Keeping SIPC Focused

pillarsSince the Securities Investor Protection Corporation (SIPC) was formed in 1970, the safeguards it provides have become a key factor in how Main Street Americans think about investing. Every year, SIPC member firms pay an assessment to the Corporation as part of a shared commitment that, by shielding investors against many of the negative impacts of a firm’s possible bankruptcy, U.S. capital markets will be better able to serve their purpose of funding strong companies while helping investors make progress toward their financial dreams.

Today, however, this crucial element of investor protection is being threatened due to the tragic fraud committed by convicted Ponzi schemer Allen Stanford, says FSI Executive Vice President & General Counsel David Bellaire.

Stanford was convicted in 2012 of perpetrating a Ponzi scheme that cheated investors out of approximately $7 billion over several decades. Stanford sold his victims fraudulent high-interest certificates of deposit at an Antigua-based bank he controlled, using the proceeds to fund his own lavish lifestyle.

In June 2011, the Securities and Exchange Commission (SEC) instructed SIPC to begin the process of compensating the Stanford victims. When SIPC pushed back, arguing that its mandate did not include guaranteeing investments’ values, protecting against fraud or covering investments in non-member offshore banks, the SEC sued to force SIPC to extend its coverage.

Bellaire points out the SEC’s lawsuit against SIPC would make the tragedy of the Stanford fraud even worse. “The SEC’s suit to force SIPC to extend its coverage in this case would punish those who were doing business the right way — as well as their investors — for an unrelated criminal action,” he says.

SIPC describes its mandate as working to recover missing cash and securities for customers when a firm fails due to bankruptcy or other regular-course financial trouble. It also maintains a reserve to meet remaining customer claims of up to $500,000, including a maximum $250,000 in cash.

“The SEC’s effort to force SIPC to extend coverage may be motivated by compassion for the Stanford victims, but it’s not based on firm legal footing,” says Bellaire.

More importantly, the suit could significantly weaken SIPC and cripple firms. “This case could undermine SIPC by greatly reducing the funds the Corporation has available to fulfill its intended mandate. That, of course, would mean an increase in assessments for broker-dealer firms. It could also result in SIPC having to tap its line of credit with the Treasury,” he says.

Such an outcome would, in effect, extend the damage caused by the Stanford Ponzi scheme to impact not just Stanford’s own victims, but firms and investors all across the country. “SIPC coverage is not a free lunch,” says Bellaire. “The money comes from good, clean businesses that are trying to do the right thing by serving investors, creating jobs and supporting families.”

“Holding innocent firms responsible for fraud committed by others will result in more of our members having to close, or at least operating under significant financial stress,” he says.

FSI is not allowing this threat to go unchallenged. In April, the organization filed an amicus brief on SIPC’s behalf, focusing on the policy aspects of the case and the potential negative impacts on firms that could result from a ruling in favor of the SEC.

FSI has worked diligently to protect our members and their investors on this front for years: In July 2012, it successfully lobbied members of the House Subcommittee on Capital Markets and Government Sponsored Enterprises to oppose a bill that would have expanded SIPC coverage and raised assessments to unreasonable levels in response to the Bernie Madoff Ponzi scheme.


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