30 securities brokers and dealers who are registered as such under section 15C(a)(1)(A) of the Securities Exchange Act B: Customer Claims Satisfied, Litigation Matters Pending 32 of 1934, and persons who are registered as brokers or dealers under section 15(b)(11)(A) of C: Proceedings Completed in 2011 34 the Securities Exchange Act of 1934. D: Summary 36 2 SECURITIES INVESTOR PROTECTION CORPORATION MESSAGE FROM THE ACTIng CHAIR SIPC had no customer protection proceed- tomer exposure. SIPC began each as soon ings for two years until 2011 when MF as it became apparent that the need existed. Global Inc. and WallStreet*E Financial In May, SIPC started a direct payment pro- Services, Inc. were initiated. ceeding to protect an individual whose as- sets were not returned to him from the de- MF Global Inc. funct firm when it closed its doors. Because The liquidation of MF Global Inc. and re- no court proceeding was needed, the satis- lated entities in late October 2011 was the faction of the claim, and the review of other eighth largest bankruptcy, of any kind, in claims, proceeded with dispatch, and the en- history. While the WallStreet*E Financial tire matter should be closed for all purposes Services case demonstrated SIPC’s ability to in 2012. The ability to use a streamlined pro- react in an efficient way to a small case, the cess was beneficial to all concerned. MF Global case demonstrated how quickly and effectively SIPC was able to respond to Stanford Group Company a massive failure. In the Stanford case, SIPC did not initiate SIPC was first notified of the need for a a customer protection proceeding because liquidation proceeding of MF Global Inc. doing so would be inconsistent with the at 5:20 a.m. on the morning of October statutory mandate of SIPC. There is no 31. By that afternoon legal pleadings were doubt that there are numerous victims of drafted, counsel for SIPC initiated a cus- fraud in the Stanford matter, and all of us Sharon Y. Bowen tomer protection proceeding, and the court at SIPC recognize that the Stanford Ponzi placed the firm in liquidation under the scheme is a tragedy for investors that has Securities Investor Protection Act (SIPA) caused a significant hardship. However, Board shortly after the release of this fi- under the control of a court-appointed SIPA protects only the “custody” or “safe- nal Report and the expiration of his term Trustee. Despite chaotic records, and more keeping” function performed by broker- on the SIPC Board. Chairman Johnson than $1.6 billion missing and unavailable age firms, and does not protect investors noted that the SIPC Board will consider for distribution, a highly experienced SIPC against the loss of value of any security, the Task Force’s recommendations after staff and the Trustee made partial distribu- even if that loss was caused by fraud. reviewing all appropriate materials and tions to commodities claimants, within a Notwithstanding the foregoing, SIPC commissioning any further empirical week, and transferred securities positions was notified by the SEC that a SIPA case analysis it deems necessary. to allow securities customers to begin to should be initiated for Stanford. After Chairman Johnson took office at the regain control of some or all of their port- complete and detailed consideration of the height of the financial crisis. As a result of folios shortly thereafter. The Trustee has unique factors presented by the Stanford the Lehman Brothers and Madoff cases, since made additional partial distributions matters, reluctantly, SIPC declined, find- SIPC’s work is in the public eye as never as the case proceeded. ing no statutory basis to do so. The case before. SIPC was fortunate to have his Contrary to commentary that commodi- proceeds in the United States District leadership and guidance during this dra- ties customers would have fared better in a Court in Washington DC. matic time. We thank him and the mem- liquidation regime under the Bankruptcy bers of the Task Force for the critical roles Code rather than SIPA, the SIPA statutory SIPC Modernization Task Force they played in examining and proposing scheme specifically contemplates the possi- Report under Former Chairman ways to modernize SIPC in the vein of its bility of a SIPC member with commodities Orlan Johnson statutory mandate. customers. As such, the provisions of the At the conclusion of his term, Chair- Bankruptcy Code dealing with commodities man Orlan Johnson withdrew from the are indeed being followed by the Trustee. SIPC Board. At his confirmation hear- ing, Chairman Johnson proposed the WallStreet*E Financial first full review of SIPC’s operations Services, Inc. since 1978. That proposal resulted in the WallStreet*E Financial Services is a case SIPC Modernization Task Force, which with exceptionally small customer exposure. has now completed its work. Chairman Sharon Y. Bowen MF Global is a case with substantial cus- Johnson stepped down from the SIPC Acting Chair 2011 ANNUAL REPORT 3 OVerVIEW of SIPC The Securities Investor Protection Corporation (SIPC) had its origins in the difficult years of 1968–70, when the paperwork crunch, brought on by unexpectedly high trading volume, was followed by a very severe decline in stock prices. Hundreds of broker-dealers were merged, acquired or simply went out of business. Some were unable to meet their obligations to customers and went bankrupt. Public confidence in our securities markets was in jeopardy. ongress acted swiftly, passing the Securities control of customers’ and members’ assets to satisfying Investor Protection Act of 1970, 15 U.S.C. § valid customer claims and accounting for the handling C 78aaa et seq. (SIPA). Its purpose is to afford of all assets and liabilities. certain protections against loss to customers result- The resources required to protect customers beyond ing from broker-dealer failure and, thereby, promote those available from the property in the possession of investor confidence in the nation’s securities markets. the trustee for the failed broker-dealer are advanced by Currently, the limits of protection are $500,000 per SIPC. The sources of money for the SIPC Fund are customer except that claims for cash are limited to assessments collected from SIPC members and inter- $250,000 per customer. est on investments in United States Government secu- SIPC is a nonprofit, membership corporation. Its rities. In addition, if the need arises, the SEC has the members are, with some exceptions, all persons regis- authority to lend SIPC up to $2.5 billion, which it, in tered as brokers or dealers under Section 15(b) of the turn, would borrow from the United States Treasury. Securities Exchange Act of 1934 and all persons who __________ are members of a national securities exchange. See the series 100 Rules Identifying Accounts of “separate A board of seven directors determines policies and customers” of SIPC members. governs operations. Five directors are appointed by * Section 3(a)(2)(A) of SIPA excludes: the President of the United States subject to Senate (i) persons whose principal business, in the determination of SIPC, taking into account business of affiliated entities, is conducted approval. Three of the five represent the securities outside the United States and its territories and possessions; industry and two are from the general public. One (ii) persons whose business as a broker or dealer consists director is appointed by the Secretary of the Treasury exclusively of (I) the distribution of shares of registered open end investment companies or unit investment trusts, (I ) the and one by the Federal Reserve Board from among sale of variable annuities, (II ) the business of insurance, or the officers and employees of those organizations. (IV) the business of rendering investment advisory services to one or more registered investment companies or insurance The Chairman and the Vice Chairman are designated company separate accounts; and by the President from the public directors. (iii) persons who are registered as a broker or dealer pursuant to The self-regulatory organizations—the exchanges [15 U.S.C.