The passage, or failure, of a single piece of legislation is going to tell us a lot about whether our Congress represents the people of the United States or just its financial service industry donors.
The legislation is the Restoring Main Street Investor Confidence and Protection Act, House Resolution 3482 and Senate Bill 1725. The website Govtrak.us gives the bill only a 23 percent chance of passage.
So we’ve got a good test, right now, of whether the folks we vote for actually represent the people who voted for them. Here’s the story:
The Restoring Main Street Investor Confidence and Protection Act would define the value of a person’s brokerage account — their “net equity” — as the value of the account based on the last statement from the brokerage house. In other words, the value of your account is what the brokerage house reports to you. That amount, up to $500,000, is what you could recover from the Securities Investor Protection Corp., the SIPC, in the event of failure or fraud at the brokerage firm that has your money.
Some of you are probably wondering, “Why do we need legislation for that? Isn’t that what the SIPC already guarantees? Isn’t that what it says on its website?”
Well, it turns out the SIPC has a different definition of “net equity.” It isn’t the value of your account on the last statement from your brokerage firm; it is the amount of money you deposited with the firm, less any amounts are withdrawn.
You don’t have to think about that very long to realize that your insurance coverage could actually be, um, nada. How? Easy. All you need is a long-term account from which you have withdrawn a regular income — like a retirement account.
A more dramatic example: Say you are the proud owner of Apple Inc. shares purchased five years ago at $20. Withdrawing the proceeds from selling some shares at the current price of $90 would eliminate your net equity. By the SIPC definition, there would be no net equity — and no loss.
But wait, it gets worse. In the event of fraud, the appointed trustee can sue the victims to recover money that was distributed from their account. Visit the Madoff Trustees website, and you will learn that 16,519 claims were received. Only 2,518 were allowed. Check the “recoveries” page, and you’ll find that the primary source of the $9.8 billion recovered to date was, yes, Bernard Madoff’s victims. The victims faced a hard choice: Take an “avoidance action” and repay money withdrawn to avoid litigation -- or be sued to repay up to six years of money withdrawn prior to the bankruptcy.
That’s probably not your idea of insurance protection. This definition isn’t exactly trumpeted on the SIPC website. What it and its securities industry backers want us to believe is that we actually have $500,000 of insurance protection against bankruptcy and fraud.
Unfortunately, the SIPC definition of net equity was upheld in court. The argument for its definition, as seen in court filings, is that when there is fraud, brokerage statements are works of fiction. This makes settlements based on those statements affirmations of the fraud, the lawyers argued.
In a sense, that is correct. Why use nonsense for making settlements? But that reasoning ignores a much larger set of issues by reducing it all to an impossible accountancy. What the SIPC definition ignores is basic justice. It ignores the fact that investors who were defrauded are no less innocent than investors whose broker went bankrupt.
Remember, in both cases people who believed they were doing business with a reputable firm lost money through no fault of their own. And one reason investors do business with any firm is that they are confident they also have protection from the SIPC.
So where are we? The industry’s own insurance company has hollowed out the assurances that were created to buttress investor confidence. The industry has turned insurance into an opportunity to sue the victims. Unbelievable. Horrible. True.
If H.R. 3482 isn’t voted into law, coffee cans and mattresses will look like really good places to invest.
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