HFS Subcommittee Reviews Garrett , Maloney Bill to Amend SIPA
At November 21st’s House Financial Services Subcommittee hearing, Subcommittee Chairman Scott Garrett (R-N.J.) discussed H.R.
3482, the Restoring Main Street Investor Protection Act, that he and
Carolyn Maloney (D-N.Y.) introduced last week. As stated in his opening
statement, Garrett said the legislation’s purpose is to “reaffirm the original
intent of the law and to correct the misapplication of the law by [the
Securities Investor Protection Corporation (SIPC)] and the trustee.”
The
legislation would: 1) remove the inconsistencies in the application of SIPC
coverage, which have led to “greater confusion”; 2) assure that SIPC-protected
benefits go to innocent customers; 3) limit the exposure of taxpayers by
establishing new accountability measures for SIPC’s borrowing authority; 4)
avoid over-technical legal interpretation at odds with SIPC’s remedial
objectives and the original intent in the law; 5) improve the fiduciary
character of SIPC liquidations; 6) strengthen the Security and Exchange
Commission’s (SEC) oversight of SIPC; and 7) direct the SEC and FINRA to give
high priority to inspection procedures which verify and validate the accuracy
and authenticity of information provided by broker-dealers to their customers.
Garrett
noted that roughly one-quarter of the House Financial Services Committee has
cosponsored the bill, and said his support for the legislation stems from
studying the law, reviewing past precedent, and an analysis of the original
congressional intent, and added that “it is very clear to me that SIPC and the
trustees are not applying the law as intended by Congress,” nor are they
adhering “to their own past precedent, which has been affirmed by the Courts.”
Garrett
brought up past statements from President Nixon to various other lawmakers
involved with the Securities Investor Protection Act (SIPA) to set the
record straight that “protecting investors from fraud was a core function of
the original statute, and has been applied that way throughout its existence.”
Turning
from prior statements, Garrett said “time and time again, SIPC changes the
rules in its story after the fact when it suits its own purposes. The clear
truth from a long and exhaustive record makes it clear that SIPA is an
insurance program set up by Congress to protect investors and to insure the
appropriate functioning of our nation’s securities markets, especially in the
case of fraud.”
“I’m
deeply disturbed by your satisfaction with SIPA’s performance in these massive
fraud cases, which have, thankfully, captured the attention of Congress now
with profound concern,” Garrett said to SIPC President Stephen Harbeck.
In
her opening remarks, Subcommittee Ranking Member Carolyn Maloney (D-N.Y.) said
H.R. 3482 seeks to correct SIPC’s flaws that were exposed after the Madoff and
Stanford Ponzi schemes came to light. In the Madoff case, SIPC and the trustees
have “pursued a highly aggressive strategy that… has unfairly punished some of
my constituents,” especially former customers who had withdrawn money in the
years prior to the firm’s failure only to learn “that their money was clawed
back only when the trustees filed a lawsuit against them,” Maloney said.
“This
is hardly the way to promote the confidence in the securities markets,” she
added. The legislation would prevent “unfair” clawbacks of money that “innocent
customers had long ago withdrawn.” However, the bill would still allow
clawbacks in cases where an investor knew of the fraud when they withdrew
money.
In
their opening statements, Reps. Brad Sherman (D-Calif.) and Ed Perlmutter
(D-Colo.) cautioned the Subcommittee in its efforts to reform SIPA.
Sherman
explained that various lawsuits are in progress at this moment and that “I
think they ought to be decided based on what the law was at the relevant time.”
He
added, “I would count on judicial and quasi-judicial entities to make that
determination without a lot of help from Congress.”
Perlmutter
also cautioned the committee in its pursuit to address Ponzi schemes and
provide solutions to the problems because “the numbers are not real.”
TESTIMONY
Harbeck
opened
by saying it is SIPC’s belief that it has done the “greatest good” for the
greatest number of people, consistent with the law and prior precedence.
