Sense on Cents

All too often I have heard over the last few years from investors violated by the Wall Street-Washington incestuous process and feeling totally disenfranchised as a result. Why have investors gotten trampled?

Great question and worthy of widespread debate and discussion. In an attempt to narrow our focus today, let’s zero in on the Securities Investor Protection Corporation, the organization designed to:

restoring funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms. The Securities Investor Protection Corporation was not chartered by Congress to combat fraud.

From where does SIPC raise its funds in order to offer this protection to investors? 

The banks and broker-dealers in the industry pay an annual premium (effectively an insurance premium) in order that SIPC may fulfill its obligations.

Why are we discussing SIPC today? Recall that post Bernie Madoff, the SIPC fund was depleted. Recall also that for approximately 13 years those paying into SIPC were charged an annual premium of $150 in order to put the SIPC stamp of protection on their brokerage statements.

Did you just spill your coffee and think I must have mistyped that figure. I didn’t. I highlighted that ridiculous figure in November 2009 when I wrote, Wall Street Scams Main Street: SIPC Investor Insurance  for $150 Premium:

How much had SIPC chosen to assess its member firms since 1996 up until April 1, 2009? Are you sitting down?

As Ms. Chaitman informed us last evening, SIPC assessed its member firms $150 annually since 1996. That’s right. Every SIPC member has been able to send out brokerage statements with the SIPC stamp of approval for a mere $150 annual premium. Yes, Goldman Sachs and every other SIPC member firm has paid a whopping $150 to buy the SIPC stamp of approval on their brokerage statements. SIPC’s Annual Report provides a full history of these premiums:

History of Member Assessments*
1971: ½ of 1% plus an initial assessment of 1⁄8 of 1% of
1969 revenues ($150 minimum).
1972–1977: ½ of 1%.
January 1–June 30, 1978: ¼ of 1%.
July 1–December 31, 1978: None.
1979–1982: $25 annual assessment.
1983–March 31, 1986: ¼ of 1% effective May 1, 1983 ($25 minimum).
1986–1988: $100 annual assessment.
1989–1990: 3⁄16 of 1% ($150 minimum).
1991: .065% of members’ net operating revenues ($150 minimum).
1992: .057% of members’ net operating revenues ($150 minimum).
1993: .054% of members’ net operating revenues ($150 minimum).
1994: .073% of members’ net operating revenues ($150 minimum).
1995: .095% of members’ net operating revenues ($150 minimum).
1996–2008: $150 annual assessment.!!! (LD’s emphasis)

As a result of this travesty and SIPC’s insufficient funds in dealing with the Madoff fiasco, SIPC appealed to the courts and won to effectively change the rules of the game midstream in how customers were treated. Those customer statements which Madoff investors received and which had the SIPC stamp attached (and which were good enough for the IRS) were rendered worth less than the paper on which they were written.

Feeling exposed yet? Fortunately, there is one member of Congress who appreciates the injustice of this all and has proposed H.R. 757 to address this travesty. Representative Scott Garrett (R-NJ) recently released the following statement:

“When investors see the Securities Investor Protection Corporation (SIPC) seal of approval, they should have the utmost confidence in the account statements they receive. I do not believe these ordinary investors, who knew nothing about the fraud being perpetrated by Bernie Madoff, should be held to a higher standard than the federal government. After all, it was the Securities and Exchange Commission (SEC) that missed the Madoff fraud in the first place. Furthermore, the Internal Revenue Service (IRS) was happy to rely on these same statements to collect taxes from the reported profits.

“My bill clarifies that for the purposes of SIPC protection, customers of registered brokers are legally entitled to rely on their customer statements as evidence of what their broker owes them. Indeed, in a world where customers do not hold physical securities, it could not be any other way.

“I introduced this legislation because I am increasingly concerned that the Trustee in the Madoff case is ignoring the law and failing to provide prompt assistance to those who have been thrust into financial chaos. He is taking positions on a wide range of issues that are contrary to SIPA, the Bankruptcy Code, and federal and state laws that are intended to protect investors against bad acts on the part of their brokers.

Think back to the fact that the each firm paid an annual premium of $150 to fund SIPC. That grotesque figure speaks volumes as to how the industry viewed its customers. 

Who is on the subcommittee addressing H.R. 757 this week?

 Subcommittee Email Addresses

If your representative is on this committee as mine is, please call or email your representative and ask — no rather tell — him/her to support this bill.

Isn’t it time to  subscribe to all my work via e-mail, RSS feed, on Twitter or Facebook?

Do your friends, family, and colleagues a favor and get them to do the same. Thanks!!

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

Larry Doyle

This entry was posted on Monday, March 5th, 2012 at 8:47 AM and is filed under General, SIPC. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.