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Role of the District Court
15 U.S.C. § 78eee(a)(3)(A) provides that the SIPC may file an application for a protective decree with the U.S. district court if the SIPC determines that any member has failed or is in danger of failing to meet obligations to customers and meets one of the four conditions specified in 15 U.S.C. § 78eee(b)(1). This application is filed as a civil case in which the SIPC or the SEC or both are named as plaintiff, and the member securities firm is named as the debtor-defendant. In the event that the SIPC refuses to act under the SIPA, the SEC may apply to the U.S. District Court for the District of Columbia to require the SIPC to discharge its obligations under the SIPA. 15 U.S.C. § 78ggg(b). By contrast, customers of failing broker-dealers do not have an implied right of action under the SIPA to compel the SIPC to exercise its statutory authority for their benefit. Barbour,421 U.S. at 425. Upon the filing of an application, the district court has exclusive jurisdiction of the debtor-defendant and its property.
The institution of a case under the SIPA brings a pending bankruptcy liquidation to a halt. Irrespective of the automatic stay, the SIPC may file an application for a protective decree under SIPA. 11 U.S.C. § 742; 15 U.S.C. § 78aaa et seq. The filing stays all proceedings in the bankruptcy case until the SIPC action is completed. Id. Pending issuance of a protective decree, the district court:
15 U.S.C. § 78eee(b)(2)(B)(I - iv) (emphasis added).
In addition, upon the filing of a SIPC application, 11 U.S.C. § 362 comes into effect.
The SIPA provides that the district court will issue a protective decree if the debtor consents, the debtor fails to contest the application for a protective decree, or the district court finds that one of the conditions specified in 15 U.S.C. § 78eee(b)(1) exist. If the court issues a protective decree, then the court will appoint a trustee and an attorney for the trustee whom the SIPC, in its sole discretion, specifies. 15 U.S.C. § 78eee(b)(3). Upon the issuance of a protective decree and appointment of a trustee, or a trustee and counsel, the district court will order the removal of the entire liquidation proceeding to the bankruptcy court in the same judicial district. 15 U.S.C. § 78eee(b)(4).