June 18, 1970
Page 20339
ESTABLISHMENT OF A FEDERAL BROKER-DEALER INSURANCE CORPORATION – AMENDMENT
AMENDMENT No. 709
Mr. MUSKIE. Mr. President, when I introduced a bill – S. 2348 – to establish a program of insurance for the protection of securities industry customers a year ago, it did not find enthusiastic reception either in the securities industry or elsewhere. Sporadic failures in the brokerage business, even among some larger firms, did not seem to provide sufficient incentive for action in this field, despite the overwhelming importance of capital market stability to our economic life and health.
But now successive months of almost unparalleled erosion of prices and volume, a direct consequence of widening public uncertainty and unease over administration policies both at home and abroad, have changed the picture. The securities industry, accustomed to rendering financial advice, is itself beset with financial problems on a scale which, though not yet disastrous, leaves no room for either optimism or patience. Increasingly, firms find themselves unable to meet even the relatively modest net capital requirements imposed by the SEC or self-regulatory bodies. Increasingly they seek to solve these problems by merger as one of the few alternatives to public offerings in a disinterested market. And increasingly the public has become aware of the risks inherent in a situation unlikely to disappear even if a bull market were to return – an event no one is willing to predict.
As a result of these events, I now discover interest in my proposal has been aroused on all sides. I was pleased to note that President Nixon in his economic address on June 17 mentioned the importance he attaches to constructive legislation in this field. But even before the President's remarks, our efforts have produced various proposals from the industry as well as from the SEC.
Today I am submitting on behalf of myself and Senators HART, MCINTYRE, METCALF, MONDALE, and Moss, an amendment to S. 2348 which reflects many of the constructive views embodied in these proposals.
In submitting this amendment, I hope that we can move to a speedy and constructive conclusion in the best interest of both the securities industry and the public.
The major differences between the version of S. 2348 now before the Banking Committee and the version I introduced today are as follows:
The new version provides broader and more explicit supervisory and oversight authority, as well as exemptive powers, for the SEC, partly as a matter of reiteration of authority already available to the SEC. Also, the bankruptcy provisions as now written reflect the thinking and research of both the SEC and the industry as expressed in proposals each has recently submitted. Further, we have introduced a suggested reserve of $75 million as an appropriate size for the Corporation's insurance fund in periods when no Treasury borrowings are outstanding. However, this figure is discretionary. In the event that a Treasury loan is outstanding to the Corporation, the assessment rate for the industry would be adjusted upward to facilitate timely repayment of such loans.
Treasury borrowing authority under the new version has been reduced to $1 billion, from the earlier $3 billion, Insurable coverage is not extended to other broker-dealers. Two additional amendments worthy of note are an improved definition of insurable risk, and the substitution of an independent auditor for the GSA.
I ask unanimous consent that the text of the amendment be printed in the RECORD at this point.
The PRESIDING OFFICER (Mr. CRANSTON). The amendment will be received and printed, and will be appropriately referred; and, without objection, the amendment will be printed in the RECORD.
The amendment (No. 709) was referred to the Committee on Banking and Currency, as follows:
AMENDMENT No. 709
Strike out all after the enacting clause and insert in lieu thereof the following: SHORT TITLE
SECTION 1. This Act may be cited as the "Securities Investor Insurance Act".
SEC. 2. The Securities Exchange Act of 1934 is amended by adding the following new section:
"SEC. 35(a) There is hereby established a body corporate to be known as the 'Securities Investor Insurance Corporation' (hereinafter referred to as the 'Corporation'). The Corporation shall be a nonprofit corporation and shall have succession until dissolved by Act of Congress. The Corporation shall be an instrumentality of the United States Government.
"(b) The Corporation shall be under the direction of a Board of Governors which shall consist of the members of the Securities and Exchange Commission who shall serve, ex officio, as members of the Board without additional compensation. The principal office of the Corporation shall be in the District of Columbia.
"(c) The Board of Directors shall meet at the call of its Chairman, or as otherwise provided by its bylaws. The Board shall determine the policies which shall govern the operations of the Corporation.
