December 10, 1970
Page 40867
SECURITIES INVESTOR PROTECTION ACT OF 1970
The Senate resumed the consideration of the bill (S.2348) to establish a Federal Broker-dealer Insurance Corporation.
Mr. MUSKIE. Mr. President, every American has a stake in guaranteeing the healthy and efficient functioning of the American securities markets.
Today, more than 30 million people participate directly as investors in securities of one class or another. Perhaps another 100 million participate indirectly, through mutual funds, pension funds, and the like. Moreover, every sector of our economy is heavily dependent on the strength and viability of our Nation’s securities industries.
The Congress has long recognized the great impact of the securities markets on our national economy and the critical role that public confidence plays in the strength of these markets. To enhance public confidence, the Securities Act of 1933 was enacted so that the investor would have the necessary information to exercise sound judgment in making securities purchases. And the Securities Exchange Act of 1934 provides safeguards to assure that the investor will not be victimized by fraudulent, manipulative or deceptive selling schemes.
These two statutes are largely successful in accomplishing their purposes. But, as recent experience has shown, there still exists a serious gap in our securities laws which neither of these statutes covers. An investor may exercise sound judgment in his choice of stock, and he
may place his order with a reputable broker. Nevertheless, he may still lose his entire investment if the broker subsequently fails because of operational or financial difficulty.
Mr. President, since 1934, the United States has insured bank deposits under the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation. These insurance programs protect bank depositors from loss of their savings because of bank failures. And the existence of this deposit insurance has become a source of confidence in the soundness of our savings institutions.
S. 2348, the Security Investor Protection Act of 1970, would accomplish a similar purpose for securities investors by protecting them from losses because of the failure of their brokers. This bill has been reported unanimously by the Committee on Banking and Currency following 4 days of hearings. That there is an urgent need for this legislation, I think, is clear.
The stockbroker is not a simple pass-through agent for the purchase and sale of securities. Customer accounts with brokerage firms in credit balances, cash, and securities are maintained on a continuing basis. These balances provide the investor with liquidity for future transactions. And, as is the case with banks, these balances are used by the broker to finance the operations of his business. Recent estimates indicate that the liabilities of brokers to their customers in credit balances, cash, and securities exceed $50 billion.
The willingness of investors to entrust assets of this magnitude to brokerage firms attests to the great confidence the American public has had in our securities industry in the past. But today that confidence is jeopardized.
Over the past year, insolvencies in the securities industry have been mounting sharply. Several major firms have suffered serious financial difficulties. Some have failed completely, or have been forced to merge with healthier firms. In the past 18 months, a large number of brokerage firms, including 12 major ones, have failed. And, since August alone, three members or former members of the New York Stock Exchange have been forced to go into bankruptcy or to commence liquidation proceedings.
The industry itself has attempted to stem the tide of failure and to provide some protection for the customers of failing firms. In 1964, the New York Stock Exchange, for example, established a trust fund to protect investors from losses due to insolvencies. But that trust fund already has commitments to troubled firms totaling $55 million. Beyond this, the Exchange recently made a commitment for an additional assessment to indemnify one large firm against losses it may incur because of its acquisition of another firm which was close to bankruptcy.
Mr. President, the customers of the firms which the stock exchanges have managed to protect are fortunate. But we have now reached the point where the ability of the industry to handle additional losses on a significant scale is uncertain at best.
There is uncertainty about what new emergencies, what new losses, may emerge in the near or distant future. There is uncertainty about how much relief the industry itself can provide against such emergencies if they should arise. And there is cause for concern about the customers of those broker-dealers who are not members of an exchange with trust fund protection. These customers are fully exposed and have no protection at all.
In my judgment, it is clear that the Congress must act now to protect the investor and to restore public confidence in the securities industry.
S. 2348 is a major step toward accomplishing these goals. It does so in three ways
First, S.2348 proposes the creation of the Securities Investor Protection Corporation (SIPC), a private nonprofit corporation which would administer an insurance fund composed of industry funds raised by annual assessment, backed up by Treasury borrowing authority. This insurance fund would protect investors from the serious hardships that can follow the failure of a brokerage firm. Customers of covered broker-dealers would be insured against financial losses up to $50,000 caused by the insolvency of the broker-dealer, in a manner broadly parallel to the operation of the Federal Deposit Insurance Corporation.
The fund would be financed initially by the industry itself in the amount of $75 million. This fund would be composed of $10 million in cash assessments and $65 million in firm lines of credit negotiated with commercial banks. And to provide additional protection for investors, customers would have the assurance that $1 billion of Treasury borrowing authority would be available to cover losses in case the industry financed fund is exhausted.
The bill also provides that the initial industry financed assessment fund will be enlarged over a 5-year period to $150 million, thus reducing further the possibility of having to draw upon Treasury funds. Additionally, the bank line of credit, which would provide $65 million in initial funding, will be replaced over a period of 7 years by cash raised through annual assessments against the industry.
Initial assessment rates for members of the Corporation would be a maximum of one-half of 1 percent of gross revenues for the preceding 12-month period. This rate of assessment may be lowered as the total fund reaches $150 million, or raised again to repay any Treasury borrowing that may become necessary.
Finally, to assist in the repayment of any Treasury funds borrowed under the authority established in the bill, S. 2348 also provides an additional financial safeguard in the form of a transactions charge. This charge would be imposed in addition to existing commission rates, but the aggregate may not exceed 20 cents per $1,000 of securities transactions. This charge may be levied by determination of the SEC, only in the event of a Treasury borrowing by SIPC.
Thus, Mr. President, S. 2348 calls initially for an industry financed insurance fund. Public funds would become available only in the event industry backed financing is exhausted. And transactions charges to investors would be imposed only to repay funds borrowed from the Treasury. I believe these mechanisms for establishing and maintaining an insurance fund to protect securities investors are both realistic and equitable.
Second, in order to minimize delay in meeting the legitimate claims of customers injured by the insolvency of a broker-dealer, S. 2348 introduces certain procedures for prompt liquidation of SIPC members when required, outside the time-consuming machinery of a bankruptcy proceeding. The bill also would establish procedures for making prompt distribution and payment of claims under certain conditions, without the need for formal proof of claim as is now required by the bankruptcy laws. These provisions, I believe, are a highly desirable adjunct to the present bankruptcy laws in minimizing the difficulties and delays that investors would otherwise experience in having their claims satisfied under existing law.
Third, the establishment of an insurance fund to protect the assets of investors is not sufficient without additional corrective measures to eliminate some of the problems which are causing broker failures. S. 2348 would give the Securities and Exchange Commission greater ability and authority to deal with these problems. It does so by further clarifying certain powers of the Securities and Exchange Commission to implement rules to safeguard customer assets. This is done by affirming the rule-making authority of the Commission with regard to all practices of brokers that bear on financial responsibility, expressly including the custody and use of a customer’s securities, cash deposits, or credit balances.
The bill also provides that the Commission’s authority in these matters would extend to broker-dealers who do business only on an exchange, placing them on an identical footing with those firms which are not members of an exchange. Thus, the SEC would deal directly with member firms, without the intermediary of a self-regulatory body.
Mr. President, I believe S. 2348 would go a long way toward providing the kind of public confidence which is so necessary to a healthy securities industry. But I recognize there remain some very basic problems within certain parts of the securities industry. There are problems of obsolete management techniques, careless business practices, inadequate self-regulation, and occasional fraudulent activities. All of these account in some part for the industry’s financial difficulties today.
I am by no means the first to cite these serious weaknesses. In 1963, the SEC published a monumental study of the securities industry, which has become something of a Bible to students of securities self-regulation. That study treated virtually every aspect of the industry from capital requirements to eligibility for entry. And most of what it had to say seems equally important today.
In fact, it is safe to say that if the recommendations of that 1963 study had been implemented, we would not now need to be here considering this insurance legislation, because the industry abuses that give rise to the need for insurance probably would. not have occurred.
I think it clear that the insurance plan established by S. 2348 is a necessity. And the other provisions of the bill will strengthen the powers of the Securities and Exchange Commission in the public interest.
But it is equally clear that this legislation should be only the beginning of a broad program of reform within the securities industry. And this, I think, imposes responsibilities upon the SEC and upon Congress, as well as upon the industry. I think that for its part, Congress and the Senate specifically should undertake broad and thorough hearings in depth into the operations of the securities industry, with a view to initiating the additional reforms that are clearly indicated and necessary in the long run.
What we are proposing here today is simply the first step, and it must not be allowed to become the last step, in dealing with the problem which it is intended to cover.
I am convinced that if we do that, Mr. President, Congress will be able to acquit its responsibility to the public as well as to the industry for the proper regulation of this critically important component of our economic system
Mr. President, last week the House of Representatives passed H.R. 19333 which is similar to the bill before us. I urge early Senate approval of S. 2348 so that Congress can complete action on this important legislation this year.