Remarking
on the recent Ponzi schemes, Harbeck said “I realize how difficult it is for
the victims, but the fact remains, that this is a zero-sum game and if one
credits Ponzi scheme profits that were generated solely in the mind of Mr.
Madoff, and if those profits stand on equal footing with the net amounts that
people have not received back, that means that dollar for dollar, people who
received those amounts as profits, would be taken directly from people who did
not receive their own money back. That is bad policy and bad law; it is not the
law and never has been.”
Reflecting
on current and prior cases, Harbeck said “in any instance… even in the cases
mentioned by the chairman today, the fact is that at no time have fictional
profits ever been recognized under the Securities Investor Protection Act.”
Ira
Hammerman, SIFMA’s Executive Vice President and General Counsel, stated
that he previously served on the SIPC Modernization Task Force that “undertook
a comprehensive review of SIPA and the operations and policies of SIPC,” and
agreed that some of the recommendations “warrant consideration.”
Hammerman
mentioned how recommendations including increasing the cap on advances SIPC
makes to customers from its own funds, the elimination of the current
distinction under SIPA between claims for cash and claims for securities, and
making individual pension plan participants eligible for SIPC advances with
respect to their shares of the plan’s account at a failed broker would
appropriately expand SIPA, while protecting its core purpose.
That
being said, Hammerman said SIPA “was never intended to provide broad protection
to investors against the risk of fraud or investments that turn out to be
worthless.” The proposed legislation’s expansion of the term “customer” to
include any person whose assets were misappropriated by an affiliate of a
brokerage firm “would extend SIPA well beyond its core purposes and would have
significant public policy implications.”
Hammerman
also questioned the costs associated with the proposal and explained to the
Subcommittee that the bill’s expansion to the term “customer” would “have
financial costs that could exceed the available SIPC funds and could have a
detrimental impact on the viability of SIPC and firms across the brokerage
industry,” which could inadvertently increase the costs borne by investors and
potentially result in investors losing access to the financial markets
altogether.
Angie
Kogutt, Director and Founder of the Stanford Victims Coalition, testified
that the SEC had known for roughly 12 years that Stanford was using his U.S.
broker dealer “to steal customer funds intended to purchase CDs from Stanford
International Bank.”
Reflecting
on her own experience, Kogutt mentioned how her family was told that international
certificates of deposit (CDs) are “better” than investing in a US bank CD
“because the international CDs were securities and they were backed by SIPC,”
which was up to $500,000 at that time versus the Federal Deposit Insurance
Corporation which only protected up to $100,000.
Five
years on since the Stanford scheme was uncovered, “SIPC has continued to deny
protection of Stanford Group Company customers by saying we received the
securities we purchased through SGC, which simply is not true.,” she said.
Kogutt’s
prepared remarks also contain exhibits, some of which regard letters sent to
SIFMA’s Hammerman in opposition to SIFMA’s “erroneous” claims and analysis
related to the Stanford fraud.
In
his opening
testimony, Ron Stein, President of the Network for Investor Action and
Protection, explained how the creation of SIPC, “the insurance like entity,”
was the cornerstone of the SIPA legislation and “an essential step to providing
confidence and trust to investors….”
Stein
said he supported the proposed legislation and vented his frustration that SIPC
“has refused to honor their very purpose: to protect investors, and instead
done everything in their power to circumvent those responsibilities.”
Two
additional witnesses attended the hearing. Suzanne
Tosso Shean and Neil
Friedman, two victims of the Stanford and Madoff scandals, respectively,
discussed their experiences with SIPC after the fraudulent activity came to
light.
Q&A
Retail
vs. Institutional Investors
Garrett
asked Stein for numbers regarding the distribution of funds for retail
investors and institutional investors related to the Madoff fraud.