"(d) (1) The Corporation shall establish a fund to carry out its operations under this section. All fees and assessments collected by the Corporation shall be paid into the fund. All expenses of the Corporation shall be paid from the fund.
"Brokers and dealers shall be assessed, under rules and regulations of the Corporation (which may grant exemptions), at a rate which will result in total annual assessment income to the Corporation of not more than $25,000,000.
"(2) Each year, the premium is to be paid by an insured broker or insured dealer shall, subject to subsection (d) (3) of this Act, depend on risk factors determined by the Corporation to be relevant. Risk factors shall include, but not be limited to, giving reasonable consideration to (i) membership in a guarantee fund or plan which is approved by the Corporation and has substantial reserves kept in a separate account that is required to be applied to indemnify holders of insured customer accounts or insured liabilities, and (ii) varying practices among broker-dealers or members of exchanges or classes thereof with reference to the method of conduct of their respective business and consequent risks to their customers, including but not limited to whether and to what extent such persons hold 'free-credit balances' of customers, or accept payments from customers in advance of delivery of securities, or accept custody of customer owned securities, or segregate their business as agents for customers from that as dealer, including underwriter; and (iii) such fees or charges as may be payable for the purpose of contribution to any exchange or securities association trust or other fund for the protection of customers of particular classes of broker-dealers.
"(3) All assessment income after deducting the operating expenses of the Corporation, including interest or borrowings from the Treasury, shall be set aside as a reserve for possible insurance losses and all losses paid shall be charged to the reserve. In any year that the balance in the reserve reaches $75,000,000 or such amount which the Corporation considers reasonable, the Corporation shall adjust the assessment rate for the succeeding year so that assessment income will approximate (i) the annual expenses of the Corporation, including interest on Treasury borrowings. and (ii) insurance losses incurred in the most recent calendar or fiscal year.
"(e) Any national securities exchange or registered national securities association of securities dealers may transfer funds to the Corporation at any time, and these funds shall constitute an advance payment of fees and assessments on behalf of members of such exchange or association.
"(f) In the event that moneys in the fund are or may reasonably appear to be insufficient for the purposes of this section, the Treasury is authorized to make loans to the Corporation.
"To enable the Treasury to make such loans, the Corporation is authorized to issue to the Secretary of the Treasury notes or other obligations in an aggregate amount of not to exceed $1,000,000,000 in such forms and denominations, bearing such maturities, and subject to such terms and conditions, as may be prescribed by the Secretary of the Treasury. Such notes or other obligations shall bear interest at a rate determined by the Secretary of the Treasury, taking into consideration the average market yield on outstanding marketable obligations of the United States of comparable maturities during the quarter preceding the issuance of the notes or other obligations. The Secretary of the Treasury is authorized and directed to purchase any notes and other obligations issued hereunder and for that purpose is authorized to use as a public debt transaction the proceeds from the sale of any securities issued under the Second Liberty Bond Act, as amended, and the purposes for which securities may be issued under that Act, as amended, are extended to include any purchase of such notes and obligations. The Secretary of the Treasury may at any time sell any of the notes or other obligations acquired by him under this subsection. All redemptions, purchases, and sales by the Secretary of the Treasury of such notes or other obligations shall be treated as public debt transactions of the United States.
"(g) At the time of application for, and as a condition to, any such loan the Corporation shall file with the Treasury a statement with respect to the anticipated use of the proceeds of the loan and a plan providing for the imposition of the minimum additional fees and assessments intended to be collected during the term of the loan. Such additional fees and assessments, which shall not be limited in amount by any other provisions of this Act, shall take into account varying practices among brokers and dealers with respect to the method of conduct of their business and consequent risks to their customers. The Corporation shall certify to the Secretary of the Treasury that such loan is necessary for the protection of customers of brokers and dealers and maintenance of confidence in the United States securities markets. Notwithstanding the provisions of any plan, the Corporation may, taking into account the ability of the industry to pay and to continue to function effectively at any time during the period when such loan may be outstanding, either impose such further additional fees and assessments as it may conclude to be reasonable in order to expedite the repayment of such loan or, with the approval of the Secretary of the Treasury, either reduce existing fees and assessment, or extend the maturities of outstanding indebtedness of the Corporation.