Mr. WILLIAMS of Delaware, Mr. President, will the Senator yield?
Mr. MUSKIE. I am happy to yield to the Senator from Delaware.
Mr. WILLIAMS of Delaware. I compliment the Senator from Maine on his presentation. I certainly agree with him that this is a most important piece of legislation, and I think that its approval in this session of Congress will go far toward restoring investor confidence in this country. I think it is most essential that we take this action before adjournment.
Mr. MUSKIE. I thank the distinguished Senator from Delaware. His approval of a measure in this field, I think it is a sound endorsement of its principles and purposes. I appreciate the Senator’s remarks.
Mr. BENNETT. Mr. President, the primary purpose of the bill before us is to provide insurance protection for millions of individuals who are customers of brokers or dealers in securities throughout this country. Many customers leave their securities and cash with their broker-dealer for safekeeping or to facilitate trading. If a broker-dealer encounters financial difficulties for any of a variety of reasons, the customer may experience a delay in receiving his cash balance or his securities, or, even worse, he may never fully recover that to which he is entitled.
In order to protect investors against such a contingency, major stock exchanges set up trust funds to which their members contributed. Until recently, these trust funds have been adequate to take care of the needs of the industry and, as a result, there have been a. few actual losses. However, due to a variety of reasons, some which could be foreseen and some which could not, the securities industry is now in a financial crisis. During the last 2 years, the New York Stock Exchange has been required to fully commit its trust fund of some $55 million in order to meet possible demands. In addition, New York Stock Exchange firms now face a potential assessment of up to an additional $30 million in connection with a recent takeover of Goodbody & Co. by Merrill Lynch.
This burden on securities firms comes at a time when their volume is much lower than that which they had to plan for only a relatively few months ago, and when profits have been squeezed in many firms and eliminated in many others The failure of broker-dealer firms in recent months, has shaken the confidence of customers who earlier were assured that the industry trust funds were adequate to meet any foreseeable contingency. It is important not only for the securities industry but for our entire economy that the previous confidence in our securities markets and the firms involved in those markets be restored. Since the industry is no position at the present time to restore that confidence without assistance, it has become necessary for us to enact legislation which will remove present uncertainties concerning possible losses of cash and securities belonging to customers.
This proposed legislation would provide for the establishment of a fund to be used to make it possible for customers, in the event of the financial insolvency of their broker, to recover that to which they are entitled, with a limitation of $50,000 for each customer on the amounts to be provided by the fund. In addition, this legislation requires a general upgrading of financial responsibility requirements of brokers and dealers, to eliminate to the maximum extent possible the risks which lead to customer losses such as have occurred. I believe it is important to point out that this legislation does not provide protection to broker or dealer firms themselves, nor does it in any way protect individuals who purchase securities from incurring losses which may result from decreases in the market value of those securities. It only assures a customer that he will receive securities he has purchased or cash he has left with a firm in the event that firm faces financial insolvency. I would also like to add that this protection is provided by a private fund made up of assessments on the industry itself. Only if that fund should prove inadequate in a major crisis would Federal funds be loaned to the insurance corporation to pay customer losses. Machinery is provided under which funds to repay the Federal Government. can be developed within the industry.
While no one can predict the future, it is not expected that this insurance will result in any permanent cost to the Federal Government or to taxpayers. In the event of a major crisis if the fund is exhausted, the insurance corporation may borrow on application through the Securities and Exchange Commission up to $1 billion from the U.S. Treasury. While some have argued that this Treasury backup is not appropriate, there is no doubt that it is necessary to assure the proper operation of the insurance fund. In addition, while $1 billion may seem like a tremendous contribution to be made by taxpayers, we must remember that any such borrowing must include a reasonable plan for repayment and must be approved by a Government agency before it is made.
Furthermore, the seriousness of a collapse of our securities markets and the effect it would have on the financial system and economy of this country is such that it would warrant the expenditure of many billions of dollars of taxpayers funds to save it if necessary, and such an expenditure would be far less than the loss would occur as the result of unemployment, lack of production, and wasted resources if the funds were needed and were not made available.
Mr. President, I do not intend to discuss the details of this bill, since Senator MUSKIE already has outlined them, and I feel it is unnecessary to repeat all he has said. I do feel that it is important for us to enact legislation without delay. I must admit that I do not approve nor support all of the provisions of this bill. This is no time, however, to quibble about items which are not absolutely necessary for the restoration of investor confidence The important thing is to get on with the job and if changes are discovered to be necessary, in the light of experience, certainly we can make them.
Mr President as I close, I want to pay my respects to the industry itself, which has already taxed itself very heavily to assume, as an industry, the burdens created by the failure of individual members. New York Stock Exchange members alone have already committed $55 million for that purpose and are prepared now to commit an additional $30 million. This is evidence of its acceptance of responsibility and of its good faith. I think this kind of evidence demonstrates that the industry is entitled to the additional protection that this bill would make available to it if necessary through the Treasury and after a process which will carefully safeguard the safety of this loan by the Treasury to the taxpayer.
Mr. President, I hope that the Senate will approve this bill today, so that we can get it to conference and get it passed in the remaining days of the session.
Mr. MUSKIE. Mr. President, I ask unanimous consent to have printed at this point in the RECORD a letter from Chairman Hamer H. Budge, Chairman of the SEC dated October 2, 1970, with respect to the adequacy of the funds that would be created under the pending measure, a letter from Charls E. Walker, Acting Secretary of the Treasury, urging the passage of the pending measure, and a letter from Robert W. Haack, president of the New York Stock Exchange, dated October 1, 1970.
There being no objection the letters were ordered to be printed in the RECORD, as follows:
SECURITIES AND EXCHANGE COMMISSION
Washington, D .C.,
October 2, 1970.
Hon. EDMUND S. MUSKIE,
U.S. Senate,
Washington, D.C.
DEAR SENATOR: Your letter of September 25, 1970, asks whether the Commission is prepared to make a judgment as to the adequacy of the $75 million fund which will be available to SIPC within four months of its creation and the adequacy of the projected $150 million amount set as a goal of the legislation.
As stated in my September 17 letter to Chairman Sparkman, no one can be certain, because of the impossibility of making an underwriting analysis of just what the potential risks are, even for the near term, that the initial $75 million fund or the eventual $150 million fund will be adequate.
This is the reason for the possible involvement of the U.S. Treasury. Based upon past experience and the representations made to us in the enclosed October 1, 1970 letter from the New York Stock Exchange, unless events take a turn for the worse, it is believed that the initial $75 million to be raised from nonpublic sources by SIPC is likely to be adequate to meet the needs of investor protection. In any event, unless there are significant adverse developments, the commitment to investor protection of privately raised funds is likely to substantially outweigh any Treasury commitment in the early stages of the accumulation of the fund. Further, we would hope that the rule-making and oversight authority of the Commission provided for in the proposed legislation will help increase the likelihood that in the future the $150 million fund will be adequate.
As I have previously observed, the proposed SIPC legislation does not exculpate anyone in the securities industry from any liability they may have respecting financial difficulties of broker-dealers arising prior to or after the enactment of the legislation. Accordingly, in the Commission’s view, the legislative proposal is a measure designed to protect investors and not a measure to protect broker-dealers in financial difficulties or others in the securities industry who may have some legal responsibility to the customers of such broker-dealers. Moreover, under the legislation, any broker-dealer who causes the expenditure of any SIPC funds may not reenter the securities business unless the Commission determines it is in the public interest.
Sincerely,
HAMER H. BUDGE, Chairman.
THE SECRETARY OF THE TREASURY,
Washington, D.C.
December 8, 1970.
Hon. JOHN SPARKMAN,
Chairman, Banking and Currency Committee,
U.S. Senate,
Washington, D.C.
DEAR Mr. CHAIRMAN: I am writing to reemphasize the Administration’s support for S. 2348, legislation to provide protection for customers of registered brokers and dealers and members of national securities exchanges. As you know, the House of Representatives passed similar legislation on December 1, 1970 by a vote of 359 to 3. The Administration is hopeful that Senate consideration can be scheduled in the immediate future to enable final enactment before the adjournment of the 91st Congress.
The Committee bill reflects in substantial degree the proposals recommended jointly by the Administration and the Securities Industry Task Force. Several modifications were made by the Committee; however, on the whole, we support and urge prompt passage of the Committee bill, S. 2348, as amended.
