December 10, 1970
Page 40901
Mr. MUSKIE. Mr. President, may I say to the Senator from Illinois that I appreciate his raising this point. It has been one that has concerned us as we have tried to resolve the various problems which have been raised. Before and after the bill was reported from the committee, we specifically pursued this particular one. We have all received, I think, copies of the telegram which the Senator has just read.
I, too, read it as a commitment from President Haack and the board of governors of the New York Stock Exchange to make the strongest possible case to the board and to the membership. I think they should understand that we accept that as a commitment on their part and that we would feel let down if the result is anything but a success.
I feel and have felt, long before we discussed this in terms of the impact upon the legislation, that they had a responsibility to the customers of these three firms. I felt that the exchange, in setting up the trust funds to deal with the customers of firms in difficulty, and to protect them, had held out to the public, in effect, that no customer would lose money because of failure of broker-dealers who are members of the exchange, although from their point of view, in terms of minimum obligation, their obligation may seem marginal in terms of the public's point of view and the right to rely on the exchange's assurance. But its objective is not to let any of these customers down. In terms of that assurance, the exchange had an obligation. So I think that this telegram reflects an intent and an attitude as such to do everything possible to see to it that the objective set out in the telegram is achieved.
Mr. PERCY. Mr. President, I very much appreciate the comments of the Senator from Maine. I am very much reassured by them. As a member of the minority on the committee, I would be even more reassured if my senior Republican colleague shared those opinions.
Mr. BENNETT. Mr. President, the exchange went to the limit of its resources and beyond, in order to take care of a very large problem, namely, Goodbody's problem. It seems to me they would be expected to assume the responsibility to take care of the three little ones also. After saying that they will go to the extent of $30 million over their $55 million trust fund, because the problem with Goodbody is so great that it will shake up many communities including my own of Salt Lake City, I do not think they can say that these three small companies do not mean very much in the total overall effect, so we do need to worry about them. Having, as the Senator from Maine said, held out this hope, this assurance, that they must be expected, in good conscience to assume responsibility for the small ones.
Does the Senator from Illinois know whether these are the only ones now without exchange support or assistance?
Mr. PERCY. Mr. President, to the best of my knowledge this is true. I have not researched it thoroughly. However, certainly we would have heard, I think, by now if there were any others. I would think that this colloquy would be all that would be necessary.
These are men of honor who deal in a profession in which they must deal every day on each other's word. I would not think it would be at all necessary for the House or the Senate to direct that the exchange do this when we have had this best effort telegram, reinforced by this colloquy.
I feel quite certain that we have strengthened President Haack's hand sufficiently so that I do feel they will carry forward as they have committed themselves.
Mr. BENNETT. Mr. President, I hope that before too long they can send us another telegram telling us that they have worked out a program to help the customers of these three small firms.
Mr. PERCY. Mr. President, I thank the Senator.
Mr. BENNETT. 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. MUSKIE. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
UNANIMOUS CONSENT AGREEMENT
Mr. MUSKIE. Mr. President, I ask unanimous consent that the vote on final passage take place not later than 6 o'clock this evening.
Mr. BYRD of West Virginia. Mr. President, reserving the right to object, and I will not object, I know that the Senator means to waive rule XII.
Mr. MUSKIE. The Senator is correct. Mr. President, I include that in my request.
The PRESIDING OFFICER. Is there objection? The Chair hears none, and it is so ordered.
What is the will of the Senate?
AMENDMENT NO. 1095
Mr. BROOKE. Mr. President, I call up amendment No. 1095 and ask that it be stated.
The PRESIDING OFFICER. The clerk will report the amendment.
The legislative clerk read as follows:
On page 73, Jine 7, it is proposed to insert the following:
"SEC: 4. Section 18(c) of the Securities Exchange Act of 1934 is amended by adding the following:
"'(6) (A) No broker or dealer or member of a national securities exchange shall hold in custody or under a lien any money, security, or other property received from or on behalf of any customer, except that such broker may hold in custody or under a lien or may lend or pledge an amount of such securities that is fair and reasonable in view of the indebtedness of said customer to said member, broker, or dealer and in compliance with such rules and regulations as the Commission may prescribe for the protection of investors.
"'(B) When a broker or dealer or member receives or holds securities that are fully paid for or in excess of the amount which can be held in custody or under a lien or under a loan or pledge under this section or receives any moneys or other property from or on behalf of any customer, except in the ordinary course of business to complete a transaction for such customer, such member, broker, or dealer shall
"'(i) promptly deliver such securities, money, or other property to such customer, or
"'(ii) upon the written consent of such customer, place or maintain such securities, money, or other property in the custody of either a bank which has at all times an aggregate capital, surplus, and undivided profits of such specified minimum amount as may from time to time be prescribed by the Commission, or of a clearing corporation, central depository, or similar facility subject to such qualifications as the rules and regulations of the Commission may prescribe in the public interest and for the protection of investors. Such securities, money, or other property shall not be removed by the broker or dealer from such bank, clearing corporation, central depository, or similar facility, except upon the specific authorization of such customer to complete a transaction for the account of such customer or for delivery to such customer or his designee and subject to such rules and regulations as the Commission may prescribe in the public interest and for the protection of investors.
