Sept.Senate Banking Committee on SIPC Oversight
Senate
Banking Subcommittee on Securities, Insurance, and Investment
“Oversight of the Securities Investor Protection Corporation”
Wednesday, September 30,
2015
Key
Topics & Takeaways
-
Proactive Regulation:
Subcommittee Ranking Member Warner (D-Va.) said that regulators need to be
“more proactive on the front end” to stop fraud, and highlighted that only 10
percent of investment advisors are examined each year.
-
SIPC Reform:
Sen. Vitter (R-La.) said he is determined that the discussion on SIPC “move to
action in terms of appropriate reform” and that there will be no confirmation
of proposed SIPC nominees until reform takes place.
-
SIPC Misconception:
Wissner-Gross said SIPC is a “real problem” and that the average investor has
“no idea” that SIPC is not a guarantor like the FDIC.
-
Privatization:
Verret said that privatization of SIPC’s custodian insurance function is the
“best solution to protect taxpayers” and to increase market discipline for risk
pricing.
Witnesses
-
Stephen Harbeck,
President and CEO of SIPC
-
Sigmund S. Wissner-Gross,
Counselor at law, Brown Rudnick LLP
-
J.W. Verret, Assistant
Professor of Law, George Mason University School of Law
-
James W. Giddens,
Partner, Hughes Hubbard & Reed LLP
Opening Statements
Subcommittee
Chairman Mike Crapo (R-Idaho), in his opening statement, noted that the Securities Investor Protection Corporation (SIPC) was
created in 1970 to oversee liquidation of broker-dealers. He said that events
such as the Lehman Brothers, and MF Global failures have had a lasting effect
on investors and said he is interested in hearing how SIPC is protecting
investors and how it responds to claims made by investors.
Subcommittee
Ranking Member Mark Warner (D-Va.) noted that cash and
securities have different levels of protection under SIPC and said that
regulators need to be “more proactive on the front end” to stop fraud,
highlighting that only 10 percent of investment advisors are examined each
year.
Sen.
David Vitter (R-La.) said that not enough attention is paid in Congress to SIPC
and that “Wall Street runs SIPC their way.” He continued that “no investor can
be confident their assets are protected” by SIPC as intended by Congress and
said investors are lead to believe that SIPC will be there is a broker-dealer
failure, but that this is “patently false.” Vitter said that Congress needs to
decide to restore SIPC to its intended purpose “or abolish it.” He also
expressed concern that two pending nominees to SIPC do not have a track record
of reform and customer protection, saying these nominees will not be confirmed
“until there is real reform at SIPC.”
Witness Testimony
Stephen
Harbeck, SIPC
Stephen
Harbeck, President and CEO of SIPC, in his testimony,
stated that an overview of SIPC cases demonstrates that SIPC protects investors
as outlined by the Securities Investor Protection Act (SIPA). He noted that in
case of the Lehman Brothers bankruptcy, SIPC helped transfer 110,000 customer
accounts worth $92 billion in assets to solvent brokerage firms and that today,
all Lehman customers have received 100 percent of the contents of their
securities accounts, while general creditors received 35 percent of their
assets. Harbeck noted that SIPC has $2.4 billion in funds, which is more money
than it has had to expend on all liquidations over its 45 year history.
Sigmund
S. Wissner-Gross, Brown Rudnick LLP
Sigmund
S. Wissner-Gross, Counselor at law, Brown Rudnick LLP but testifying in an
“individual capacity,” stated in his testimony
that he endorses the way Sen. Vitter framed SIPC saying it is a “real problem”
and that the average investor has “no idea” that SIPC is not a guarantor like
the Federal Deposit Insurance Corporation (FDIC). He recommended that SIPC’s
maximum coverage amount should be increased from $500,000 to $1.3 million, that
the distinction between claims for securities and cash be eliminated, and that
the Securities and Exchange Commission (SEC) be given more oversight authority
over SIPC. He said there needs to be reform of SIPC so that trustees are truly
independent and said that S. 67,
the Restoring Main Street Investor Protection and Confidence Act, is an
“excellent start” for reform legislation.