The Committee bill does exempt certain classes of broker/dealers from required membership in SIPC, which exemptions are of great concern to the Administration. Subsection (h) would exempt from membership those broker/dealers who do not hold securities or free credit balances for customers, who hold customer securities only in non-transferable form or who hold funds or securities only to the extent required to complete a transaction. If retained, these exemptions would reduce potential revenues by at least 20 percent. Such a reduction would seriously hinder the required accumulation of cash in the balance of the fund within the time anticipated, thus increasing the potential need for the Corporation to borrow from the U.S. Treasury.
Quite apart from the loss of revenues, we continue to feel that all registered brokers or dealers and members of national securities exchanges should be required to be members, with authority in SEC to exempt any such broker/dealers or members of national exchanges as it deems necessary or appropriate in the public interest, or for the protection of investors. While certain portions of the industry do not directly hold customer securities or free credit balances, their operations are so closely related to the overall securities business that they benefit from the preservation of investor confidence in the securities markets and the strengthening of those markets by the general protection of all present and potential customers in such markets.
We feel this legislation is a necessary first step to protect customers and improve public confidence in this essential sector of our economy. This legislation provides clear authority to the SEC to regulate those aspects of the operations of the securities industry that have contributed to the recent problems.
It cannot be emphasized too strongly that this legislation provides protection to the customers of member firms and provides no insurance coverage or protection for firms themselves. I want to clearly state that we join with the Committee in its desire that this important legislation be approved and enacted in this Congress.
Sincerely yours,
CHARLS E. WALKER, Acting Secretary.
NEW YORK STOCK EXCHANGE,
New York N.Y.
October 1 1970.
Hon. HAMER H. BUDGE,
Chairman, Securities and Exchange Commission,
Washington, D.C.
DEAR Mr. CHAIRMAN: We have been asked by the Commission staff to provide an appraisal of the current financial condition of NYSE member organizations and our opinions on the adequacy of the initial and subsequent funding of the SIPC, as contemplated by the bills presently pending in the United States Senate and the House of Representatives.
With respect to the current financial condition of member organizations, we are pleased to report that the thirty member organizations which were on the Exchange’s "early warning" surveillance list last week has now been reduced to 17 through corrective action in the case of 13 firms. A detailed tabulation relating to these 17 firms is enclosed. Events in process make it now fairly certain that 11 of these firms will be removed from our list in the near future.
The general criteria for determining whether a firm is included on this list and, therefore, subjected to special surveillance is if a firm’s capital ratio exceeds 1200% or its monthly operating losses exceed 15% of the organization’s excess net capital. Basic capital and profitability data are required from every member organization monthly, with weekly or dally follow-ups on those on our special surveillance list The criteria are set so that unfavorable trends can be spotted and corrective action taken well before a firm’s capital ratio exceeds 2000% and violates our net capital rule.
The number of firms currently subject to special surveillance compares very favorably with the number of firms which have been on the list since the current guidelines were developed in March. For example, there were 87 firms on the special surveillance list on June 30 and 46 on August 28. As of September 30, a total of 139 member organizations had been on the list.
The situation with respect to the 17 firms which are referred to in the enclosed table can be summarized as follows: Four are large nationwide firms which have programs underway for solving their capital problems. The situation with respect to two of the firms is discussed in detail later in this letter. Seven are small regional firms and six are small New York based firms. Among the 13 smaller firms, four carry no customer accounts but introduce accounts to other firms. Two others are in the process of merging or going out of business and ten of the 13 have reported events which will remove them from this list if substantiated.
The two large firms which are of concern at the moment are taking steps which should lead to a solution to their potential problems. One firm exceeded our guidelines during the summer months but the firm has increased its capital and improved its profitability and is filing daily reports with the Exchange. An audit now in process, however, is expected either to confirm or correct a group of older security differences. It could also show unknown errors and differences left over from the firm’s operations difficulties of 1969 or its recent merger. Adverse audit reports conceivably could cause a capital problem and the Exchange consequently maintains the firm and the audit under close daily surveillance. The firm, a partnership, has agreed to increase its capital condition by $5 million of new capital before the end of October.
This additional capital would give the firm some $14 million of excess net capital. This amount should be sufficient to absorb any audit adversity.
The second large firm is also a partnership. It did not exceed our guidelines until affected by large August losses; however, it estimates a $500,000 profit in September. However, several subordinated lenders have given notice of termination of their loans which could cause an increasing capital problem in October and November. A merger is being negotiated which the parties hope to consummate by the end of October. The firm is also liquidating proprietary positions to improve the firm’s capital.
In sum, it presently appears to us that the current financial condition of member organizations has improved over the past several months, particularly in September. Thus, based on the current plans and programs, we do not anticipate any major financial exposure.
Our appraisal of the current financial condition of firms, therefore, is one of cautious optimism. However, there are a number of factors which are outside the control of the Exchange as a self-regulatory authority which can have a dramatic and deleterious effect on the capital position of member organizations.
The securities industry has been for many months now in an economically depressed state because of the steep decline in market volume and drop in securities prices. Unfortunately this economic situation came upon the industry at a time of escalating costs.
The monitoring data which the Exchange and the Commission staff have been collecting since April, 1970 reveals the overall unprofitability in the securities industry.
The security commission business was absolutely dreadful in the month of August as 75% of all reporting firms had security commission income losses.
The results for retail firms primarily serving public customers were even worse. A shocking 92.5% of the retail firms lost money on their security commission business in August.
Profitability apparently improved in September. The record of present and recent losses, however, makes the raising of new capital very difficult for all firms and often impossible for a firm which has a special problem. In other words, the red ink in the securities business exacerbates capital problems for the problem firms.
If the economic situation in the securities industry does not continue to improve, there will obviously be substantial regulatory problems with respect to the financial condition of broker-dealers.
However, the number of firms on the special surveillance list, as explained previously, is on the decline and the magnitude of problems presented by the firms, as a group, is less severe than has been the case during the past several months.
This leads to a response to the second question asking our opinion on the adequacy of the initial ($75 million) and subsequent ($150 million) contemplated funding of the proposed Securities Investor Protection Corporation. One way to measure the possible financial exposure to SIPC is to review what financial commitments might have been required of SIPC if the legislation had been in effect since mid-July, 1970 when the proposed legislation was first filed in the House and Senate.
If SIPC had been in effect since July 15, so far as we know, a liquidator would probably have been appointed in the case of only three firms. All three of these firms are relatively small, and even if SIPC funds had been required, the total amount involved probably would have been limited to a few million dollars, at most.
This was one of the most financially adverse periods in the history of the securities industry. During this period from July 15 until, say, September 15, about 109 NYSE member organizations were on our special financial surveillance list. During this period, financial conditions in the securities industry were terrible as broker-dealer profits were down or nonexistent. Hopefully, with a continuation of the recent increase in trading volume and the adoption of the proposed new commission rate schedule, the financial situation in the securities industry in coming months will improve.
If, therefore, one can assume that economic conditions in the securities industry in the coming months will improve, it would appear that the contemplated initial $75 million funding of SIPC would be more than adequate.
I should make it clear, however, that no one can, in our opinion, make a realistic or useful evaluation of the potential dollar exposure to SIPC because there is no known way to measure the liability which might be faced in the event of broker-dealer failures. The fraud of Allied Crude Vegetable Oil against Ira Haupt & Co. for example, caused a loss of some $27 million which could in no way be anticipated in advance.
Mr. Ralph DeNunzio reached this same conclusion in responding to a question put to him by Senator Edmund Muskie in a letter of August 5 in which Senator Muskie asked: "The extent of financial exposure in dollar terms, which firms . . . might create either to the exchange or the new SIPC."
To which Mr. DeNunzio replied in a letter of August 11: “I am satisfied that nobody can make a realistic or useful evaluation of dollar terms of exposure whether upon the basis of customer protection without limit as to amount (as in an Exchange Special Trust Fund liquidation) or protection of a customer to the extent of a $50,000 limit.”
Our experience in connection with current liquidations involving the Exchanges Special Trust Fund bears out the accuracy of this statement, as estimates of possible liability made in advance of or after the liquidation was commenced, have been subject to substantial variation during the early part of a liquidation and until an audit can be completed.
The Exchange did, however, make a detailed study earlier this year of possible future trust fund size. We concluded at that time that a program for the availability of a $80 to $100 million customer protection fund would be sufficient for the needs of the foreseeable future.
This determination was reached by analyzing items relating to member organizations such as the gross income of member organizations dealing with the public, a calculation of those firms’ mean net expenses, and comparisons of liabilities, capital, size of firms and their gross income over a four-year period.
Based on these analyses, we concluded that a program as proposed in the SIPC bill, leading to a $150 million fund should be sufficient for the foreseeable future. This conclusion, in our opinion continues valid today and in the future.
Recent events in connection with litigation surrounding liquidations which are being handled under the Exchange’s Special Trust Fund procedure have brought into sharp focus the need for the liquidation procedures which are included in the SIPC bills.
