Government Looking For Ways To Cover Gap In Investor Protection


The Securities and Exchange Commission (SEC) and some Congressmen are seeking to expand the mission of the Securities Investors Protection Corporation (SIPC) to cover investors’ losses in the $7 billion Ponzi scheme operated by convicted felon R. Allen Stanford. The SIPC says it was created by Congress to restore funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms. But Stanford’s victims supposedly invested in certificates of deposit sponsored by an offshore bank (not a securities broker-dealer), and the SIPC says that it is not authorized to restore their funds. The SEC disputes this contention and is suing the SIPC. (“Advisers could be tapped as Congress seeks to expand Ponzi victim payouts,” InvestmentNews).

As the article indicates, several Congressmen have reportedly introduced legislation to expand the purview of the SIPC. But the SIPC would need additional funds to carry out an expanded mission, and potential new sources of funds have been proposed.

The SIPC Modernization Task Force has recommended that the SIPC’s coverage limits be expanded from $500,000 to $1.3 million. That money will have to come from somewhere as Congress is unlikely to authorize the printing of more money or the raising of taxes. Brokerage firms are already assessed 0.02 percent of revenues to fund current payouts.

Proposals for additional funding have included assessments on investment advisor firms and requiring them to maintain insurance to cover any errors and omissions on their part that lead to their clients investing in a Ponzi scheme. In addition, Congress “may increase the potential liability of investment advisors who don’t do their homework and send [customer money] to a fund like Bernie Madoff,” Joseph Borg, director of the Alabama Securities Commission, was quoted as saying.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.