Stein
replied that over 80 percent of the funds “in terms of dollar amount” will go
to institutional investors based on recovery numbers provided by the trustee
and SIPC. According to his prepared remarks, roughly $9 billion has been
recovered.
The
majority of investors have not received any SIPC protection, whatsoever, Stein
said, adding that investors who have received protection have had the amounts
reduced “because of the net investment method adopted by the trustee.”
Referring
to Garrett’s legislation, Stein said the bill makes it clear that the trustee
does not have the right to change the intent of SIPA to suit the purposes of
the SIPA fund “or any other rationalization [the trustee] can come up with to
do so.”
Rep.
Robert Hurt (R-Va.) asked Harbeck whether the law was being applied fairly
considering the fact that institutions are receiving most of the funds.
Harbeck
agreed and explained that if an institution, such as a pension fund, had a
claim with Madoff, and that fund has a number of indirect victims, the way the
system works is that “by paying that institution, one gets the money to the
indirects.”
Stein
replied that Harbeck’s response fails to take into account the fact that those
victims “have been denied any SIPC protection whatsoever. That whether or not
funds are going to a pension fund is immaterial to the monies that SIPC should
be advancing to those small, middle income investors who invested directly with
the regulated, registered broker-dealer as Congress and the financial services
industry intended.”
He
added that “the kinds of institutions, who the trustee, himself, has alleged
could have known and should have known about this fraud, were the ones that are
receiving most of these funds.”
Asked
by Rep. John Carney (D-Del.) whether SIPC is treating institutional investors
differently than retail investors, Harbeck responded that SIPC uses the same
methodology for everyone and that it gives “no preference to institutional
investors.” Instead, the methodology gives preference, “on a pro-rated basis,”
to a larger contributor to the fund.
Carney
then asked whether the methodology should “slant towards the retail investors,”
to which Stein said that is a legitimate question to pose going forward.
Return
on Value
Hurt
asked whether the $9 billion in returns justifies the $1 billion spent on
administrative expenses related to the Madoff case, to which Harbeck agreed and
called it an “extraordinary return.”
Stein
was quick to point out, however, that $7.2 billion was immediately recovered by
the Department of Justice early on and said the amount of funds used by the
trustee to recover additional funds “has been an enormous amount.”
Ponzi
Exemption
Garrett
noted that there was no discussion back in the 1970s, when SIPA was passed,
regarding the inclusion of a Ponzi exemption, and asked Hammerman whether this
was “just a creation of later court cases.”
Hammerman
replied that there is no Ponzi exemption and said it was not his understanding
that the court’s created such an exemption.
SIPC
Coverage
Maloney
questioned Hammerman and Kogutt on SIPC coverage, not only asking for what they
believe SIPC covers today, but what it should cover in the future. Maloney also
stated that she would like answers in writing as well.
Hammerman
stated that if an investor puts in $100,000 to a brokerage firm, with the
expectation that the brokerage firm was going to purchase securities, only to
find out that the firm turned out to be a Ponzi scheme, the amount of money
invested “would be covered, and advanced by SIPC.”
Maloney
quickly responded by noting the discrepancy between Hammerman and Kogutt’s
remarks, adding that Stanford investors bought CD’s “that apparently the SEC
and other people knew about,” only to be told that SIPC won’t provide coverage.
Hammerman
replied that from his understanding the investors invested in CDs issued by an
Antiguan bank, to which Maloney interrupted and said that “in going forward… it
should be very clear that nothing from a foreign bank is covered.”
She
added, “investors have to know what they’re getting into,” and they were
“totally misled” in the Stanford case. “So, I mean, I think we’ve got to be
clear at the very least going forward that people know what their situation
is.”
Hammerman
agreed.
Perlmutter
questioned whether to treat everyone equally when it comes to returning funds
or whether those that put their money in first deserve to be treated better
than the investors who invested right before the fraud came to light.
“For
me, I think the equality, everyone being treated equally is appropriate.”
Perlmutter
also questioned how big the SIPC fund should be, and also asked whether
broker-dealers and/or taxpayers would have to contribute to that insurance
fund, noting that the losses from Madoff and Stanford “are so huge, they swamp
the fund, it’s just gone, it’s bankrupt.”
In
closing, Perlmutter discussed how tough an issue this is and that while he
appreciates the fact that some in the committee are trying to tackle the issue,
“I’m not sure they’ve got the right answer.”
Rep.
Randy Hultgren (R-Ill.) questioned whether the SIPC Modernization Task Force’s
recommendation to increase SIPC’s maximum level of protection to $1.3 million
and index it to inflation is desirable.
Harbeck
stated that there may be some “unintended consequences” to the task force’s recommendation
and that SIPC would provide a response to the recommendations before their
board meeting in February.
He
also stated that the board will also take a look to see whether assessments
should be raised, lowered, or stay the same when SIPC reaches its target of
$2.5 billion in assets in considering whether to go beyond $2.5 billion.
Distinction
between cash and securities claims
Hultgren
also asked Harbeck to explain the distinction between cash and securities
claims and why SIPC currently feels that the distinction is no longer
necessary.
Harbeck
corrected Hultgren by noting that this is not SIPC’s position, but the task
force’s position. Harbeck said SIPC will respond to the task force
recommendations before its board meeting in February.
Hultgren
then asked whether claims for fictitious securities are considered cash or
securities claims.
Harbeck
noted the split in the circuit courts on this question. “The 6th Circuit has
taken the position that the only conceivable way to measure cash legitimately
deposited for the purpose of purchasing a security, which does not ever exist,
would be protected as a claim for cash.”
On
the other hand, “the 2nd Circuit has taken a different view, and protected it
as a claim for securities.”
More
importantly, Harbeck stated that under no circumstance, “regardless of why a
security moves up or down in value, does SIPC protect the underlying value. It
simply returns the security to you.”
For
more information on the hearing, please click
here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:General,Hearing Summaries Agency:House Financial Services Committee,Publish Year:2013
At November 21st’s House Financial Services Subcommittee hearing, Subcommittee Chairman Scott Garrett (R-N.J.) discussed H.R.
3482, the Restoring Main Street Investor Protection Act, that he and
Carolyn Maloney (D-N.Y.) introduced last week. As stated in his opening
statement, Garrett said the legislation’s purpose is to “reaffirm the original
intent of the law and to correct the misapplication of the law by [the
Securities Investor Protection Corporation (SIPC)] and the trustee.”
The
legislation would: 1) remove the inconsistencies in the application of SIPC
coverage, which have led to “greater confusion”; 2) assure that SIPC-protected
benefits go to innocent customers; 3) limit the exposure of taxpayers by
establishing new accountability measures for SIPC’s borrowing authority; 4)
avoid over-technical legal interpretation at odds with SIPC’s remedial
objectives and the original intent in the law; 5) improve the fiduciary
character of SIPC liquidations; 6) strengthen the Security and Exchange
Commission’s (SEC) oversight of SIPC; and 7) direct the SEC and FINRA to give
high priority to inspection procedures which verify and validate the accuracy
and authenticity of information provided by broker-dealers to their customers.
Garrett
noted that roughly one-quarter of the House Financial Services Committee has
cosponsored the bill, and said his support for the legislation stems from
studying the law, reviewing past precedent, and an analysis of the original
congressional intent, and added that “it is very clear to me that SIPC and the
trustees are not applying the law as intended by Congress,” nor are they
adhering “to their own past precedent, which has been affirmed by the Courts.”
Garrett
brought up past statements from President Nixon to various other lawmakers
involved with the Securities Investor Protection Act (SIPA) to set the
record straight that “protecting investors from fraud was a core function of
the original statute, and has been applied that way throughout its existence.”