The appointment of a liquidator pursuant to the procedure in the SIPC bills stays any proceedings under the bankruptcy laws so that customer accounts can be delivered out promptly while a liquidation using Special Trust Funds is voluntary and is dependent upon the voluntary forbearance of creditors of the firm.
I hope that we have answered the two questions raised by the Commission staff. As you have expressed on a number of occasions, public confidence in the Nation’s securities markets is important to the economy of the Nation. The SIPC bill will go a long way to improving and restoring the public’s confidence in our markets. If the SIPC bill is not passed by the Congress, this will serve to diminish public confidence and, thereby, intensify the financial problems of broker-dealers.
Sincerely,
ROBERT W. HAACK
Mr. WILLIAMS of New Jersey. Mr. President, S.2348 would establish a Federal Broker-dealer Insurance Corporation, in order to protect the many millions of Americans who invest in securities against brokerage firm failure.
Over the last 6 months, the need to protect consumers who leave their securities with broker-dealers for safekeeping has become an absolute necessity. During that period, some of our Nation’s largest stockbrokers have teetered on the brink of financial insolvency, while many smaller firms have either dissolved or merged with their competitors. Only large infusions of capital have saved F. I. Dupont and Hayden Stone from financial ruin. Goodbody & Co., our nation’s fifth largest stockbroker, has been absorbed by Merrill Lynch, contingent upon an indemnification payment of $30 million from New York Stock Exchange member firms.
The insolvency of a Goodbody or Dupont could create havoc in the securities industry due to the inter-relationship between broker-dealers. The real losers would of course be our Nation’s small investors, many of whom have invested a significant portion of their savings in securities. It is imperative that these investors, who are the backbone of a healthy economy, be fully protected against brokerage firm failures. They should not be forced to bear the brunt of this administration’s disastrous economic policies with which this Nation is now forced to live.
Recognizing the precarious position facing the securities industry and our Nation’s small investors, Senator MUSKIE, in June of 1969, introduced the bill before the Senate today, a bill to insure investor accounts held by brokerage firms in an amount up to $50,000. During hearings held before the Securities Subcommittee of which I am chairman, it was suggested that a securities industry task force working with the SEC, the Treasury Department, and our subcommittee give further consideration to this problem. This bill before the Senate today is the result of these deliberations. Mr. Ralph DeNunzio, Chairman of the Task Force, should. be commended for his leadership in this area. The proposed legislation not only creates lasting investor protection from insolvency but also, for the first time, gives the SEC the power to regulate the use of free credit balances and to prohibit the hypothecation of customer securities. By allowing the SEC to correct any abuses which may have occurred in these areas, S. 2348 couples investor insurance with securities industry reform.
Although the corporation administering the insurance program will be able to borrow up to $1 billion from the U.S. Treasury, an occurrence which we all hope will never occur, the first $150 million will be raised solely from assessments made upon members of the securities industry. In addition, the Directors of the Corporation will consist of the Chairman of the SEC, the Chairman of the Federal Reserve Board, the Secretary of the Treasury, and two members of the securities industry. This preponderance of public directors will, in my opinion, insure against any abuses in Treasury borrowing.
The need for S. 2348 is obvious. Small investors must be protected. Public confidence must be restored in our Nation’s securities markets.
While I, for one, am not satisfied with each and every section of this proposal, especially in the areas of free credit balance regulation, capital requirements, and assessments based upon risk, this bill certainly moves in the right direction.
I have applauded the work of the Senator from Maine on the pending legislation from its introduction to this moment on the floor of the Senate. I join with him in his hope that there will be a more fundamental study – indeed, a more profound study – of the entire Securities industry.
As chairman of the Securities Subcommittee, I intend to propose an in-depth, far-reaching inquiry into all phases of the securities industry, including the use of free credit balances and the hypothecation of customer securities. From such an inquiry, lasting legislative solutions will be found, so that what has occurred in the past will not be repeated in the future. At that time, I would hope that legislation could be enacted which would give total protection to all of our Nation’s investors.
Mr. MUSKIE. Mr. President, will the Senator yield?
Mr. WILLIAMS of New Jersey. I yield.
Mr. MUSKIE Mr. President, I should like to express my appreciation to the distinguished chairman of the subcommittee for his statement. We have worked together on this legislation for many months. He and his staff have been of tremendous assistance to us.
Recently, we discussed the difficulty of getting a much needed thoroughgoing study of the practices of the industry. In line with the statement I made earlier, and the one that the Senator from New Jersey has just made, I think it should be greatly reassuring to the House and Senate – it surely is to me – that the Senator from New Jersey considers it possible to undertake what will be a time-consuming and difficult responsibility but it needs to be done. He and I agree wholeheartedly on that.
Under the principle of self-regulation, many practices have developed that should be looked at, reviewed, and changed in accordance with our best understanding of the problems as we become more expert.
I very much applaud the Senator’s statement.
Mr. WILLIAMS of New Jersey. We will work together. I look forward to that, and I thank the Senator from Maine for his kind comments.
Mr. McINTYRE. Mr. President, I rise to propose an amendment but before I offer it – it has been worked out between the Senator from Maine (Mr. MUSKIE) and myself – I should like to say a few wards about the pending bill.
To begin with, well over a year ago when the Senator from Maine introduced this legislation, few, if any of us could foresee the tremendous need which would arise for this sort of investor protection. The distinguished junior Senator from Maine, however, understanding the nature of the crisis which was to burst upon us this year, did foresee the problem and deserves the thanks of all Americans who are interested in strong, viable financial markets.
This legislation is, however, just the first step of many which must be taken before our securities markets may regain their health. During the past decade, under the pressure of heavy trading volume, the securities markets of the Nation have displayed structural weaknesses which must be corrected. The managers of those markets have failed to reorganize themselves in order to cope with the new demands which have been made on them. They have been shortsighted, at times greedy, at times too unconcerned with the welfare of their own customers. They have risked their customers for their own profit. They have, on too many occasions, chosen the narrow private way over the broad public interest. They have been unresponsive to those few of their own colleagues who have sought to lead the marketplace toward new ways of thinking about the problems confronting them.
And so, as an essential first step, we are now considering legislation made necessary by the failure of the securities markets to adequately protect investors. Much more needs to be done, in terms of new regulation and reorganization. This action today marks the beginning of a long series of actions which must be taken to provide long-term investor protection.
After the Committee on Banking and Currency completed its action on the bill before us, S. 2348, I and others of my colleagues, including the distinguished Senator from Maine, still entertained doubts about a few details in the bill. Accordingly, we have met together and have agreed on a compromise provision affecting two sections.
First, this compromise would reduce the maximum insurance type protection per account from $50,000 to $20,000. This amendment would bring investor protection in line with the protections which the Congress has already made available to depositors in banks and shareholders in savings and loan associations. Such a reduction would still provide full protection to all small investors and would provide more of an incentive to larger investors to be more concerned with the financial soundness of the firms they designate to hold their money.
Second, the compromise amendment would adopt language passed by the House in place of language now in the bill as a result of an amendment which I had offered in executive session of the committee.
As originally proposed to the Senate, this bill would require the participation of all registered broker-dealers in SIPC. I and many of my colleagues on the Committee felt that such a sweeping requirement for membership would inadvertently include many persons whose registration as broker-dealer was not functionally related to the type of risks which the bill covers. Accordingly, I prepared language to exempt all broker-dealer whose activities did not involve such risks to investors.
After the unanimous adoption of this provision, the SEC, the Treasury, and the New York Stock Exchange all felt that it could result in so diminishing the revenue base of SIPC that the financial soundness of the insurance fund might be too weakened to perform effectively. I disagreed with this contention, but at the urging of the Senator from Maine, I have examined the method which the House has adopted to exclude certain broker-dealer from SIPC membership and have found that method satisfactory. Accordingly, the amendment which I now offer will substitute the House language for the Senate language.
I believe that this amendment will combine to preserve the basic purpose of the Senate bill, while eliminating any confusion about the soundness of the insurance fund. I have made one change in the House language, dropping two words "open end," which had the inadvertent effect of requiring brokers who advised closed end investment companies to be included in SIPC. This change has the approval of the SEC staff.
Mr. President I send the amendment to the desk and ask that it be immediately considered.
The PRESIDING OFFICER (Mr. JORDAN of Idaho) The amendment will be stated.
The assistant legislative clerk proceeded to read the amendment.
Mr. McINTYRE. Mr President, I ask unanimous consent that further reading of the amendment be dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered and the amendment will be printed in the RECORD at this point.
The text , of the amendment is follows:
On Page 65, Line 16, strike "$50,000" and insert "$20,000".