"'(C) This subsection shall become effective pursuant to regulations promulgated by the Commission. In no event, however, shall the effective date of this subsection be later than one year from the date of enactment of this Act."'
On page 73, strike lines 8 and 9, and insert in lieu thereof the following:
"SEC. 5. The amendments made by this Act shall take effect upon the date of enactment of this Act, unless otherwise specified herein."
Mr. BROOKE. Mr. President, 30 million Americans presently own shares in U.S. industry including 1,214,000 citizens of my own State of Massachusetts. The bill which we are considering today seeks to protect these investors from losses resulting from broker-dealer insolvencies.
It would do this by establishing the Securities Investor Protection Corporation which would maintain and administer an insurance fund providing coverage against customer losses up to $50,000 per account. The insurance fund would, at the outset, aggregate $75 million in lines of credit and cash raised by broker-dealer assessments. Ultimately, the industry contribution would reach $150 million in cash.
As a backstop, Treasury borrowing authority in the amount of $1 billion would be available in the event of exhaustion of industry funds. It should be noted that an assessment or "transactions charge" may be imposed on the public in the event Treasury borrowing takes place.
Thirty million investors might well ask whether this bill and the companion piece of legislation passed by the House truly protect investors, at the lowest cost to the public, or whether this bill represents protection for the industry at time when reforms are vitally needed?
If our goal is to protect the investor, then it is important to determine how the typical investor subjects himself t risk when using the services of a broker-dealer. As the Senate Banking and Currency Committee report states, we are attempting to insure against customer losses arising from broker-dealer insolvencies. These losses occur because investors are unable to withdraw both cash and securities from bankrupt broker-dealers which have neglected to segregate customer property from their own property.
Proper segregation of customer's cash is generally considered to be impossible unless steps are taken to "escrow" these funds and deposit them with banks or other financial institutions.
It is considerably easier to require the proper segregation of securities; however, it is an industry practice to hold these securities in "street name" and thus proper segregation of customers' securities is seldom achieved.
If, as industry representatives contend, customers' cash (or "free credit balances") cannot be adequately segregated and securities are seldom adequately segregated, then investors must seek relief from a "single and separate fund" at the time bankruptcy occurs along with other investors similarly situated. In the process, they may well receive only partial refunds on their investments.
This bill improves the chances that investors owning fully paid securities which have been entrusted to broker-dealers for safekeeping will receive their property. It does so by relaxing the requirement that such property be "specifically identifiable" and thus permits securities held in bulk segregation or in central certificate services to be deemed "specifically identifiable".
The bill under consideration does not, however, increase the investor's chances that he will regain the entire amount of cash which he entrusted to the brokerage house prior to its demise. The amendment which I offer is designed not only to strengthen the rules regarding proper segregation of customer's securities, but is also designed to provide new rules regarding the escrowing of investor's cash which has been entrusted to broker-dealers for safekeeping.
I believe that failure to adopt these rules will result in the passage of a bill which purports to provide assurance to the public that all is well, but in fact fails to address the potential source of investor losses.
There are few in the industry who would challenge the concept that broker-dealers should. be treated as fiduciaries when it comes to the handling of investors' property. Certainly, public confidence in our national securities markets has been built over the last 30 years on the concept that while investors might take risks in the market with respect to certain investments, their funds and securities were nevertheless safe when held by federally regulated broker-dealers.
This feeling of security has been, to a large degree, illusory since broker-dealers have been free to use free credit balances for their own needs to finance margin transactions, to satisfy broker-dealer operating needs and to take advantage of investment opportunities in equity securities which broker-dealers could not respond to in the absence of ready customer cash.
It is time that Congress put a stop to these practices and get to the bottom of the problems which are exposing investors to unreasonable risks. There are a number of people who have observed that if such reforms are instituted, there will be little need for the broker-dealer bill which is being considered today. While strict adherence to these rules would certainly lessen the need for reliance on Treasury borrowing authority since industry funding should be sufficient to meet foreseeable losses, the Senate bill contains many worthwhile provisions which should be retained.
Certainly, insurance is important to protect against losses on the part of broker-dealers who fail to comply with the proposed rules regarding the escrowing of free credit balances and the segregation of securities set forth in my amendment. The bill also establishes procedures for the prompt and orderly liquidation of bankrupt firms. In doing so, the bill makes worthwhile changes to the Bankruptcy Act.
The bill also amends section 15(c)(3) of the Securities Exchange Act to reiterate the SEC's broad powers to provide safeguards with respect to the financial responsibility of broker-dealers. This provision is necessarily vague and therefore is adequately supplemented by the amendment which I offer regarding the escrowing of cash and securities.