Turning
from prior statements, Garrett said “time and time again, SIPC changes the
rules in its story after the fact when it suits its own purposes. The clear
truth from a long and exhaustive record makes it clear that SIPA is an
insurance program set up by Congress to protect investors and to insure the
appropriate functioning of our nation’s securities markets, especially in the
case of fraud.”
“I’m
deeply disturbed by your satisfaction with SIPA’s performance in these massive
fraud cases, which have, thankfully, captured the attention of Congress now
with profound concern,” Garrett said to SIPC President Stephen Harbeck.
In
her opening remarks, Subcommittee Ranking Member Carolyn Maloney (D-N.Y.) said
H.R. 3482 seeks to correct SIPC’s flaws that were exposed after the Madoff and
Stanford Ponzi schemes came to light. In the Madoff case, SIPC and the trustees
have “pursued a highly aggressive strategy that… has unfairly punished some of
my constituents,” especially former customers who had withdrawn money in the
years prior to the firm’s failure only to learn “that their money was clawed
back only when the trustees filed a lawsuit against them,” Maloney said.
“This
is hardly the way to promote the confidence in the securities markets,” she
added. The legislation would prevent “unfair” clawbacks of money that “innocent
customers had long ago withdrawn.” However, the bill would still allow
clawbacks in cases where an investor knew of the fraud when they withdrew
money.
In
their opening statements, Reps. Brad Sherman (D-Calif.) and Ed Perlmutter
(D-Colo.) cautioned the Subcommittee in its efforts to reform SIPA.
Sherman
explained that various lawsuits are in progress at this moment and that “I
think they ought to be decided based on what the law was at the relevant time.”
He
added, “I would count on judicial and quasi-judicial entities to make that
determination without a lot of help from Congress.”
Perlmutter
also cautioned the committee in its pursuit to address Ponzi schemes and
provide solutions to the problems because “the numbers are not real.”
TESTIMONY
Harbeck
opened
by saying it is SIPC’s belief that it has done the “greatest good” for the
greatest number of people, consistent with the law and prior precedence.
Remarking
on the recent Ponzi schemes, Harbeck said “I realize how difficult it is for
the victims, but the fact remains, that this is a zero-sum game and if one
credits Ponzi scheme profits that were generated solely in the mind of Mr.
Madoff, and if those profits stand on equal footing with the net amounts that
people have not received back, that means that dollar for dollar, people who
received those amounts as profits, would be taken directly from people who did
not receive their own money back. That is bad policy and bad law; it is not the
law and never has been.”
Reflecting
on current and prior cases, Harbeck said “in any instance… even in the cases
mentioned by the chairman today, the fact is that at no time have fictional
profits ever been recognized under the Securities Investor Protection Act.”
Ira
Hammerman, SIFMA’s Executive Vice President and General Counsel, stated
that he previously served on the SIPC Modernization Task Force that “undertook
a comprehensive review of SIPA and the operations and policies of SIPC,” and
agreed that some of the recommendations “warrant consideration.”
Hammerman
mentioned how recommendations including increasing the cap on advances SIPC
makes to customers from its own funds, the elimination of the current
distinction under SIPA between claims for cash and claims for securities, and
making individual pension plan participants eligible for SIPC advances with
respect to their shares of the plan’s account at a failed broker would
appropriately expand SIPA, while protecting its core purpose.
That
being said, Hammerman said SIPA “was never intended to provide broad protection
to investors against the risk of fraud or investments that turn out to be
worthless.” The proposed legislation’s expansion of the term “customer” to
include any person whose assets were misappropriated by an affiliate of a
brokerage firm “would extend SIPA well beyond its core purposes and would have
significant public policy implications.”
Hammerman
also questioned the costs associated with the proposal and explained to the
Subcommittee that the bill’s expansion to the term “customer” would “have
financial costs that could exceed the available SIPC funds and could have a
detrimental impact on the viability of SIPC and firms across the brokerage
industry,” which could inadvertently increase the costs borne by investors and
potentially result in investors losing access to the financial markets
altogether.