On Page 47, line 12 strike all after “corporation" down through line 18, and insert, "other than persons whose business as broker or dealer consists exclusively of (i) the distribution of shares in registered open end investment companies or unit investment trusts, (ii) the sale of variable annuities, (iii) the business of insurance or (iv) the business of rendering investment advisory services to one or more registered investment companies or insurance company separate accounts.”
Mr BENNET. Mr. President, will the Senator from New Hampshire yield?
Mr. McINTYRE. I yield
Mr. BENNETT. I can understand, approve, and support the concept that the insurance coverage for cash be reduced to $20,000, because that brings it in line with the insurance coverage for cash deposits in savings and loan institutions and banks, as well as credit unions, but I wonder whether the Senator would consider keeping the $50,000 on securities, because in many cases that amount is – I was going to say reasonable. I think, in terms of the kind of new protection we are trying to offer, it might be more acceptable and more efficient in restoring confidence if the figure in the original bill with respect to securities only were left at $50,000 and the $20,000 applied to the cash.
Mr. McINTYRE. I would say to the Senator from Utah that when this matter of the $50,000 protection limit first came to my attention in executive session, I could not understand why we were going to such a high figure, particularly, as I considered the commingling of the accounts. I got to thinking that a broker should be responsible for the funds of his investor client, so I was thinking – in talking to the distinguished senator from Maine – of reducing the $50,000 protection to what the average man and woman in America who puts his money in savings and loan institutions or banks gets with the $20,000 protection. Here today, for the first time, I have been approached with this suggestion that not only should the account be protected for $20,000 in cash but insurance protection should be extended to $50,000 in securities that might be held by a broker-dealer, who went into bankruptcy, or in some way lost his financial soundness.
I am not prepared to accept that on such short term notice, but I would say to the Senator from Utah that my staff informs me this matter could go to conference. It is a little new to our staff, as it is to me. I would have no objection if the conferees discuss this in the 2 or 3 days. This may be an intelligent suggestion and worthwhile. I would have no objection, after we have a better opportunity for study, to cease my opposition if the study so indicates.
Mr. BENNET. I appreciate that comment and that suggestion.
Mr. President, I would like to make the further point that the small investor does not leave his securities with the company as a matter of practice. It is the man who is generally in and out of the market who, for his own convenience, leaves his securities there so that he does not have to go through the process of getting certificates, and so on.
I would think that the people who would be more apt to leave securities with the broker would be more apt to have in the area of $50,000 in securities than $20,000. But I certainly agree with the suggestion made by the author of the amendment that we study the matter between now and the time the bill goes to conference and try to work it out.
Mr. McINTYRE. Mr. President, I do not want to detract from anything I have just said with reference to the idea of exploring this matter of requiring $50,000 in securities and $20,000 in cash. I have been concerned with the risk we are trying to protect.
I would call the Senator’s attention to the risks which are protected against by this bill.
The greatest risk involves cash held in free credit balances and securities held as collateral for margin accounts. The people we are most interested in protecting – small investors, widows, orphans, beneficiaries of trusts, and others, are being poorly and reprehensibly served if they are keeping large amounts of cash with their broker. They are being poorly served if they have large investments on margin. They are being poorly cared for if they are beneficiaries of trusts, if their certificates are not locked up in a bank safety deposit box. And so I feel that the large $50,000 insurance protection is not needed for that class of investor.
That is why I feel that the $50,000 seems to be entirely too high. I agree with the thought raised here that we should consider the matter in conference.
Mr. MUSKIE Mr. President, will the Senator yield?
Mr. McINTYRE. I yield.
Mr. MUSKIE. Mr. President, as already indicated in the discussion, I have discussed this amendment with the distinguished Senator from New Hampshire. Both of the points covered by his amendment were raised in the committee and were considered in the committee and, I think, were not altogether resolved to the satisfaction of all committee members at that time. So, it is apparently still an open question.
I have discussed it with the distinguished Senator from New Hampshire, the distinguished Senator from Utah, and other interested Senators in connection with the pending legislation Accordingly, I am willing to agree to the amendment. I think that all others concerned come under the conditions suggested in the colloquy between the Senator from New Hampshire and the Senator from Utah.
I will add this further observation with respect to the Senator’s first point. That is the proposed reduction of coverage from $50,000 to $20,000.
We have not been able to get any firm judgment from the Commission or from the industry as to the difference this change might make upon any potential drain upon the fund. I have been told by some that it would not make too much difference. Nevertheless, I think the objective of the Senator from New Hampshire is clear and is understood. I have no objection to it.
Mr. McINTYRE. Mr. President, certainly the amendments that the Senator from Maine and I have worked out together go a long way toward developing what I would consider to be the solvency of the bill. We are eliminating the small dealer that I thought should be exempt, and are reducing the amount of coverage from $50,000 to $20,000.
Mr. MUSKIE. Mr. President, with reference to the second point in the amendment, the point is that under the bill as it was reported to the Senate, the McINTYRE amendment as it came out of the committee would have reduced the income of the fund by close to $5.5 million. As I understand the change which would be made by the present McINTYRE amendment, it would cause the revenue to be reduced to something over $1 billion. So the amendment very much strengthens the solvency of the fund.
Mr. JAVITS. Mr. President, a parliamentary inquiry.
The PRESIDING OFFICER. The Senator will state it.
Mr. JAVITS. Mr. President, I have read the amendment. It strikes me that each part is divisible. Is the amendment divisible?
The PRESIDING OFFICER. The amendment is clearly divisible.
Mr. JAVITS. Mr. President, I demand a division of the amendment.
The PRESIDING OFFICER. The amendment will be divided.
Mr. JAVITS. Mr. President, let me say that I think this bill is one of the most important things we will do in this Congress. I think the whole country and the securities industry should be eternally grateful to the Senator from Maine (Mr. MUSKIE), the Senator from New Hampshire (Mr. McINTYRE), the Senator from Utah (Mr. BENNETT), the Senator from Illinois (Mr. PERCY) and the other members of the Banking and Currency Committee who have brought us to this concurrence.
I have no desire to ruffle the water at all. My interest in the legislation is attributable to the danger posed by recent financial developments to our country and to the securities industry, most of which is concentrated in New York.
I have bird dogged this particular bill for literally months. There would be grave risk of a national financial collapse if some of the really big brokerage houses were to close. We might then be experiencing a terrible economic situation not only in this country but throughout the world.
I know of the fortitude that the Senator from Maine (Mr. MUSKIE) and the other members of the committee exercised to bring about this concurrence of view. However, we have always been faced with the question of adequacy. Indeed, one of the big things that held up action on this bill was the desire to have an adequate guarantee of funding and a guarantee figure that would be impressive enough for the investor to be confident that if he suffered loss, it would be made good.
I had the aggregate figure of $3 billion in mind. That was the original figure in the bill of the Senator from Maine. However, for reasons that were persuasive to him, and therefore to me, that figure was reduced to $1 billion.
I did not expect that we would have any further reduction in coverage. The Senator from Utah has properly put his finger right on the sore spot: even a relatively small investor might have as much as $50,000 in securities. The account of the traditional widow and orphan might frequently fall somewhere in that bracket. Certainly many relatively small investors have more than $20,000. Twenty thousand dollars is a perfectly good figure for insurance of cash accounts. But $50,000 is definitely more appropriate to the securities accounts of people dealing with brokerage houses.
If the amount is less than that, we generally find that accounts with mutual funds, closed end funds, and investment banks are involved. However, the broker in dealing with a customer is generally properly covered with a $20,000 cash balance. However, I think that we do need coverage to the extent of $50,000 of securities.
I am deeply concerned about letting a bill leave here with a floor amendment in it that cuts the coverage so materially.
I have had a lot of experience in conferences. What we take out of a bill on the theory that it can be restored in conference in some kind of a trade frequently is lost forever. We could go into conference and find that the House conferees say, "That is perfectly swell. The House recedes." Then we have a guarantee of only $20,000 for securities and cash.
Mr. President, I think that before we vote this amendment, which involves a very major change in the bill, we ought to consider its consequences most seriously.
I appreciate the feeling of the Senator from Maine that he is willing to take the amendment. However, I point out that if we do take it, it would not be without peril. I was not informed of any plan to offer this amendment. However, I am not on the committee, and I would not necessarily hear about it.
I do not think the world knows about it. In general the people who are interested in this matter throughout the country assume we are putting a $50,000 guarantee limit on this and not cutting it down to $20,000. The $20,000 is not a magical figure. It is only the figure for FDIC and bank deposits. I can see the analogy to cash deposits but not to securities.