J.W.
Verret, George Mason University School of Law
J.W.
Verret, Assistant Professor of Law, George Mason University School of Law, in
his testimony,
expressed concern with the “monopoly” that SIPC has over securities custody
insurance and with the government subsidy in the form of a line of credit from
the U.S. Treasury. He said that privatization of SIPC’s custodian insurance
function is the “best solution to protect taxpayers” and to increase market
discipline for risk pricing. He also recommended lowering SIPC’s maximum
coverage amount, removing private sector board members, imposing term limits on
the SIPC CEO, and increasing SEC oversight of SIPC.
James
W. Giddens, Hughes Hubbard & Reed
James
W. Giddens, Partner, Hughes Hubbard & Reed LLP, stated in his testimony
that SIPA has proven to be successful and that he supports 1) increasing the
maximum coverage to $1.3 million and indexing this figure to inflation; 2)
eliminating the distinction between claims for securities and cash; and 3)
expanding the borrowing and guarantee authority available to SIPC trustees and
liquidators.
Question and Answer
SIPC
Funding
Crapo
asked if SIPC’s current level of funding is appropriate. Harbeck said that a
“subtext” to every SIPC board meeting is whether there are enough resources,
and added that whenever SIPC “reaches a plateau,” the board “takes a hard look”
at the target funding level. He explained that SIPC is funded by assessments on
members in the amount of one quarter of one percent of net operating revenues,
which totals $400 million a year.
Claims
When
asked how SIPC responds to claims, Wissner-Gross said that he would prefer if
SIPC made the presumption to protect investors “in the first instance” in its
cases, saying he has had to “fight every step of the way” to get coverage for
investors.
Vitter
said there is more uncertainty for investors getting their money back in a case
of fraud compared to a bankruptcy, and Wissner-Gross agreed.
When
Vitter asked how many victims of the Stanford case recovered money, Harbeck
explained that none of them did because the court rules that the victims did
not fall under SIPC’s statutory program. Vitter said the evidence in this case
was proven to be inaccurate based on forensic accounting findings and said SIPC
“concocted a ridiculous theory” that the victims money was “somehow a loan” to
the broker-dealer, rather than being treated as cash.
SEC
Cooperation
Sen.
Jack Reed (D-R.I.) asked to what extent SIPC influences behavior of
broker-dealers. Harbeck noted that SIPC is not a regulator but said that they
work “hand in glove” with the SEC.
Reed
then asked if the SEC has the resources needed to perform proper oversight.
Harbeck said that while investment advisors are not SIPC members, they have
funds at SIPC members, and that increasing SEC resources to inspect investment
advisors more frequently is an “excellent idea.”
Planning
Reed
asked how more pre-liquidation disaster planning would help. Giddens said that
attempts to create living wills to determine where assets would be in a
liquidation would be helpful, noting that the Lehman failure was done on an ad
hoc basis and there was not sufficient time and planning of asset transfers.
Privatization
When
asked how privatization of SIPC would work, Verret said that there would need
to be a substantial transition period and that private sector participants
would conduct risk based premium pricing based on the adequacy of resolution
planning.
SIPC
Structure
Vitter
said there is a big difference between SIPC and the FDIC, noting that SIPC
employs active industry members who have an interest in SIPC members, and asked
if this presents a conflict of interest. Wissner-Gross said that is does and
the only way to address it is with a truly independent board of directors.
Vitter
said there is a bias towards SIPC because they appoint trustees and can
repeatedly hire trustees who produce favorable outcomes. He concluded by
saying that he is determined that the discussion on SIPC will “move to action
in terms of appropriate reform” and that there will be no confirmation of
proposed SIPC nominees until reform takes place.