"(h) The Corporation shall have power
"(1) to sue and be sued, complain and defend, in its corporate name and through its own counsel;
"(2) to adopt, alter, and use the corporate seal, which shall be judicially noticed;
"(3) to adopt, amend, and repeal by its board of directors such bylaws, rules, and regulations relating to the conduct of its business as the Commission may approve or require as provided in subsection (1);
"(4) to conduct its business, carry on its operations, and have offices and exercise the powers granted by this section in any State without regard to any qualification or similar statute in any State;
"(5) to lease, purchase, or otherwise acquire, own, hold, improve, use or otherwise deal in and with any property, real, personal or mixed, or any interest therein, wherever situated;
"(6) to accept gifts or donations of services, or of property, real, personal or mixed, tangible or intangible, in aid of any of the purposes of the Corporation;
"(7) to sell, convey, mortgage, pledge, lease, exchange and otherwise dispose of its property and assets;
"(8) to appoint such officers, attorneys, employees and agents as may be required, to determine their qualifications, to define their duties, to fix their salaries, require bonds for them and fix the penalty thereof;
"(9) to invest in securities issued or guaranteed by the United States or an agency thereof; and
"(10) to enter into contracts, to execute instruments, to incur liabilities, and to do all things as are necessary or incidental to the proper management of its affairs and the proper conduct of its business.
"(i) (1) Whenever it shall appear to the Corporation that any broker or dealer registered pursuant to section 15 (a) of this Act or any member of a national securities exchange not exempted by the Corporation pursuant to subsection (d) (1) hereof (herein called the debtor) is in danger of failing to meet its outstanding obligations to customers, the Corporation in its discretion may apply to any court of competent jurisdiction as specified in sections 27 and 21 (e) of this Act and upon notice to the debtor obtain a decree adjudicating that customers of the debtor are in need of protection under this section. If a national securities exchange or a registered national securities association has reason to believe that a debtor is in danger of failing to meet its outstanding obligations as defined in this paragraph it shall immediately notify the Corporation. For purposes of this subsection, the court shall deem the debtor to be in danger of failing to meet its obligations if it is insolvent within the meaning of section 1(19) of the Bankruptcy Act, or is unable to meet its obligations as they mature, or has committed an act of bankruptcy, or is the subject of a proceeding in which a receiver, trustee, or liquidator has been appointed pending in any court or before any agency of the United States or any State, or is not in compliance with requirements under the Act or rules of the Commission, the Corporation, or any national securities exchange or registered national securities association with respect to net capital, hypothecation of customers' securities, or the maintenance or preservation of books and records, or is unable to make such computations as may be necessary to establish compliance with such net capital requirements. In the discretion of the Corporation, an application under this subsection may be combined with any action brought by the Corporation or the Commission including an action by it for a temporary receiver pending an appointment of a trustee under this subsection. If the debtor shall consent to or fail to contest the Corporation's application or if the debtor fails adequately to controvert any material allegation of the application, the court shall forthwith grant an application which satisfies the requirements of this subsection. For the purposes of assessment and coverage, the provisions of this section shall not apply to any office of a debtor outside the United States if the head office and principal business of the debtor are not within the United States, unless otherwise provided by rule or regulation of the Corporation.
"(2) The purpose of a proceeding under this section shall be:
"(A) To provide for prompt payment and satisfaction, insofar as is possible, of the debtor's obligations to customers relating to securities and obligations owing to other brokers and dealers on open securities transactions made for and on behalf of customers in the ordinary course of business;
"(B) To enforce rights of subrogation to claims as specified in paragraph (11) of this subsection;
"(C) To the extent not inconsistent with purposes (A) and (B), to liquidate the debtor.
"(3) Such application may be filed notwithstanding the pendency in the same or any other court, of any bankruptcy, mortgage foreclosure, equity receivership proceeding or any similar proceeding to reorganize, conserve, or liquidate the debtor or its property, or any proceeding to enforce a lien against property of the debtor. Upon the filing of such application, the court in which application is brought shall have exclusive jurisdiction of the debtor and its property wherever located.
"(4) Upon the filing of the application by the Corporation and pending an adjudication under this subsection, the court may stay any prior pending bankruptcy, mortgage foreclosure, equity receivership or other proceeding to enforce a lien against property of the debtor any other suit against the debtor, or against any receiver, conservator, or trustee of the debtor or its property, and the court may appoint a temporary receiver. Upon such adjudication, the court shall stay or continue the stay of any such prior suit or proceeding, and shall appoint a trustee for the defendant and its property. Such trustee shall be vested with the same powers and title with respect to the defendant, its property and the same rights to avoid preferences as a trustee in a bankruptcy and a trustee under Chapter X of the Bankruptcy Act have with respect to a bankrupt and a Chapter X debtor.
In any proceeding under this subsection, customers and their subrogees shall have the rights of priorities specified in section 60e of the Bankruptcy Act except of a national securities exchange which is the subject of a proceeding under this paragraph, and, in determining whether particular customers are able to identify specifically their property, whether property remained in its identical form in the stockbroker's possession or such property or any substitutes therefor has been allocated to or physically set aside for such customer, and remained so allocated or set aside, it shall be sufficient if
"(A) securities are segregated individually, or in bulk for customers collectively, or
"(B) in the case of securities held for the account of the debtor as part of any central certificate service of any clearing corporation or any similar depository, the records of the debtor show that all or a specified part of the certificates representing the securities held by such clearing corporation or other similar depositary are held for specified customers, or for customers collectively, if such records of the debtor also show the identities of the specific customers entitled to receive specified numbers of units of such securities so held for customers collectively, Provided, That if there is any shortage in any class of securities so segregated in bulk or held for customers collectively, as compared to the aggregate rights of individual customers to receive specified securities, the respective interests of such customers in such securities shall be pro rated, without prejudice, however, to the satisfaction of any claim for deficiencies out of the funds provided in this section.
"(5) In any such proceeding the court shall designate as trustee and as attorney for the trustee, such person as the Corporation shall specify provided that no person shall be permitted to qualify as such trustee or attorney if such person is not “disinterested” within the meaning of section 158 of the Bankruptcy Act.
"(6) It shall be the duty of the trustee, to the extent feasible, to discharge promptly all obligations of the debtor owing to each of its customers relating to securities and owing to other brokers and dealers on open securities transactions made for and on behalf of customers in the ordinary course of business. Such obligations shall be discharged by the delivery of securities or effecting payments insofar as they are ascertainable from the books and records of the debtor or are otherwise determined to the satisfaction of the trustee, whether or not the particular customer shall have filed formal proof of such claim. For that purpose the court among other things shall:
"(A) Authorize the payment and discharge of claims out of funds made available by the Corporation notwithstanding the fact that there may have been no formal proof of such claims or no showing or determination that there are sufficient funds of the debtor available to make such payment;
"(B) Authorize the trustee to satisfy claims to deliver specific securities, which are ascertainable from the books and records of the debtor or are otherwise determined to the satisfaction of the trustee, if and to the extent that
"(i) securities to satisfy such claim are sufficiently identified;
"(ii) there is a deficiency of identified securities, but funds are made available by the Corporation to purchase such securities; or
"(iii) there is an unresolved controversy as to whether there is a deficiency of sufficiently identified securities, and funds are committed by the Corporation to reimburse the estate of the debtor, depending upon the outcome of such controversy, if particular securities in such estate are distributed in satisfaction of such claim.
"(C) Authorize the trustee, on the direction of a customer with a claim to undelivered securities, to sell such securities if and to the extent that
"(i) the books and records of the debtor show that the customer has such a claim; and
"(ii) securities sufficient to satisfy such a claim are sufficiently identified.