So I would like to make this suggestion to the Senator from New Hampshire, whom I respect, and I do not impute anything to him other than the highest motives. Might it not be possible, in his judgment, to separate the guarantee limits for securities and for cash, according to the thoughts of the Senator from Utah (Mr BENNETT), and endorse a somewhat higher figure not necessarily $50,000, but say $35,000, for securities? Then that issue, as an issue, will be before the conferees and we will have what the brokers call some "stop loss” in that the Senate will not face the possibility of going to conference and finding that the House agrees to the $20,000 figure.
I have been caught at the post like that before and the feeling is embarrassing, but it can happen here if we do not guard against it.
Mr. PERCY. Mr. President, I think the Senator from New York has raised a very important point. The comparison between savings account and a securities account really cannot be made. How many people keep a savings account of that size? They are using those for current needs; that is not their life savings. But I can think of thousands of employees who come up for retirement every year and their employer faces them with a choice of whether the person retiring wants to take out his accrued retirement benefits and manage it himself or leave it in some annuity form. Suddenly a husband and a wife are faced with the fact that their entire life savings and retirement benefits have accrued and they have to do something with them. They may place them in the hands of a brokerage firm if they feel that is the best way to have those funds actively managed and working.
So when a person is 65 years of age, and has 20 more years to go, $20,000 is a very small amount of money whereas that amount in a savings account is a great deal of money.
When I think back to the tens of thousands of employees in my own previous company, I can think of milling machine operators and drill press operators who have accrued a substantial retirement benefit well in excess of $50,000. Some people have worked for Sears, Roebuck for 30 or 40 years that has a very liberal profit sharing retirement fund and they have quite a bundle accrued and for some longtime employees it can get into the hundreds of thousands of dollars, but they have to make that stretch for years to cover their retirement. So $50,000 as an upper limit did not seem unreasonable to me, $20,000 seems unreasonably low.
I thank the Senator for bringing out this point.
Mr. McINTYRE. Mr. President, I believe the Senator from New York was in the Chamber when I had a colloquy with the Senator from Utah. This proposal was suddenly raised here out of nowhere about $50,000 in securities as opposed to or in conjunction with $20,000 cash. As a result of my colloquy with the Senator from Utah, and discussing the matter with members of the staff, it is my information that this issue of separation the securities and the cash will be a matter in conference. Now, it seems well to leave it at that point. It would give the staff an opportunity to review the matter to determine whether or not there is any real good sense in this question of $20,000 cash and $50,000 securities.
Speaking for myself, I want to say to the Senator from New York that I am not particularly enamored with this legislation. We felt very much handicapped as we tried to elicit statistical information from this self-regulated industry. It proved that the self-regulated industry does not give us the facts we would like to have in order to proceed intelligently. The amendment the Senator has now asked to have divided is, as in the case of so many things in the Senate and the House of Representatives, a matter of compromise .
I am the one who had to give in. In connection with the little independent back in my home town, and back in the small town in New York who does not commingle his accounts, who is going to be asked to chip in, I agreed to put him back in. There is a big question, as to whether or not in the case of serious difficulty he would have adequate funds for paying his assessments.
I know the senator does not mean to upset the apple cart by coming in now and talking about $30,000 or $50,000 in securities, but I am becoming disenchanted with the entire bill.
Mr. MUSKIE addressed the Chair.
The PRESIDING OFFICER. The Senator from New York has the floor.
Mr. JAVITS. I yield to the Senator from Maine.
The PRESIDING OFFICER. The Senator from Maine is recognized.
Mr MUSKIE. Mr. President, the Senator from New York has been interested in this bill from the beginning and he has offered to be of every assistance in working out problems which have arisen with respect to it in order to ease its passage through the Senate and the House of Representatives. This task has not been easy to perform. A great many Senators have had questions about the bill on both sides of every issue that it involves.
When I introduced the bill a year ago last summer it had no support anywhere, including the securities industry and the administration. Then, as the difficulties of the market emerged and became exposed, there was greater and greater concern about them and eventually the administration and others rallied behind the idea for this kind of insurance. This happened about midsummer, but even since that time it has been difficult to move this bill along because of the uncertainty of the conditions of the industry and the very real doubts of Senators, like the Senator from New Hampshire.
Because of those uncertainties we have undertaken to put together a bill to meet all the questions that have been raised. The questions of the Senator from New Hampshire are real. I understood them and I sympathized with them.
The amendment which is before us, and on which the Senator from New York requested a division, represented the agreement I had reached with the Senator from New Hampshire on the two points that troubled him. I realize that agreement binds only the Senator from New Hampshire and me. But what I am saying is that in order to get the bill to this point in what may be the next to the last week of the session, it has been necessary to work out all these problems, including this one, in a way to resolve doubts of senators about the bill. That is why I have indicated to the Senator from New Hampshire that I will agree to his amendment and support it, because I think in the form in which it is at the present time it contributes to the prospects for passage of the legislation.
Mr. JAVITS. Mr. President will the Senator yield for a question?
Mr. MUSKIE. I yield
Mr. JAVITS. I am very sympathetic. The Senator knows that. I appreciate what the Senator has done, and I want to help him.
Did the committee analyze or get in the testimony the proportion of securities compared with the proportion of cash that would be covered? Does the Senator have any idea?
Mr. MUSKIE. No. I wish to say to the Senator that this is the type information it has been impossible to get from the securities industry, from the Commission, and this has been the kind of information which has raised the doubts that have moved the Senator from New Hampshire and other Senators.
May I say to the Senator that this amendment has been discussed with representatives of the SEC. The industry has known about it. We checked in both quarters to get all doubts that might be expressed from those sources. Then we reached agreement on the amendment.
Mr. JAVITS. What was their attitude?
Mr. MUSKIE. The SEC is willing to have the McINTYRE amendment. They are going to press in conference for the point of view expressed by the Senator from Utah (Mr. BENNETT). They understand this is a new proposal, or a new form of proposal, but they do not press for serious consideration of it on the Senate floor. They will press it in conference. They are willing to take the amendment in its present form.
Mr. JAVITS. What would happen if I should offer an amendment to the amendment to cover securities up to $35,000, for example? To what extent would that upset the actuarial propositions which the Senator is laying down in the debate?
Mr. MUSKIE. The actuarial prepositions are not known, because so little is known of the details in the broker-dealer houses. It is that uncertainty that has plagued the bill from the beginning. If the Senator offers that amendment, I will support the McINTYRE amendment, because that was the agreement I made with him and brought to the floor. I think we can live with it. After all, we started the FDIC with a $10,000 ceiling. We moved the ceiling up to $20,000 only recently, in the last year or two. So the prospect of increasing the coverage in conference is not an unreasonable one.
Mr. JAVITS. May I be frank with the Senator, as he always is with me, and as the Senator from New Hampshire (Mr McINTYRE) always is with me? I do not want, with millions and millions of people involved, to miss the forest for the trees because we have to scale down our original intentions. In other words, I fear that we are going to take the least expensive route to please perhaps some small brokers and dealers, because they do not want to spend the money – and I cannot blame them – and miss the big purpose of the bill. That is what worries me.
What worries me is the fact that we are going to scale down the whole conception of what we are trying to accomplish in order to suit some people who do not feel happy about paying the small tab, and thereby miss the basic purpose of reassuring the community of investors that they at least have something that stands between them and the improvidence of the individual broker.
I ask that question because I think there is a moral responsibility here. If the Senator wants me to go along with this without a contest, he takes upon himself the moral responsibility of writing down the value of the guarantee just because we have to look after the interests of the small dealers.
Mr. MUSKIE. We asked the Commission, and I am sure the commission was aware, from the sources of information that were available to it, what change this would make upon the potential drain on the fund. It was their impression, without any precise information upon which to form an opinion, that there would not be a significant change to the potential drain upon the fund.
That is the argument I used to the Senator from New Hampshire in undertaking to dissuade him from offering his amendment in the first instance. Finally since he insisted on it, I comforted myself by accepting his amendment.
May I say to the Senator in addition: There is no way of knowing in what amounts securities are held for particular customers. There is another point. If the $20,000 limit on securities is unrealistic in terms of the holdings of particular customers, they can break up their security accounts.
Mr. JAVITS. May I ask the Senator from New Hampshire a question? Would the Senator from New Hampshire be willing to take a $25,000 limit? I know that does not seem very different, but in that way the Senate would present a proposal on which there could be negotiations, so that there could be a distinction between the money and the securities.
I wish the Senator would give consideration to that proposal. Let us at least show a distinction between cash and securities when we go into conference. Perhaps something good will come out of it. It may not, but at least let us have a crack at it so that we will have the idea of dividing the money from the securities.
Would the Senator consider that?