For
more information on this hearing, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:General,Hearing Summaries Agency:Senate Banking Committee,Publish Year:2015
Senate
Banking Subcommittee on Securities, Insurance, and Investment
“Oversight of the Securities Investor Protection Corporation”
Wednesday, September 30,
2015
Key
Topics & Takeaways
-
Proactive Regulation:
Subcommittee Ranking Member Warner (D-Va.) said that regulators need to be
“more proactive on the front end” to stop fraud, and highlighted that only 10
percent of investment advisors are examined each year.
-
SIPC Reform:
Sen. Vitter (R-La.) said he is determined that the discussion on SIPC “move to
action in terms of appropriate reform” and that there will be no confirmation
of proposed SIPC nominees until reform takes place.
-
SIPC Misconception:
Wissner-Gross said SIPC is a “real problem” and that the average investor has
“no idea” that SIPC is not a guarantor like the FDIC.
-
Privatization:
Verret said that privatization of SIPC’s custodian insurance function is the
“best solution to protect taxpayers” and to increase market discipline for risk
pricing.
Witnesses
-
Stephen Harbeck,
President and CEO of SIPC -
Sigmund S. Wissner-Gross,
Counselor at law, Brown Rudnick LLP -
J.W. Verret, Assistant
Professor of Law, George Mason University School of Law -
James W. Giddens,
Partner, Hughes Hubbard & Reed LLP
Opening Statements
Subcommittee
Chairman Mike Crapo (R-Idaho), in his opening statement, noted that the Securities Investor Protection Corporation (SIPC) was
created in 1970 to oversee liquidation of broker-dealers. He said that events
such as the Lehman Brothers, and MF Global failures have had a lasting effect
on investors and said he is interested in hearing how SIPC is protecting
investors and how it responds to claims made by investors.
Subcommittee
Ranking Member Mark Warner (D-Va.) noted that cash and
securities have different levels of protection under SIPC and said that
regulators need to be “more proactive on the front end” to stop fraud,
highlighting that only 10 percent of investment advisors are examined each
year.
Sen.
David Vitter (R-La.) said that not enough attention is paid in Congress to SIPC
and that “Wall Street runs SIPC their way.” He continued that “no investor can
be confident their assets are protected” by SIPC as intended by Congress and
said investors are lead to believe that SIPC will be there is a broker-dealer
failure, but that this is “patently false.” Vitter said that Congress needs to
decide to restore SIPC to its intended purpose “or abolish it.” He also
expressed concern that two pending nominees to SIPC do not have a track record
of reform and customer protection, saying these nominees will not be confirmed
“until there is real reform at SIPC.”
Witness Testimony
Stephen
Harbeck, SIPC
Stephen
Harbeck, President and CEO of SIPC, in his testimony,
stated that an overview of SIPC cases demonstrates that SIPC protects investors
as outlined by the Securities Investor Protection Act (SIPA). He noted that in
case of the Lehman Brothers bankruptcy, SIPC helped transfer 110,000 customer
accounts worth $92 billion in assets to solvent brokerage firms and that today,
all Lehman customers have received 100 percent of the contents of their
securities accounts, while general creditors received 35 percent of their
assets. Harbeck noted that SIPC has $2.4 billion in funds, which is more money
than it has had to expend on all liquidations over its 45 year history.
Sigmund
S. Wissner-Gross, Brown Rudnick LLP
Sigmund
S. Wissner-Gross, Counselor at law, Brown Rudnick LLP but testifying in an
“individual capacity,” stated in his testimony
that he endorses the way Sen. Vitter framed SIPC saying it is a “real problem”
and that the average investor has “no idea” that SIPC is not a guarantor like
the Federal Deposit Insurance Corporation (FDIC). He recommended that SIPC’s
maximum coverage amount should be increased from $500,000 to $1.3 million, that
the distinction between claims for securities and cash be eliminated, and that
the Securities and Exchange Commission (SEC) be given more oversight authority
over SIPC. He said there needs to be reform of SIPC so that trustees are truly
independent and said that S. 67,
the Restoring Main Street Investor Protection and Confidence Act, is an
“excellent start” for reform legislation.