Any payment, sale, or delivery of securities pursuant to this subsection may be conditioned upon the trustee requiring claimants to execute in a form to be determined by the trustee, appropriate receipts, supporting affidavits and assignments, but shall be without prejudice to any claimant filing formal proof of claim for any balance of securities or cash to which he may deem himself entitled, and any cash received for any securities sold pursuant to subparagraph (C) of this subsection shall thereafter be treated as equivalent to such securities for the purpose of this section;
"(D) Authorize the trustee to establish a procedure for fixing the value of unverified or insufficiently identified claims.
"(7) The provisions of this subsection permitting discharge of obligations of the debtor to pay cash or to deliver securities, without formal proofs of claim or with funds committed or made available by the Corporation shall not include any person 'associated' with the debtor as defined in section 3(a) (18) or any holder of one percent or more of the voting stock of the debtor or any member of the immediate family of any of the foregoing.
"(8) In order to provide for prompt payment and satisfaction of obligations the Corporation shall make available to the trustee such of its funds as may be required to pay or otherwise satisfy claims relating to securities of each customer in full but not to exceed $50,000 or such greater amount as the Corporation may determine with the approval of the Commission: Provided, That no limitation shall apply to the completion of open securities transactions of the debtor made for and on behalf of customers in the ordinary course of business; and Provided further, That in the case of a person acting as agent who transacts business for third parties through an account or accounts with a broker, dealer, or member of a national securities exchange, for purposes of the $50,000 limitation, the term 'customer' shall not be limited by the number of such accounts but shall include each such third party insofar as the claims of such third parties are ascertainable from the books and records of either the debtor or the person acting as agent made available to the trustee or are otherwise determined to the satisfaction of the trustee.
"(9) For the purposes of the $50,000 limitation of this subsection, the amount of the claims of each customer shall be determined as of the date of bankruptcy or the date of filing of the application, whichever shall occur first.
"(10) Nothing in this section shall limit the rights of any person to establish by formal proof such rights as such person may have to payment, or to delivery of specific securities without resort to such funds as may be made available by the Corporation.
"(11) If and to the extent that provision is made to satisfy the claims of customers out of any funds made available by the Corporation, the Commission, or the United States, or any agency or instrumentality thereof, or by any national securities exchange or registered national securities association, the provider of such funds shall be subrogated to the claims of such persons including the rights and priorities established under paragraph (4) of this subsection.
"(12) Without limiting the powers and duties of the trustee to discharge promptly obligations as specified in this subsection the court may make appropriate provision for proof and enforcement of all other claims against the debtor including claims of any provider of funds pursuant to paragraph (11) of this subsection as subrogee; and, subject to the order of the court, the proceeding shall be conducted in accordance with the provisions of Chapter X and such of the provisions of Chapters I through VIII inclusive, of the Bankruptcy Act as section 102 of Chapter X makes applicable, except as inconsistent with the provisions of this subsection and except that such trustee shall not consider the formulation of a plan of reorganization.
"(13) Notwithstanding the limitations contained in section 19(b) of the Act and without limiting its powers under other sections of the Act the Corporation by rule, regulation or order: (i) may require any registered securities association and any national securities exchange to adopt any specified alteration of or supplement to its rules, practices and procedures with respect to the frequency and scope of inspections and examinations of its members and the selection and qualifications of examiners and may require such exchanges and associations to furnish the Corporation with such reports and records or copies thereof relating to the financial condition of its members as the Commissioner may consider necessary or appropriate and may make or require inspections and examinations of such exchanges or associations or their members relating to any of the foregoing matters as it may consider necessary or appropriate; and (ii) is authorized to make, issue, and rescind such rules, regulations and orders with respect to the acceptance of custody and use of customers' securities, and the carrying and use of customers' deposits or credit balances as the Commission may consider necessary or appropriate to minimize the risks of failure to meet obligations to customers and to reduce the expenses of providing against such risks.
"(j) Unless specifically authorized by the Commission, no registered broker or dealer or member of a national securities exchange that is in arrears in any financial obligation arising under this section to the Corporation, the Commission, or to any national securities exchange or any registered national securities association shall continue to engage in or conduct any securities business.