Mr. McINTYRE. Mr. President, may I first say to the Senator from New York that one of the principal reasons in my own mind, why I resist this entire idea is that this is a very complicated subject. At no time in my recollection during either the executive sessions or other considerations by the committee did we have the benefit of information on which this split type of protection was to be considered. Today, when it first came up, and it was brought to my attention by the Senator from New Jersey (Mr.WILLIAMS), I immediately went to the staff and asked them if they could tell me whether it was a good idea, a poor idea, or what. They all asked for more time to study it.
I do not pose as having all the expertise on the inner sanctums of the markets of New York so that I would want to hold fast on an amendment as a result of a compromise or agreement, without its having been considered in hearings.
Mr. JAVITS This could be dropped in conference, but the issue of the difference between $20,000 and $50,000 would be there, with the dynamics of different treatment for securities and for money. All I am trying to do is get something into the bill which would indicate that there is a field for settlement, for negotiation. Perhaps it will not be done. Perhaps nothing will happen. Perhaps the $20,000 will come out of conference just as the Senator wants it, but at least let us make the distinction between securities and money.
Certainly, I recognize, and the Senator from Illinois (Mr. PERCY) has just explained it very feelingly, that there is a difference between bank accounts and brokerage accounts, that there are different volumes of resources involved.
I think if we are to turn out something that is meaningful, we should not just shut our eyes and take the FDIC figures.
Again, I respect the arrangements Senators have made, but we are here on the floor to make proposals. We might just as well legislate in committee if we are not going to be permitted to say anything about it because the manager and the proponent of an amendment decided that they were going to get together. Now we find ourselves locked out and asked to just be quiet. I do not think I should do that, and I do not think anybody would want me to do that.
Mr. MUSKIE. May I say, in all good will, the Senator has been asking me how he could help to get the bill moving along. I assume in each case he meant what specific things with respect to the bill he had an influence on that might eliminate objections. That is what I was doing with this amendment. I am sorry the Senator implies that is an objectionable way to handle the business of the Senate, but the Senator from New Hampshire had a legitimate question. In the committee, I think properly, we discussed it and resolved it by a vote, but not to the satisfaction of every member of the committee. The issue was still alive. As the Senator indicated, he "bird dogged" me on it all along. This is how we worked it out.
I recognize the Senator’s right in trying to change it. I am certainly not going to hold that against him. What we tried to do is to work out these problems. This is not the only way. An extended debate on any item could stimulate other Senators to resurrect sleeping doubts about this bill before the day is over.
Mr. BENNETT. Mr President, will the Senator yield?
Mr JAVITS. I have the floor, Mr. President.
Mr. BENNETT. Will the Senator yield to me?
Mr. JAVITS. May I just say this I think what the Senator says is absolutely right, were it not for the fact that the committee presented a bill to us with $50,000. That is the substantive aspect of it.
With all my desire to help get a bill passed – and it is very real and it will be apparent throughout this debate – that does not mean I can suborn my judgment, and accept a bill I think would be unwise.
I do not think the Senator from Maine wold ever misconstrue my desire to get a bill out, because he knows I think it is of vital importance.
I yield to the Senator from Utah.
Mr. BENNETT. I ask the Senator from New Hampshire, in order to make sure that this balance of $50,000 and $20,000 will actually be in conference. Would the Senator from New Hampshire agree to modify his amendment just enough to say "$20,000 cash or securities," so they will be separated that much, and so that the House of Representatives cannot say, Under the circumstances, we cannot consider those as two separate prepositions?
Mr. McINTYRE. First of all, I think the legislative history that has been filled out here this afternoon, with my own colloquy with the Senator from Utah, and with the interest that has been generated now because this is the first time we have heard of this split type of protection undoubtedly will mean that the matter will be in conference. I am not likely to be a conferee, but. to make everyone a little happier, I will be somewhat accommodating, if I may have the attention of the distinguished Senator from New York and the distinguished Senator from Utah. If I may have their attention, how would it be, in order that they may be reassured, if we take the $20,000 figure and call it"cash and securities"?
Several Senators addressed the Chair.
Mr. BENNETT. I think it should be "cash or securities," because we do not want to say that the total of cash and securities put together can be only $20,000. I do not think that is what the Senator wants.
Mr. McINTYRE. I say a $20,000 limitation, whatever it may be.
Mr. BENNETT. That is right.
Mr. McINTYRE. Would the Senator be satisfied with that?
Mr. BENNETT. I think it would make it easier in conference to treat the two separately, than if they were handled the same way.
Mr. MUSKIE. Mr. President I ask, for purposes of clarification, whether we are now talking about two figures that are cumulative.
Mr. BENNETT. No.
Mr. MUSKIE. Because, as I understood the Senator’s amendment, the total coverage for cash and securities would be $20,000. If the coverage is $20,000 for cash and $20,000 for securities, then the total available to a single customer at a single broker-dealer house is $40,000. Is that what the Senator intends in his new proposal?
Mr. BENNETT. That is not what I intended, Mr. President.
Mr. MUSKIE. I think other senators understood it was to be $20,000 for all cash and securities.
Mr. BENNETT. The thing I am trying to work out is a technical point. I do not want to go to conference with the House of Representatives, and have them say, "In your bill cash and securities are lumped together therefore we cannot separate them."
If I am hypercritical, and there is no such technical problem, I will withdraw my question. Does the Senator see what I am trying to get at?
Mr. MUSKIE. Yes, but I also see the complications, because when you do that you also open up the question of whether they are cumulative. If you have a total set out of $20,000, $30,000, or $40,000, then it can be any combination of cash and securities.
Mr. BENNETT. That was not my intention.
Mr. MUSKIE. No, but I point out the difficulty of phrasing an amendment that does not lead to that dilemma. That is one of the reasons I thought it made sense to take this issue to conference, without complicating it here on the floor of the Senate.
Mr. BENNETT. I do not want to complicate it, but I do not want to be foreclosed in conference by having them say, "We have to consider the Senate level as for cash and securities, because that is the way you have it in your bill."
Mr MUSKIE. Up to now, the implication has been that we are dealing with an account which is all cash, in which case the coverage ought to be $20,000, or an account that is all securities, in which case it ought to be $50,000. No attention has been addressed to the question, what if you have a combination; what then will be the limitation on the two?
That has not been worked out in colloquy, with no suggestions as to what the formula ought to be in that instance. That is why I think it makes more sense to go to conference, and I think this legislative history this afternoon indicates, as far as the Senate is concerned, that that is one of the options we want open, as to what is to be the limit.
Mr. BENNETT. Perhaps our colloquy has accomplished the purpose I sought to accomplish, then.
Mr. WILLIAMS of New Jersey. Mr. President, will the Senator yield?
Mr. JAVITS. I yield to the Senator from New Jersey.
Mr. WILLIAMS of New Jersey. Being the co-chairman of the Securities Subcommittee, and therefore considering it possible that I might be a conferee, at this point I am somewhat unclear, as to what the objective is.
I thought the objective, of the McINTYRE amendment was to limit the insurance coverage to $20,000 in value and that the $20,000 was not to be defined in terms of cash or securities. It was to be a ceiling.
I also thought that an effort was being made to refine that, with a ceiling amount on cash ,and with an additional amount to be covered in securities. I did not hear all of the colloquy, but I thought the Senator from New York was suggesting a $20,000 ceiling on insurance for cash held by the broker.
Mr. JAVITS. That is right.
Mr. WILLIAMS of New Jersey. And an additional amount in terms of the coverage of the value of securities.
Mr. JAVITS. $25,000, I suggested.
Mr. WILLIAMS of New Jersey. That is clear to me. As a conferee, I would know those were the amounts we were dealing with, a cash amount, so defined, and a securities amount. Is that what has evolved?
Mr. JAVITS. It has not evolved.
Mr. McINTYRE. Mr, President, will the Senator yield to me?
Mr. JAVITS. I have the floor. I just want to finish what I am saying.
Mr. McINTYRE. Is the Senator from New York still holding the floor?
Mr. JAVITS. Well, I can yield it, and happily, but I wanted to answer the question of the Senator from New Jersey. I do technically have the floor.
I just want to answer by saying we had not evolved anything really. I had latched on to the suggestion that was made that we might differentiate between securities and cash, and thereby preserve all we could of Senator McINTYRE’s amendment, by limiting it to $20,000 – because when I heard his argument, he emphasized cash – and provide a higher figure for the account which has securities in it, over and above $20,000. So, if we adopted the formula I suggested to him, if a man had $15,000 in securities and $20,000 in cash, he would be covered for the whole $35,000. If he had $18,000 in cash and $17,000 in securities, he would be covered. If the securities in the account exceeded $15,000, then he would be covered up to $35,000. That is really what I was shooting at, but the Senator from New Hampshire apparently does not find that agreeable, and the Senator from Maine feels that would force what he had understood was enabling him to keep the bill and the objections to it are in balance and this is what is giving me great concern, very frankly.