It is also interesting to note that the Senate Committee report implicitly recognizes the need for this amendment by making membership in the insurance corporation compulsory only for those brokers and dealers who hold securities and/or free credit balances for customers. As the committee report states:
The thrust of this [rule]... is to permit exemption of those firms which do not, in the nature of their business, expose public customers to risk of loss.
Thus, where free credit balances or securities are not held, insurance is not deemed to be necessary. It follows from this general proposition that adequate safeguards must be developed to protect these two types of investor property. This amendment, in my opinion, adequately addresses this problem.
Mr. President, there is ample precedent for the proposed amendment. Section 6d of the Commodity Exchange Act imposes strict rules regarding the segregation of investors' property involved in futures trading. I believe that we must apply similar rules to broker-dealers serving investors who utilize our national securities markets.
There are those who argue that while stringent rules should be enacted regarding the use of customers' cash and securities, imposition of such rules at this time would strike a fatal blow to an already crippled industry. This argument is premised on the fact that the securities and industry self-regulated bodies have given tacit approval over the years to the use of free credit balances for whatever purposes broker-dealers have seen fit. These practices must be curtailed; however, the industry must not be disrupted in the process.
Thus, the imposition of these rules must be phased in over a reasonable period of time, thereby enabling the industry to seek other sources of capital. I therefore propose an effective date not later than 1 year after the date of enactment of the act. I believe this proposal meets the concerns of those who are fearful of disrupting the industry and yet, at the same time, insures that there will be the proper separation of customers' property from brokerage house property within a reasonable period of time.
To argue for even less stringent regulation is to ignore the very causes which have undermined investor confidence in our national securities markets over the last few months. We cannot ignore the broker-dealer liquidations which have occurred and the effect which these events have had on the investing public in general.
To enact the present bill without reaching the abuses which have prompted our concern would be to enact legislation which, in effect, pays the doctor for his services regardless of whether steps have been taken to improve the patient's health. I cannot accept and I hope Congress will not accept such a practice.
Broker-dealers who hold investors' cash and securities must be treated as fiduciaries with respect to their customers' property. The bill which we are considering, if amended in the manner which I propose, will reach this result.
I am also introducing an amendment which specifies that the Securities Investor Protection Corporation will terminate its operation and dissolve within 2 years unless its operating authority is renewed by Congress. This amendment is designed to result in closer congressional scrutiny of the progress of industry reforms and to enable results of industry studies to be considered when renewing the corporation's charter. I do not anticipate that Congress will fail to renew this authority; however, I believe the 2-year life will insure that greater congressional scrutiny of industry reforms occurs.
Mr. President, I modify my amendment as follows:
On page 73, at the end of line 7, add the following: "Such rules and regulations shall require the maintenance of reserves with respect to customers' deposits, or credit balances, as determined by such rules and regulations."
On page 73, after line 7, insert the following:
"SEC. 4. Section 15 (c) of the Securities Exchange Act of 1934 is amended by adding the following:
"'(6) (A) No broker or dealer or member of a national securities exchange shall hold in custody or under a lien any security, or other property received from or on behalf of customers, except that such broker may hold in custody or under a lien or may lend or pledge an amount of such securities that is fair and reasonable in view of the aggregate indebtedness of said customers to said member, broker, or dealer and in compliance with such rules and regulations as the Commission may prescribe for the protection of investors.
"' (B) When a broker or dealer or member receives or holds securities that are fully paid for or in excess of the amount which can be held in custody or under a lien or under a loan or pledge under this section or receives any moneys or other property from or on behalf of any customer, except in the ordinary course of business to complete a transaction for such customers, such member, broker, or dealer shall
"’(i) promptly deliver such securities, money, or other property to such customer, or
"'(ii) upon the written consent of such customer, place or maintain such securities, or other property in the custody of either a bank which has at all times an aggregate capital, surplus, and undivided profits of such specified minimum amount as may from time to time be prescribed by the Commission, or of a clearing corporation, central depository, or other facilities including those of the broker dealer subject to such qualifications as the rules and regulations of the Commission may prescribe in the public interest and for the protection of investors. Such securities, money, or other property shall not be removed by the broker or dealer from such bank, clearing corporation, central depository, or similar facility, except upon the specific authorization of such customer to complete a transaction for the account of such customer or for delivery to such customer or his designee and subject to such rules and regulations as the Commission may prescribe in the public interest and for the protection of investors.
" '(C) This subsection shall become effectivepursuant to regulations promulgated by the Commission; In no event, however, shall the effective date of this subsection be later than one year from the date of enactment of this Act:"'
On page 73, strike lines 8 and 9, and insert in lieu thereof the following:
"SEC. 5. The amendments made by this Act shall take effect upon the date of enactment of this Act, unless otherwise specified herein."
The PRESIDING OFFICER. The amendment is so modified.
The Senator from Massachusetts has the floor.
Mr. BROOKE. Mr. President, I have sent a further modification of the amendment to the desk.
The PRESIDING OFFICER. The amendment is further modified.
The amendment, as further modified, is as follows:
On page 73, line 7, insert the following: "SEC, 4. Section 15(c) of the Securities Exchange Act of 1934 is amended by adding the following:
"'(6) (A) No broker or dealer or member of a national securities exchange which is a member of the Securities Investor Protection Corporation shall hold in custody or under a lien any security, or other property received from or on behalf of customers, except that such broker may hold in custody or under a lien or may lend or pledge an amount of such securities that is fair and reasonable in view of the aggregate indebtedness of said customers to said member, broker, or dealer and in compliance with such rules and regulations as the Commission may prescribe for the protection of investors.
"' (B) When such broker or dealer or member of a National Securites Exchange receives or holds securities that are fully paid for or in excess of the amount which can be held in custody or under a lien or under a loan or pledge under this section or receives any moneys or other property from or on behalf of any customer, except in the ordinary course of business to complete a transaction for such customer, such member, broker, or dealer shall
"'(i) promptly deliver such securities, money, or other property to such customer,
"'(ii) upon the written consent of such customer, place or maintain such securities, money, or other property in the custody of either a bank which has at all times an aggregate capital, surplus, and undivided profits of such specified minimum amount as may from time to time be prescribed by the Commission, or of a clearing corporation, central depository or other facilities including those of the broker dealer subject to such qualifications as the rules and regulations of the Commission may prescribe in the public interest and for the protection of investors. Such securities, money, or other property shall not be removed by the broker or dealer from such bank, clearing corporation, central depository, or similar facility, except upon the specific authorization of such customer to complete a transaction for the account of such customer or for delivery to such customer or his designee and subject to such rules and regulations as the Commission may prescribe in the public interest and for the protection of investors.
"'(C) This subsection shall become effective pursuant to regulations promulgated by the Commission. In no event, however, shall the effective date of this subsection be later than one year from the date of enactment' of this Act."'
On page 73; strike lines 8 and 9, and insert in lieu thereof the following:
"SEC. 5. The amendments made by this Act shall take effect upon the date of enactment of this Act, unless otherwise specified herein."
The PRESIDING OFFICER. What is the will of the Senate?
Mr. MUSKIE. Mr. President, will the Senator from Massachusetts yield. so that I may request the yeas and nays on final passage?
Mr. BROOKE. I yield.
Mr. MUSKIE. Mr. President, I ask for the yeas and nays on final passage.
The yeas and nays were ordered.
The PRESIDING OFFICER. The Senator from Massachusetts has been recognized.
Mr. BROOKE. Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The legislative clerk proceeded to call the roll.
Mr. BROOKE. 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. BROOKE: Mr. President, the purpose of the amendment, which I have introduced, is to require the segregation of securities held by the broker-dealers. At the present time broker- dealers hold for safekeeping and for the convenience of their customers securities which have been entrusted to them and these securities have been commingled with their own. As a result of failure of several of the broker-dealers in the country and the resulting bankruptcies, there has been great difficulty in segregating the securities of the customer from the securities of the broker-dealer. This also has been a fact with cash that is held by the broker-dealer after securities have been sold by them; and it also has been a practice in the industry that this cash and these securities have been used by the broker-dealer houses for their own operational needs.
The purpose of the amendment, as modified, is to make it mandatory that reserves be established for the protection of the cash which is held by broker-dealers belonging to investor customers. The other purpose of the amendment is to make it mandatory that the securities in the aggregate be segregated, those of the investor customers from the securities of the broker-dealers. This has been a very serious matter in recent days because of the fact that there have been bankruptcy proceedings and it has been difficult, if not impossible, to identify the securities and certainly even more difficult to identify the cash. This is an attempt to have the broker-dealers move in the direction of the segregation of both cash and securities.
We have great faith and great confidence in the stability of the investment industry. We do not condone the practice, however, of commingling of cash or of securities and it is suggested very strongly that this industry take warning that Congress is concerned and wishes them to move as quickly as they possibly can so that there will be no risk at all to investors who have permitted them to hold their cash and to hold their securities in safekeeping.
It is regrettable that this practice has been established, in most instances without the knowledge and consent of the investors. If we are to stop the erosion of public confidence in broker-dealers; in the investment securities industry and, generally, in the industries of this Nation, we must pass this legislation which will begin to restore that confidence through maximum protection for the investors.
Now, this does not mean that we have achieved maximum protection at the present time. We have tried in this amendment to eliminate some of the risk with the hope that as the industry stabilizes, as the economy improves, we will have complete protection for the investor.
It is significant that this amendment has been proposed to the plan which has been introduced by the distinguished manager of the bill, the Senator from Maine (Mr. MUSKIE). Here we are attempting to give again security to the investor through both participation by the broker-dealers themselves and with insurance guarantees from the Federal Government. That is a big step; it is a giant step; it is an important step, and an essential step.
Mr. President, the purpose of the amendment is to go even further and strengthen that insurance program by providing essentially for reserves, segregation of aggregate securities; and hopefully in the near future to move to complete segregation of cash and securities.