"(k) The Corporation, its property, its franchise, capital, reserves, surplus, and its income, shall be exempt from all taxation now or hereafter imposed by the United States or by any State or local taxing authority.
"(l) The Corporation shall, as soon as practicable after the end of each fiscal year, transmit to the President and the Congress, an annual report of its operations and activities.
"(m) (1) The accounts of the Corporation shall be audited annually in accordance with generally accepted auditing standards by independent certified public accountants or independent licensed public accountants certified or licensed by a regulatory authority of a State or other political subdivision of the United States. The audits shall be conducted at the place or places where the accounts of the Corporation are normally kept. All books, accounts, financial records, reports, files, and all other papers, things, or property belonging to or in use by the Corporation and necessary to facilitate the audits shall be made available to the person or persons conducting the audits; and full facilities for verifying transactions with the balances or securities held by depositories, fiscal agents and custodians shall be afforded to such person or persons.
"(2) The report of each such independent audit shall be included in the annual report required by subsection (1) of this section. The audit report shall set forth the scope of the audit and include such statements as are necessary to present fairly the Corporation's assets and liabilities, surplus or deficit, with an analysis of the changes therein during the year, supplemented in reasonable detail by a statement of the Corporation's income and expenses during the year, and a statement of the sources and application of funds, together with the independent auditor's opinion of those statements.
"(n) Whoever steals, unlawfully abstracts, unlawfully and willfully converts to his own use or to the use of another, or embezzles any of the monies, funds, securities, credits, property or assets of the Corporation shall be deemed guilty of a crime, and upon conviction shall be fined not more than $50,000 or imprisoned not more than five years, or both.
"(o) Any broker or dealer, or any officer, director, partner, owner of 10 percent or more of the voting securities or controlling person of such broker or dealer thereafter shall be ineligible to be a broker or dealer, or to be associated with a broker or dealer included within the coverage of the Corporation if such broker or dealer has received funds or caused funds to be obligated from the Corporation on its behalf, unless the Commission otherwise determines in the public interest.
"(p) This Act shall become effective on ___________, except that, with the approval of the Commission, the Corporation may be substituted for or joined with the Commission in any action instituted by the Commission on or after the date of the introduction of this Act and for the purposes of such action the provisions of this Act shall be fully applicable as if it were in effect as of that date."
SEC. 3. Subsection (c) of section 24 of the Securities and Exchange Act of 1934 is amended to read as follows:
"(c) It shall be unlawful for any member, officer, or employee of the Commission to disclose to any person other than a member, officer, or employee of the Commission, or to use for personal benefit, any information contained in any application, report, or document filed with the Commission which is not made available to the public pursuant to subsection (b) of this section: Provided, That the Commission may make available to the Treasury Department, the Board of Governors of the Federal Reserve System, or the Securities Investor Insurance Corporation any information requested by the Treasury Department, the Board, or the Corporation for the purpose of enabling the Department, the Board, or the Corporation to perform its respective duties under this title."
SEC. 4. (a) Each insured broker and insured dealer shall display at each place of business maintained by it a sign or signs, and include in all its advertisements a statement to the effect that its customer accounts are insured by the Corporation: Provided, That the Board of Directors may exempt from this requirement advertisements which do not relate to customer accounts or when it is impractical to include such statement therein. The Board of Directors shall prescribe by regulation and forms of such signs and the manner of display and the substance of such statements and the manner of use. For each day an insured broker or insured dealer continues to violate any provisions of this subsection or any lawful provisions of said regulations, it shall be subject to a penalty of not more than $100, which the Corporation may recover for its use.
(b) The Corporation may require any insured broker, insured dealer, or stock clearing corporation to provide protection and indemnity against burglary, defalcation, and other insurable losses. Whenever any insured broker, insured dealer, or stock clearing corporation refuses to comply with any such requirement the Corporation may contract for such protection and indemnity and assess the refusing party.
(c) Any insured broker or insured dealer which willfully fails or refuses to file any certified statement, or pay any assessment, required under this Act shall be subject to a penalty of not more than $1,000 for each day that any such violation continues, which penalty the Corporation may recover for its use.