Mr. President, I yield the floor.
Mr. McINTYRE. Mr. President, I just want to tell my good friend from New Jersey that I had hoped we were about ready to put this motion to a voice vote, to adopt this amendment, with the feeling that the colloquy that had transpired here would raise this issue for the conferees.
The Senator knows and I know that the first word I heard about splitting the guarantee between securities and cash reached my ears from the Senator about an hour ago.
I would like the benefit of not being pushed on this floor to eat something I do not know very much about; but I would agree since it seems to be reasonable and to have some sense to it, to have the question go to conference. And I believe that is where it would go, if the Senator would just take it easy.
Mr. WILLIAMS of New Jersey. As a potential conferee, I believe it now makes sense to me. Apparently the effect of the last statement of the Senator from New Hampshire is that he believes that the conferees could go, in conference, to an amount in cash and another amount in securities?
Mr. McINTYRE. The staff tells me that this whole matter would be in conference. The House bill has the maximum coverage at $50,000, and we have it at $20,000. The Senator from Illinois and the Senator from Utah are raising, as is the Senator from New Jersey, the question of different treatment for cash and securities, which I had never considered before. No Member of the Senate, to the best of my knowledge, had considered this until an hour or two ago. I am perfectly willing to let that go to conference and to let the conferees decide what is best.
Mr. JAVITS. Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. BENNETT. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. BENNETT. Mr. President, a parliamentary inquiry.
The PRESIDING OFFICER (Mr. JORDAN of Idaho). The Senator will state it.
Mr. BENNETT. Mr. President, we have had a discussion as to the separability of the insurance rates on these two types of risk coverage, and I ask the Chair whether in fact, this separation could be accomplished in conference under the language of the amendment if it is germane.
The PRESIDING OFFICER The amendment of the Senator from New Hampshire is divisible. The Senator from New York has called for a division.
The Chair understands that the bill is likely to be passed after first striking all after the enacting clause and passing a new bill. Under rule 30, the conferees would have more leeway than they would under specific amendments. Rule XXVII, section 3, provides as follows:
3 (a) In any case in which a disagreement to an amendment in the nature of a substitute has been referred to conferees, it shall be in order for the conferees to report a substitute on the same subject matter, but they may not include in the report matter not committed to them by either House. They may, however, include in their report in any such case matter which is a germane modification of subjects in disagreement.
Mr. BENNETT. I thank the Chair.
Mr. JAVITS. Mr. President, I should like to repeat a question that I asked the manager of the bill. I asked him whether he had any figures on the division in brokerage accounts between cash and securities. At that time, he was not quite prepared to give me an answer. I wonder whether he is now.
Mr. MUSKIE. We have overall figures which indicate that broker-dealers hold $4 billion in cash and $47 billion in securities. We have no figures to tell us in what increments and to what extent. the $47 billion in securities is held in individual broker-dealer houses. So that we have no basis upon which to evaluate the impact in terms of coverage of either the $20,000 or the $50,000 or the $35,000 limitation.
Mr. JAVITS. Except that we know that there is 10 times as much in securities in the hands of brokers as there is cash. So it is logical to assume, as there are not that many differences in the customers, that securities preponderate by 10 to 1. It seems to me that that bears very heavily upon the proposition that if we are going to do something really effective, we ought to do more, materially more, with respect to securities than we do to cash.
I should like to read into the RECORD the provision from the bill of the House on this subject. It is on, page 3, lines 8 to 13, and reads as follows:
(7) the term "insured customer account" means the net amount due any customer from his account maintained with an insured broker or insured dealer (after deducting offsets of any debit balances of cash and the value of any debit balances of securities) less any part thereof which is in excess of $50,000.
That is to be contrasted with the definition in the bill before the Senate, which is found at page 65, lines 12 to 17,which reads as follows:
(1l) In order to provide for prompt payment and satisfaction of the net equities of customers of the debtor, the corporation shall advance to the trustee such moneys as may be required to pay or otherwise satisfy claims in full of each customer but not to exceed $50,000 for each customer.
Mr. President, I ask the Senator from Maine whether he defines the words "net equities of customers of the debtor" to include both cash and securities?
Mr. MUSKIE. I would say yes, I do.
Mr. JAVITS And does he similarly define the words in the House bill which say "the net amount due any customer from his account" to include cash and securities?
Mr. MUSKIE That would be my interpretation, although the House bill, of course, was written on the House side.
Mr. JAVITS. Therefore, the Senator, when he goes to conference, will feel that he has a right to negotiate, to make this figure higher in toto – that is, we raise the $20,000 from the higher estimate, or separate the concept of the securities from the concept of the cash in the way of what is guaranteed, on the ground that the guarantee is intended to cover both in a particular account.
Mr. MUSKIE. Yes. In my judgment, there is no doubt on that point. Let me put it this way, so that there is complete clarification. The $50,000 ceiling in the Senate bill as reported. by the committee could conceivably include all cash or all securities or any combination. The $20,000 in the McINTYRE amendment could include cash or securities or any combination. So if we want to go to a different figure between, that could conceivably include cash or securities or any combination. That being so, it seems to me, within the total, that we can indicate some division.
Mr. JAVITS. The coverage could be between cash and securities, that seems to be clear or there could be a higher figure for an account containing securities than for an account which contains only cash.
Mr. MUSKIE Yes, I would think so.
Mr. JAVITS. So that, for example, if we took the $35,000 figure, we could confine that to an account which has securities in excess of $20,000.
Mr. MUSKIE. Yes, in accordance with the example that the Senator put earlier in colloquy with the Senator from Illinois and the Senator from Utah. I agree.
Mr. JAVITS. What is the restriction on the number of accounts a particular Customer can retain?
Mr. MUSKIE There are no restrictions in the bill.
Mr., JAVITS. There is no definition which defines more than one account?
Mr. MUSKIE No.
Mr. JAVITS He can maintain a number of accounts then?
Mr. MUSKIE. Just as anyone can maintain several savings deposits under the FDIC.
Mr. JAVITS. He can also go to a different broker and not have to keep the same one?
Mr. MUSKIE. Yes.
Mr. JAVITS. I have such regard for the Senator from Maine in what he is trying to do that although I shall vote aloud no against this amendment, I shall let it go at that, hoping that he will maintain the reputation, which he has many reasons for cherishing right now, by being realistic when he gets into conference.
I can assure the Senator that I know something about this business and if we want to make the guarantee meaningful, we must go to a materially higher figure regarding securities, and we want to make it meaningful.
Mr. MUSKIE. The $50,000 limit was in the original bill last year.
Mr. JAVITS. The committee sustained the Senator from Maine.
Mr. MUSKIE Yes. So it is a figure that I was persuaded was realistic months ago, and I still think it is realistic. Now as to what the Senator from New Hampshire (Mr. MCINTYRE) was indicating, it seems to me the environment has now developed for thoughtful and serious consideration of this matter.
Mr. PERCY. Mr. President, I should like to reiterate my support for the full $50,000. My impression is that here we are trying to protect people. Let us take the case of a retiree and his wife. They suddenly take their money out of a profit-sharing or a pension plan and go over to a brokerage house and say, "This is my life savings." They have taken it out in cash, of course, say $50,000 in cash but as soon as they invest it they work it down to the point on the average where they have 10 percent cash and 90 percent securities and they may have reserves to keep moving it around. The customer should be protected for the entire amount, without any distinction between cash and securities.
Mr. MUSKIE I would agree. May I add a point which underlies the concern expressed by the Senator from New Hampshire, that this retired customer of whom the Senator from Illinois speaks, would not need to be concerned if there had been, under the whole principle of self-regulation, a segregation of customer cash and securities from that of the broker-dealer house. So that I would hope, in addition to the insurance we are providing here, that there would be a reform of the practices of the broker-dealer houses in order to avoid risks, in addition to providing adequate insurance.
Mr. JAVITS. I know that bank insurance goes for every customer. Even if he has $100,000, his first $20,000 is covered.
Mr. MUSKIE. That is right.
Mr. JAVITS. I am ready to vote on the first of the two amendments.
Mr. McINTYRE. Mr. President, I move adoption of the amendment as modified.
The PRESIDING OFFICER The clerk will restate the amendment as modified.
The LEGISLATIVE CLERK. On page 65, line 16, strike "$50,000" and insert "$20,000."
The PRESIDING OFFICER (Mr. SAXBE). The question is on agreeing to the first part of the amendment of the Senator from New Hampshire.
The amendment was agreed to.
The PRESIDING OFFICER(Mr.SAXBE). The question is on agreeing to the remainder of the amendment of the Senator from New Hampshire (Mr. McINTYRE).
The remainder of the amendments was agreed to.