So, Mr. President, the modified amendment which I have submitted will be a strengthening amendment, in my opinion, to the bill which is presently before the Senate. I hope the amendment will be agreed to and accepted by the committee and that when they go to conference, they will be able to hold the provision in conference because that will be a very important step in restoring confidence of the public in our investment industry.
Mr. MUSKIE. Mr. President, will the Senator yield?
Mr. BROOKE. I yield.
Mr. MUSKIE. Mr. President, I wish to compliment the Senator for developing the amendment in the form in which it is now before us. The amendment sets out an objective which I think is essential, an objective which the committee regarded as essential. The problem has been in achieving it in light of the present conditions in the industry, the present economic situation, and the difficulty of making the transition from conditions as they are to conditions as they should be.
For example, these broker-dealer houses hold something like $4 billion in customer cash. To segregate it overnight would require the industry to raise cash in the amount of $4 billion to replace that cash.
Mr. President, that would be impossible to do under present market conditions or conditions we could anticipate in the next year. I think the Senator has found the formula to move in that direction – meaningfully and effectively. The Senator's amendment requires the Commission to begin or that the Commission have the authority to set regulations requiring beginning the processes of setting aside a reserve to preserve customer's cash.
The Commission should move as rapidly as it can do so, as rapidly as the industry can respond in that direction. I think this is a viable formula. I think it is an effective one. I think to include it in the bill is a distinct service. I compliment the Senator from Massachusetts and will, of course, support it.
Mr. BENNETT. Mr. President, will the Senator from Massachusetts yield?
Mr. BROOKE. I yield.
Mr. BENNETT. I would like to join the manager of the bill in expressing great satisfaction at the manner in which this matter has been worked out. We need to find a new basis, we need to find a transition method, by which we can move from the present situation to a situation of assurance and safety based on reserves, and I will join the author of the amendment and the manager of the bill in supporting the amendment, and urge that the Senate support it.
Mr. BROOKE. Mr. President, I thank my distinguished colleagues, the floor manager and the ranking Republican member of the Banking and Currency Committee, for their support of the amendment.
I think that the amendments previously accepted by the floor manager, which provide that there be a study, that the committee make an indepth study, of the various practices of broker-dealers and report back to Congress, will enable us to be afforded information which will be helpful to us in determining how we best can protect the individual investor as well as the aggregate of investors.
I think, in addition, the reserves we have provided for and the authority being vested in the Securities and Exchange Commission for the promulgation of rules and regulations could result in working toward a reserve fund which would be of maximum protection to the investor. I am not prepared at this time to say what that should be. I do not know, but I do believe that the SEC can and, indeed, must promulgate such rules and regulations as would give us maximum security.
Perhaps at the beginning, since this would be immediate, it could of course take into consideration the economic conditions facing the country, but work toward maximum security, which may be 90 percent or 100 percent. I frankly do not know. I think that may be accomplished, and I think we are headed in the right direction.
Mr. McINTYRE. Mr. President, will the Senator yield for a question or two?
Mr. BROOKE. I yield.
Mr. McINTYRE. I think the Senator touched on what I wanted to inquire about at. the end of his answer to the floor manager's statement. The Senator from Massachusetts said he expects these reserves to reach 90 percent.
Mr. BROOKE. Frankly, I do not know. I just threw those figures out. It may be necessary to cover 90 percent or it may be necessary to cover 100 percent. I do not know which figure is necessary.
Mr. McINTYRE. I think it would be very interesting, by way of legislative history, to inquire about the time element. Would the Senator from Massachusetts expect it to go to 90 percent in 2 years, or would it go to 50 percent in 6 months, or 60 percent in 1 year, or 90 percent?
Mr. BROOKE. I would expect that immediately when it goes into effect, the SEC would promulgate rules and regulations. Its members would have to take into consideration the economic conditions in establishing what the initial goal would be. It might be 25 percent. It may be dangerous to use these figures because, as I have said, the SEC would have many factors to consider in establishing the formula. But the goal of the SEC would be to establish a formula which gives maximum and complete protection to the investing public.
Mr. McINTYRE. What would the Senator think would be a reasonable time to reach that goal?
Mr. BROOKE. I frankly cannot say whether it would be a year or 2 years. I just do not know. I cannot foresee what the economic conditions will be at that time. We are all hopeful that the economy has turned around and that it will turn up, and the investment industry will improve accordingly. We are very much heartened by what has happened in recent days. But we frankly do not know. We will have to wait and see. So I would not want to say a year or two. I would hope, however, that we could reach it within a year or two – no more, perhaps even less. There is the possibility of an even more limited time. I think, in vesting this authority in the SEC, we will have to rely on it and depend on it for maximum protection.
Mr. MCINTYRE. The Senator's feeling is 2 years as a maximum, and, hopefully, a more rapid time?
Mr. BROOKE. That is no more than a hope. I would hope they could do it in 2 years. I do not know. I would not want the legislative history to indicate that we were putting a deadline on them; because we do not know what the circumstances will be.
