House Financial Services Committee Holds Hearing on Amending Securities Investor Protection Act (with Delta Strategy Group Summary) (with Lofchie Comment)
The House Financial Services Committee held a meeting entitled "A Legislative Proposal to Amend the Securities Investor Protection Act" to discuss legislation intended to reaffirm the Securities Investor Protection Corporation's ("SIPC") retail investor objectives by amending provisions of the Securities Investor Protection Act of 1970 ("SIPA").
The bill would, among other things, change the manner in which a customer's net equity is calculated and allow for a trustee to favor retail customers over institutional customers in the bankruptcy of a broker-dealer.
Lofchie Comment: The attached remarks by the SIFMA Chairman provide a fairly comprehensive discussion of why the attached legislative proposal is such a bad idea. That said, there are two aspects of the proposal that seem particularly damaging:(i) The bill would extend the protections of SIPA far beyond what was originally intended; i.e., beyond protecting investors that have been the victims of a mishandling or theft of custodied assets. In effect, the bill would create a public insurance scheme for the benefit of individuals who have been the victims of certain types of securities fraud. This insurance scheme has the potential to have very substantial costs that will be borne by securities firms, and indirectly their customers, who have had no involvement in the fraud. This seems to be a bad idea for the following reasons: (a) those who will pay the costs of the fraud will have had no involvement and will have had no ability to control or limit their exposure to the fraud; (b) the scheme creates a "moral hazard" in that it reduces the cost of investigating for fraud; and (c) it has no logical stopping ground – why should only these particular victims of fraud be the beneficiaries of a public insurance scheme; why not all victims of securities fraud; in fact, why not all victims of any fraud?(ii) The bill provides that the ordinary principles of pro rata distribution of assets to creditors in bankruptcy proceedings may be disregarded and that "special consideration [may be given] for the typical, non-professional investor." Allowing judges to favor one group of creditors over another, where each has the same legal standing and monetary claim, seems to be a dangerous direction. Further, the result of such favoritism is that institutional investors may simply make the decision to avoid doing business with smaller broker-dealers who do a retail business, as the institutional investors may view the smaller broker-dealers' assets as being in potential danger of appropriation by a bankruptcy judge.
Click here to view a summary of the hearing prepared by Delta Strategy Group.See: Financial Services Committee Hearing. See also: A Legislative Proposal to Amend SIPASee Also: SIFMA Executive Vice President and General Counsel Ira Hammerman Testimony.See generally: Lofchie's Guide to Broker-Dealer Regulation, Insolvency Chapter