CONGRESSIONAL RECORD -- SENATE
June 9, 1969
Page 15165
S. 2348 -- INTRODUCTION OF THE FEDERAL BROKER-DEALER INSURANCE CORPORATION ACT
Mr. MUSKIE. Mr. President, I introduce, for appropriate reference, a bill (S. 2348) to establish a Federal broker-dealer insurance corporation.
The Government waited until the events of the 1920's and 1930's deprived millions of Americans of their savings before Congress took action to assure that this kind of disaster would not confront bank depositors again. Since 1933, the Federal Government has provided insurance for deposits in commercial and mutual savings institutions through the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation which were created by Congress during the Nation's severest banking crisis and business depression.
The need for such insurance was demonstrated by a series of financial panics in which suspension of payments by one or a few institutions was followed by "runs" on many sound institutions which were in turn forced to close their doors. The major purpose of deposit insurance then and now is to preserve public confidence in the ability of financial institutions to meet their liabilities.
Another purpose is to protect the savings of families of moderate means, who often lack the financial sophistication to make judgments regarding the relative soundness of the various financial institutions.
The events since 1933 have substantiated the belief that deposit insurance would help restore and maintain confidence in the Nation's banks.
Therefore, I am today proposing a bill which would create the Federal Broker Dealer Insurance Corporation to protect investors from loss because of the failure of broker-dealer firms through whom they buy and sell securities. The bill would not in any way protect investors against investment losses.
Today, Americans who invest in the securities markets are almost as numerous as bank depositors in the 1920's and 1930's. The vast majority has moderate means. Over 25 million Americans own securities issued by individual corporations. Millions more participate in the securities markets through investment companies, pension funds, trust funds, endowment funds, and other types of institutional investing. The investing public is currently subject to risks, the precise magnitude of which is not known, from their dealings with broker-dealers whose financial resources and stability, in some cases, may be in doubt. There is the further danger that sound brokers may deal with other brokers who fail and thereby start a chain of failures.
Recently the Securities and Exchange Commission has been forced to ask for receivers for four firms which are not members of any stock exchange. While no data are yet available on the amount that the investing public stands to lose because of the current failures, the failure of Ira Haupt & Co. in 1963 would have left customers with losses of $9.5 million if members of the New York Stock Exchange had not voluntarily committed funds to make customers whole.
Banks did lose many millions of dollars in that failure. For firms which are members of exchanges, as an outgrowth of the Haupt matter, there are voluntary trust funds which the exchanges can use to help bail out customers in cases of broker or dealer failures. In a major disaster, however, such trusts would not have sufficient assets to make all customers whole.
The back-office fails, and paperwork problems of the securities industry have caused the present situation which endangers the entire industry. The ability of the securities industry to process transactions has not kept pace with the level of activity which has grown fourfold in 7 years.
Firms which are unable to properly handle the prevailing levels of activity experience a number of substantial difficulties. These are manifested by books and records, which do not accurately reflect securities transactions consummated on their own and on their customer's behalf; they do not accurately reflect capital position, conceal losses and thefts; and they lead to unprofitable operations and which eventually can cause situations which may deteriorate to the point of failure.
We should apply our lesson from the events of four decades ago, and from 36 years of successful Government operation of a banking insurance system to provide insurance for the Nation's investors in securities. The bill that I am introducing today will provide insurance against loss occasioned by the financial collapse of broker-dealers. All customers of broker-dealers and stock clearing corporations would be afforded protection.
The FBDIC has been designed to be self-sufficient. It would not cost the taxpayers of the Nation $1. In the first years of the program, the Treasury would pledge capital to be used if needed. That obligation would be reduced each year by the Corporation's reserves built up from assessments on broker-dealer members of the Corporation. In less than 20 years, the Treasury obligation would be completely eliminated or repaid, if used. There would be no reduction in assessments until all such commitments were canceled. Both the FDIC and the FSLIC work on this principle and Government commitments in both cases were retired promptly.
No new Federal agency would be created by the legislation. The Board of Directors of the FBDIC would be the Commissioners of the Securities and Exchange Commission. I envision that the staff of the Corporation would, as a practical matter, operate as another division of the Commission. Unlike the banking industry, all governmental regulation of broker dealers is already performed by one agency, the Securities and Exchange Commission. Therefore, new personnel to regulate insured firms would be kept to a minimum. I believe the proposed agency is patterned after the best features of both existing Federal insuring agencies. Again, I would like to emphasize that the insurance system would not be a burden on the taxpayers, but will be completely self-supporting.
The insurance system would do much more than assume that investors will not lose their savings if the broker-dealers with whom they deal fail. It could well prove to be the keystone to the solution of the "fails" problem in the securities industry. Fails are another manifestation of the problem and a danger area. A fail is a security which has been purchased and not delivered within the settlement period. When the market price at which the security has been traded fails, one of the parties is exposed to loss until the fail is cleared up.
Total fails in the industry have been as high as $4 billion at one point during the past year. One of the prime causes of this problem is the lack of a national over-the-counter clearing facility. All transactions taking place on securities exchanges and to an extent some over-the-counter transactions in New York City and on the Pacific coast are cleared. In other words, securities and money are exchanged through a clearing corporation. The clearing corporation matches and pairs off many transactions between a large number of brokers in the same security and balances many differences between their various brokers. When a clearing house is injected into the process, 30 to 70 percent of the movement of securities and money, depending on the system, is netted out by that pairing of buy-and-sell transactions.
In the present system, almost every over-the-counter transaction necessitates a separate delivery of securities and payment of money. One major obstacle to having an effective national over-the-counter clearing system is the lack of guarantee or insurance against the insolvency of those brokers who deal with the clearing corporation. Existing clearing corporations are reluctant to admit those outside their immediate spheres of influence and supervision because of this lack of guarantee. When this is solved, a giant step will be taken toward a final solution to the problems caused by the securities industry's failure to efficiently and adequately process its own paperwork. The FBDIC, in addition to insuring a firm's customer, would afford a measure of protection to clearinghouses and their participating brokers in the event of a member broker's failure.
Thus, the FBDIC will facilitate solutions to the current problems facing the securities industry and the investing public in two very visible areas: First, the industry's inability to process paper in its own back offices and to keep its book and records on an adequate and current basis; and, second, the lack of a national over-the-counter clearing system to aid in the exchange of money and securities between brokers. The first problem may cause the failure of a broker-dealer and the FBDIC will protect the investor from loss because of that failure. Because clearing corporations will not be protected from the financial loss occasioned by failure of their members, they will not be more willing to expand their services and the FBDIC will give financial assurances needed for the establishment of a national over-the-counter clearing system.
Mr. President, I ask unanimous consent that the text of the bill be printed at this point in the RECORD.
The VICE PRESIDENT. The bill will be received and appropriately referred; and, without objection, the bill will be printed in the RECORD.
The bill (S. 2348), to establish a Federal Broker-Dealer Insurance Corporation, introduced by Mr. MUSKIE, was received, read twice by its title, referred to the Committee on Banking and Currency, and ordered to be printed in the RECORD, as follows: