The Limits of SIPC Protection
On June 15, 2011, the Securities and Exchange Commission (SEC) released an Analysis of Securities Investor Protection Act Coverage for Stanford Group Company (the SEC Analysis). The SEC Analysis concluded that investors who purchased certificates of deposit (CDs) issued by Stanford International Bank, Ltd. (SIBL) through the Stanford Group Company (SGC) have protected “customer” claims under the Securities Investor Protection Act (SIPA) for their net investment in the SIBL CDs.
After careful review, SIFMA has concluded that the SEC Analysis should be rejected for two independent reasons, and details its reasons in this White Paper.
Excerpt
Executive Summary
On June 15, 2011, the Securities and Exchange Commission (―SEC‖) released an Analysis of Securities Investor Protection Act Coverage for Stanford Group Company (the ―SEC Analysis‖). The SEC Analysis concluded that investors who purchased certificates of deposit (―CDs‖) issued by Stanford International Bank, Ltd. (―SIBL‖) through the Stanford Group Company (―SGC‖) have protected ―customer‖ claims under the Securities Investor Protection Act (―SIPA‖) for their net investment in the SIBL CDs.
After careful review, the Securities Industry and Financial Markets Association (―SIFMA‖) has concluded that the SEC Analysis should be rejected for two independent reasons. First, the SEC Analysis erroneously concludes that purchasers of SIBL CDs were ―customers‖ of SGC, the only Stanford entity that is a member of the Securities Investor Protection Corporation (―SIPC‖), even though their funds may never have been transferred to a SGC account. Second, the SEC Analysis‘s attempted invocation of the ―net investment‖ method to measure the claims of investors who purchased SIBL CDs is unsupported by law or policy. Crucially, unlike the situation in the cases relied upon in the SEC Analysis, including the liquidation of Bernard L. Madoff Investment Securities LLC, the purchasers of SIBL CDs actually purchased the very security they sought to acquire. Accordingly, valuing the claims of purchasers of SIBL CDs on a ―net investment‖ basis would result in an unprecedented expansion of SIPA protection to ordinary investment losses. The SEC Analysis is thus fundamentally inconsistent with SIPA‘s narrow mandate and, if followed, its proposed unprecedented expansion of SIPA protection will result in increased assessments being levied against SIPC‘s members and may eventually threaten the solvency of the SIPC.