Mr. MUSKIE. Mr. President, will the Senator yield?
Mr. BROOKE. I yield.
Mr. MUSKIE. I think we all agree that we wish that goal had been achieved at some point in the past. The problem is to adjust from things as they are to what they ought to be. They ought to move as fast as possible. We are trying to build a fire under the industry to move it as rapidly as possible. That was the purpose of the Proxmire amendment; the provision in the bill which the Senate committee adopted; and the colloquy had between the Senator from New Jersey and other Senators of the need for an indepth study of the industry. In these ways we hope to move into reforms involving segregation of cash and securities of the customer from those of the dealers themselves.
Mr. PROXMIRE. Mr. President, will the Senator yield?
Mr. BENNETT. I think the Senator has yielded the floor.
Mr. PROXMIRE. I can say to the Senator from Massachusetts, without asking a Senator to yield, that I commend him very warmly on his amendment. It is an essential amendment. He has done an excellent job in working out the problems involved, although I think the original amendment was a good one and could have been supported by the Senate.
As I understand, it would have provided that funds held by brokers, which really belong to the investors, should be put in escrow within 2 years. After all, it is money that does not belong to the brokers. I learned only in the last few days, and I am sure many people do not know this, that brokers hold somewhere between $3 billion and $4 billion of other people's money that they are using, on which they are making a return of 8 to 10 percent.
That is the problem, because when they use that money, they speculate with it. The result has been that some brokerage firms have gone into bankruptcy, and the investors have lost their money, or have been on the verge of losing their money, and may lose it.
So I think the amendment proposed by the Senator from Massachusetts is an excellent amendment. He has shown us a practical way to make it effective. I warmly commend him, and I ask unanimous consent that I be listed as a cosponsor.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. BROOKE. Mr. President, I am very happy to accept the Senator from Wisconsin as a cosponsor of the amendment.
I certainly agree that the initial, original amendment was a strong amendment and one we would like to have had. I am not sure it would have been supported by the Senate, because I think the Senate has to take into consideration the stability of the investment industry and the economic conditions facing the Nation; but I think this is a necessary first step. The Senator is quite right in the figures involved. Even under this amendment, the interest on the segregated cash which would be held would still inure to the benefit of the broker-dealer, and not to the benefit of the investor. So we are not taking anything away from the investment industry; we are trying to protect them, but at the same time to protect their customers, namely, the investing public.
I thank the distinguished Senator.
The PRESIDING OFFICER. The question is on agreeing to the amendment of the Senator from Massachusetts.
The amendment was agreed to.
Mr. BENNETT. Mr. President, I send an amendment to the desk and ask for its immediate consideration.
The PRESIDING OFFICER. The amendment will be stated.
The legislative clerk proceeded to read the amendment.
Mr. BENNETT. I ask unanimous consent that further reading of the amendment be dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered. The amendment will be printed in the RECORD.
The amendment reads as follows: Amend Sec. 35 (m) (6) at page 58, line 5, by striking the period after the word "debtor," inserting a comma and adding the following: "but the Court shall not stay as against a bons fide purchaser, as defined under the Uniform Commercial Code or in other applicable state law, the right to enforce such a lien."
Mr. BENNETT. Mr. President, this legislation establishes procedures for the prompt and orderly liquidation of SIPC members whenever required. These procedures are to be conducted as if they were under section 60(e) of the Bankruptcy Act, which section is the present bankruptcy law governing liquidation of stockbrokers. Certain shortcomings have become apparent in section 60(e), as it applies, specifically, to liquidation of broker/dealers. Therefore, this bill provides that SIPC members will be liquidated in special proceedings outside the Bankruptcy Act. The actual liquidation procedure will be conducted in accordance with, and as though it were being conducted under the provisions of chapter 10 of the Bankruptcy Act, which allows business reorganizations, provided however, that no plan of reorganization shall be filed. A trustee shall be appointed and shall have all the powers and duties of a trustee under the Bankruptcy Act.
These liquidation procedures have been carefully designed to allow flexibility, to meet the special needs in liquidation of broker/dealers to assure that the customers can receive prompt return of their securities and cash held by such broker/ dealers.
The basic purpose of these procedures is to give the trustee authority to return, as promptly as possible, specifically identifiable property to customers of the broker/dealers, to pay to customers moneys advanced by SIPC which has been left with such broker/dealers and to operate the business of the debtor in order to complete open contractual commitments of the broker/dealer.
SIPC will be subrogated to the rights of the customers to the extent it has advanced moneys to the trustee and stand as a preferred creditor in the liquidation proceedings. Finally, the trustee shall complete the liquidation of the broker/dealer. It is anticipated that even under these procedures liquidation of the broker/ dealer could take some considerable period of time to complete. Customer's securities which are held by the firm could well decline in value if the customer were required to wait until liquidation was completed. The protection afforded by this bill could not be effective unless the means were given for those customers to promptly receive their securities. This is the basic purpose of the legislation.
The legislation contemplated that secured and general creditors should participate in the liquidation proceedings and receive payment of their claims as in normal bankruptcy. The reorganization procedures of chapter 10 of the Bankruptcy Act were adopted to give the trustee the maximum flexibility in managing the affairs of the broker/dealer pending liquidation. This procedure is necessary to meet the special requirements of this legislation.
One power given to the trustee and the court in chapter 10 proceedings, which is not generally available under section 60(e), is the power of the court to stay enforcement by creditors of their right to set off and their right to enforce valid nonpreferential liens against property of the debtor. This stay authority is discretionary but may be necessary, for a period of short duration, to allow an orderly commencement of liquidation procedures, to pay the claims of customers and to complete stock transaction orders of the debtor entered prior to the final date. This procedure generally, will in no way be detrimental to the rights of creditors because the stay authority is specifically stated to not abrogate any such rights.
However, in one specific instance, the exercise of this stay order could be detrimental to the rights of a creditor. Creditors who hold securities pledged by the broker/dealer as collateral against loans where that creditor is a "bona fide purchaser" should not be stayed from enforcing their right to immediate foreclosure against such collateral, if necessary. Normally, these creditors will be financial institutions which hold loan accounts with the broker/dealer to facilitate trading and margin security operations. These loan accounts are active and change daily both with regard to the amount of loan and the amount and type of securities pledged. These types of loans are an integral part of the securities business. These creditors run the same risk as customers of substantial detriment and loss in the event the market value of those securities falls during the stay period. The status of a "bona fide purchaser" for value is well established in every jurisdiction and existing law should remain the same as regards the rights of such "bona fide purchaser."
As a practical matter, the threat of such a stay order by a court could well precipitate such creditors into calling such loans and enforcing their rights prior to the filing of liquidation proceedings. Because of the nature of these loan accounts these creditors would in most cases be aware that a broker/dealer is in financial difficulty. In such instances the activity and daily turnover in these accounts will either cease or be sharply reduced. It would appear to be to the advantage of the customers and the trustee that maximum flexibility be allowed in negotiating with such creditors to continue such loans, withdraw the securities, and liquidate those loans in an orderly manner. Prompt receipt of the securities by the customers could well be more valuable to the customers than a payment in cash by the trustee for the value of the securities. So long as the creditor has the right to foreclose against such collateral at any time, that creditor will be encouraged to continue the loans and cooperate with the trustee in paying the amounts due and delivering the securities pledged to the trustee and the customers. It is the clear intent of this legislation to facilitate and encourage such cooperation and flexibility and to discourage precipitate actions by creditors which will be damaging to the rights of customers.
Should these creditors also hold cash accounts of the broker/dealer they are not damaged and would suffer no detriment from a stay of enforcement of their rights to use such cash as a set off against a loan under section 68 of the Bankruptcy Act. The right to set off can only be delayed, not abrogated.
This amendment would accomplish these objectives by amending section 35 (m) (6) at page 58, line 5, by providing that the court under its stay authority could not stay the rights of a "bona fide purchaser" to enforce a valid nonpreferential lien. This amendment merely reflects existing bankruptcy law as regards the rights of a "bona fide purchaser" and would appear fully justified to accomplish the basic intent of this legislation.
Mr. President, I ask the manager of the bill if he is prepared to accept the amendment.
Mr. MUSKIE. Yes, I am. I think it is a necessary technical amendment, and I support it.
The PRESIDING OFFICER. The question is on agreeing to the amendment of the Senator from Utah.
The amendment was agreed to.
The PRESIDING OFFICER. The bill is open to further amendment.
Mr. JAVITS. Mr. President, I shall take just a moment of the Senate's time. I understand there was a discussion at a time when I did not happen to be present in the Chamber about the customers of the brokerage firms which have gotten into difficulties, that will not be covered by this bill, and that a telegram of communication was produced from Mr. Robert W. Haack, president of the New York Stock Exchange.
I think perhaps it would also be of help to us if a telegram which I have received from the chairman of the board of the exchange, who is himself a leading broker and represents, in a sense, those who will be paying out the money, should go into the RECORD. The telegram is very brief, and I should like to read it. It shows why I have bird-dogged the Senator from Maine on this bill:
Assuming the SIPC legislation presently pending in Congress becomes law, I will recommend to the board of governors that the exchange provide assistance, if necessary, to the customers of the First Devonshire Corp., Charles Plohn & Co. and Robinson & Co. I am confident that the board of governors would follow my recommendation.
BERNARD J. LASKER,
Chairman of the Board, New York Stock Exchange.
Mr. MUSKIE. Mr. President, will the Senator yield?
Mr. JAVITS. I yield.
Mr. MUSKIE. I express my appreciation to the Senator for adding this communication to the RECORD on this point. It is obvious that many Senators, including the Senator from Illinois, the Senator from Utah, the Senator from New York, and myself, have been concerned about the customers of those firms, and I think this is a welcome addition to the RECORD.
Mr. BROOKE. Mr. President, will the Senator yield?
Mr. JAVITS. I yield.
Mr. BROOKE Mr President, I commend the Senator from New York. I think this assurance is essential if we are to restore customer confidence. I think this is a valuable contribution.
Mr. JAVITS: I think we all ought to bear in mind that the people who are going to pay the money are entitled to a little credit. The stock exchange members recognize that the reputation, not just of that institution, but of the whole industry, is at stake. They can take care of the situation as long as it remains within manageable dimensions. We are taking care of the problem if it becomes unmanageable. They should get credit for the fact that we are going to act as we are, because they are going to take care of what has already happened.
The PRESIDING OFFICER. The bill is open for further amendment. If there be no further amendment to be proposed, the question is on the engrossment and third reading of the bill.
The bill (S. 2348) was ordered to be engrossed for a third reading, and was read the third time.
[Unrelated intervening Senate action omitted]
SECURITIES INVESTOR PROTECTION ACT OF 1970
The Senate continued with the consideration of the bill (S. 2348) to establish a Federal Broker-Dealer Insurance Corporation.
The PRESIDING OFFICER. The bill having been read the third time, the question is, shall it pass?
Mr: MUSKIE. Mr. President, I ask unanimous consent that the Committee on Banking and Currency be discharged from further consideration of H.R. 19333, and that the Senate proceed to its immediate consideration.
The PRESIDING OFFICER. Without objection, it is so ordered.
Thereupon the Senate proceeded to consider the bill (H.R. 19.333), to provide greater protection for customers of registered brokers and dealers and members of 'national securities exchanges.
Mr. MUSKIE. I move to strike out all after the enacting clause and substitute the language of S. 2348, as amended.
The PRESIDING OFFICER. The question is on agreeing to the motion of the Senator from Maine to substitute the Senate language.
The motion was agreed to.
The PRESIDING OFFICER. The question is on the engrossment of the amendment and the third reading of the bill.
The amendment was ordered to be engrossed for a third reading, and the bill to be read the third time.
The bill (H.R. 19333) was read the third time.
Mr. MUSKIE. Mr. President, I ask for the yeas and nays on passage.
The yeas and nays were ordered.
The PRESIDING OFFICER (Mr. CRANSTON). The bill having been read the third time, the question is, Shall it pass? On this question the yeas and nays have been ordered, and the clerk will call the roll.
The legislative clerk called the roll.
The result was announced – yeas 77, nays 0, as follows:
[ROLL CALL VOTE LISTING OMITTED]
So the bill (H.R. 19333) was passed. Mr. MUSKIE. Mr. President, I move to reconsider the vote by which the bill was passed.
Mr. KENNEDY. Mr. President, I move to lay that motion on the table.
The motion was agreed to.
The title was amended so as to read "A bill to provide greater protection for customers of registered brokers and dealers and members of national securities exchanges."
Mr. MUSKIE. Mr. President, I move that the Senate insist on its amendments and request a conference with the House, and that the Chair be authorized to appoint the conferees.
The motion was agreed to and the Presiding Officer (Mr. BYRD of Virginia) appointed Mr. SPARKMAN, Mr. PROXMIRE, Mr. WILLIAMS of New Jersey, Mr. MUSKIE, Mr. BENNETT, Mr. TOWER, and Mr. PACKWOOD conferees on the part of the Senate.
Mr. MUSKIE. Mr. President, I ask unanimous consent that the Secretary of the Senate be authorized to make technical and clerical corrections in the engrossment of the Senate amendments on H.R. 19333 and that the bill be printed as passed by the Senate.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. MUSKIE. Mr. President, I ask unanimous consent that S. 2348 be indefinitely postponed.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. MANSFIELD. Mr. President, the distinguished Senator from Maine (Mr. MUSKIE) has again demonstrated his outstanding legislative skill and ability. His complete understanding of all of the many complex issues contained in this proposal was largely responsible for its overwhelming acceptance by the Senate.
To this measure he brought the great skill and ability that he devotes to all legislative proposals that gain his strong support and leadership. Providing protections for the millions of securities investors in this land is clearly an undertaking of the highest importance. The Senate is indebted to Senator MUSKIE.
Equally to be commended is the distinguished Senator from Utah (Mr. BENNETT), the able and distinguished ranking member of the Committee on Banking and Currency. His splendid cooperation and assistance was indispensable to the full and efficient consideration of this proposal. The same may be said for the efforts of the distinguished Senator from New York (Mr. JAVITS). Representing among his constituency the heart of the investment community, his contribution on this measure was particularly significant.
Noteworthy as well, during the consideration of this measure, was the participation of many other Senators. The Senator from New Hampshire (Mr. McINTYRE), the Senator from Wisconsin (Mr. PROXMIRE), the Senator from Indiana (Mr. HARTKE) and the Senator from Massachusetts (Mr. BROOKE) all made valuable contributions and gave us the benefit of their thoughtful views. We are grateful to them.