Angie
Kogutt, Director and Founder of the Stanford Victims Coalition, testified
that the SEC had known for roughly 12 years that Stanford was using his U.S.
broker dealer “to steal customer funds intended to purchase CDs from Stanford
International Bank.”
Reflecting
on her own experience, Kogutt mentioned how her family was told that international
certificates of deposit (CDs) are “better” than investing in a US bank CD
“because the international CDs were securities and they were backed by SIPC,”
which was up to $500,000 at that time versus the Federal Deposit Insurance
Corporation which only protected up to $100,000.
Five
years on since the Stanford scheme was uncovered, “SIPC has continued to deny
protection of Stanford Group Company customers by saying we received the
securities we purchased through SGC, which simply is not true.,” she said.
Kogutt’s
prepared remarks also contain exhibits, some of which regard letters sent to
SIFMA’s Hammerman in opposition to SIFMA’s “erroneous” claims and analysis
related to the Stanford fraud.
In
his opening
testimony, Ron Stein, President of the Network for Investor Action and
Protection, explained how the creation of SIPC, “the insurance like entity,”
was the cornerstone of the SIPA legislation and “an essential step to providing
confidence and trust to investors….”
Stein
said he supported the proposed legislation and vented his frustration that SIPC
“has refused to honor their very purpose: to protect investors, and instead
done everything in their power to circumvent those responsibilities.”
Two
additional witnesses attended the hearing. Suzanne
Tosso Shean and Neil
Friedman, two victims of the Stanford and Madoff scandals, respectively,
discussed their experiences with SIPC after the fraudulent activity came to
light.
Q&A
Retail
vs. Institutional Investors
Garrett
asked Stein for numbers regarding the distribution of funds for retail
investors and institutional investors related to the Madoff fraud.
Stein
replied that over 80 percent of the funds “in terms of dollar amount” will go
to institutional investors based on recovery numbers provided by the trustee
and SIPC. According to his prepared remarks, roughly $9 billion has been
recovered.
The
majority of investors have not received any SIPC protection, whatsoever, Stein
said, adding that investors who have received protection have had the amounts
reduced “because of the net investment method adopted by the trustee.”
Referring
to Garrett’s legislation, Stein said the bill makes it clear that the trustee
does not have the right to change the intent of SIPA to suit the purposes of
the SIPA fund “or any other rationalization [the trustee] can come up with to
do so.”
Rep.
Robert Hurt (R-Va.) asked Harbeck whether the law was being applied fairly
considering the fact that institutions are receiving most of the funds.
Harbeck
agreed and explained that if an institution, such as a pension fund, had a
claim with Madoff, and that fund has a number of indirect victims, the way the
system works is that “by paying that institution, one gets the money to the
indirects.”
Stein
replied that Harbeck’s response fails to take into account the fact that those
victims “have been denied any SIPC protection whatsoever. That whether or not
funds are going to a pension fund is immaterial to the monies that SIPC should
be advancing to those small, middle income investors who invested directly with
the regulated, registered broker-dealer as Congress and the financial services
industry intended.”
He
added that “the kinds of institutions, who the trustee, himself, has alleged
could have known and should have known about this fraud, were the ones that are
receiving most of these funds.”
Asked
by Rep. John Carney (D-Del.) whether SIPC is treating institutional investors
differently than retail investors, Harbeck responded that SIPC uses the same
methodology for everyone and that it gives “no preference to institutional
investors.” Instead, the methodology gives preference, “on a pro-rated basis,”
to a larger contributor to the fund.
Carney
then asked whether the methodology should “slant towards the retail investors,”
to which Stein said that is a legitimate question to pose going forward.
Return
on Value
Hurt
asked whether the $9 billion in returns justifies the $1 billion spent on
administrative expenses related to the Madoff case, to which Harbeck agreed and
called it an “extraordinary return.”