J.W.
Verret, George Mason University School of Law
J.W.
Verret, Assistant Professor of Law, George Mason University School of Law, in
his testimony,
expressed concern with the “monopoly” that SIPC has over securities custody
insurance and with the government subsidy in the form of a line of credit from
the U.S. Treasury. He said that privatization of SIPC’s custodian insurance
function is the “best solution to protect taxpayers” and to increase market
discipline for risk pricing. He also recommended lowering SIPC’s maximum
coverage amount, removing private sector board members, imposing term limits on
the SIPC CEO, and increasing SEC oversight of SIPC.
James
W. Giddens, Hughes Hubbard & Reed
James
W. Giddens, Partner, Hughes Hubbard & Reed LLP, stated in his testimony
that SIPA has proven to be successful and that he supports 1) increasing the
maximum coverage to $1.3 million and indexing this figure to inflation; 2)
eliminating the distinction between claims for securities and cash; and 3)
expanding the borrowing and guarantee authority available to SIPC trustees and
liquidators.
Question and Answer
SIPC
Funding
Crapo
asked if SIPC’s current level of funding is appropriate. Harbeck said that a
“subtext” to every SIPC board meeting is whether there are enough resources,
and added that whenever SIPC “reaches a plateau,” the board “takes a hard look”
at the target funding level. He explained that SIPC is funded by assessments on
members in the amount of one quarter of one percent of net operating revenues,
which totals $400 million a year.
Claims
When
asked how SIPC responds to claims, Wissner-Gross said that he would prefer if
SIPC made the presumption to protect investors “in the first instance” in its
cases, saying he has had to “fight every step of the way” to get coverage for
investors.
Vitter
said there is more uncertainty for investors getting their money back in a case
of fraud compared to a bankruptcy, and Wissner-Gross agreed.
When
Vitter asked how many victims of the Stanford case recovered money, Harbeck
explained that none of them did because the court rules that the victims did
not fall under SIPC’s statutory program. Vitter said the evidence in this case
was proven to be inaccurate based on forensic accounting findings and said SIPC
“concocted a ridiculous theory” that the victims money was “somehow a loan” to
the broker-dealer, rather than being treated as cash.
SEC
Cooperation
Sen.
Jack Reed (D-R.I.) asked to what extent SIPC influences behavior of
broker-dealers. Harbeck noted that SIPC is not a regulator but said that they
work “hand in glove” with the SEC.
Reed
then asked if the SEC has the resources needed to perform proper oversight.
Harbeck said that while investment advisors are not SIPC members, they have
funds at SIPC members, and that increasing SEC resources to inspect investment
advisors more frequently is an “excellent idea.”
Planning
Reed
asked how more pre-liquidation disaster planning would help. Giddens said that
attempts to create living wills to determine where assets would be in a
liquidation would be helpful, noting that the Lehman failure was done on an ad
hoc basis and there was not sufficient time and planning of asset transfers.
Privatization
When
asked how privatization of SIPC would work, Verret said that there would need
to be a substantial transition period and that private sector participants
would conduct risk based premium pricing based on the adequacy of resolution
planning.
SIPC
Structure
Vitter
said there is a big difference between SIPC and the FDIC, noting that SIPC
employs active industry members who have an interest in SIPC members, and asked
if this presents a conflict of interest. Wissner-Gross said that is does and
the only way to address it is with a truly independent board of directors.
Vitter
said there is a bias towards SIPC because they appoint trustees and can
repeatedly hire trustees who produce favorable outcomes. He concluded by
saying that he is determined that the discussion on SIPC will “move to action
in terms of appropriate reform” and that there will be no confirmation of
proposed SIPC nominees until reform takes place.
For
more information on this hearing, please click here.