Stein
was quick to point out, however, that $7.2 billion was immediately recovered by
the Department of Justice early on and said the amount of funds used by the
trustee to recover additional funds “has been an enormous amount.”
Ponzi
Exemption
Garrett
noted that there was no discussion back in the 1970s, when SIPA was passed,
regarding the inclusion of a Ponzi exemption, and asked Hammerman whether this
was “just a creation of later court cases.”
Hammerman
replied that there is no Ponzi exemption and said it was not his understanding
that the court’s created such an exemption.
SIPC
Coverage
Maloney
questioned Hammerman and Kogutt on SIPC coverage, not only asking for what they
believe SIPC covers today, but what it should cover in the future. Maloney also
stated that she would like answers in writing as well.
Hammerman
stated that if an investor puts in $100,000 to a brokerage firm, with the
expectation that the brokerage firm was going to purchase securities, only to
find out that the firm turned out to be a Ponzi scheme, the amount of money
invested “would be covered, and advanced by SIPC.”
Maloney
quickly responded by noting the discrepancy between Hammerman and Kogutt’s
remarks, adding that Stanford investors bought CD’s “that apparently the SEC
and other people knew about,” only to be told that SIPC won’t provide coverage.
Hammerman
replied that from his understanding the investors invested in CDs issued by an
Antiguan bank, to which Maloney interrupted and said that “in going forward… it
should be very clear that nothing from a foreign bank is covered.”
She
added, “investors have to know what they’re getting into,” and they were
“totally misled” in the Stanford case. “So, I mean, I think we’ve got to be
clear at the very least going forward that people know what their situation
is.”
Hammerman
agreed.
Perlmutter
questioned whether to treat everyone equally when it comes to returning funds
or whether those that put their money in first deserve to be treated better
than the investors who invested right before the fraud came to light.
“For
me, I think the equality, everyone being treated equally is appropriate.”
Perlmutter
also questioned how big the SIPC fund should be, and also asked whether
broker-dealers and/or taxpayers would have to contribute to that insurance
fund, noting that the losses from Madoff and Stanford “are so huge, they swamp
the fund, it’s just gone, it’s bankrupt.”
In
closing, Perlmutter discussed how tough an issue this is and that while he
appreciates the fact that some in the committee are trying to tackle the issue,
“I’m not sure they’ve got the right answer.”
Rep.
Randy Hultgren (R-Ill.) questioned whether the SIPC Modernization Task Force’s
recommendation to increase SIPC’s maximum level of protection to $1.3 million
and index it to inflation is desirable.
Harbeck
stated that there may be some “unintended consequences” to the task force’s recommendation
and that SIPC would provide a response to the recommendations before their
board meeting in February.
He
also stated that the board will also take a look to see whether assessments
should be raised, lowered, or stay the same when SIPC reaches its target of
$2.5 billion in assets in considering whether to go beyond $2.5 billion.
Distinction
between cash and securities claims
Hultgren
also asked Harbeck to explain the distinction between cash and securities
claims and why SIPC currently feels that the distinction is no longer
necessary.
Harbeck
corrected Hultgren by noting that this is not SIPC’s position, but the task
force’s position. Harbeck said SIPC will respond to the task force
recommendations before its board meeting in February.
Hultgren
then asked whether claims for fictitious securities are considered cash or
securities claims.
Harbeck
noted the split in the circuit courts on this question. “The 6th Circuit has
taken the position that the only conceivable way to measure cash legitimately
deposited for the purpose of purchasing a security, which does not ever exist,
would be protected as a claim for cash.”
On
the other hand, “the 2nd Circuit has taken a different view, and protected it
as a claim for securities.”
More
importantly, Harbeck stated that under no circumstance, “regardless of why a
security moves up or down in value, does SIPC protect the underlying value. It
simply returns the security to you.”
For
more information on the hearing, please click
here.