December 10, 1970
Page 40890
Mr. PROXMIRE. Mr. President, before explaining the amendment, I commend the fine leadership exercised by the Senator from Maine (Mr. MUSKIE) in bringing this important and vital legislation to the floor.
This bill is of crucial importance to the 27 million Americans who own common stock and to the additional millions of Americans who own stock indirectly through pension funds or mutual funds. The recent wave of failures on Wall Street has sent shock waves throughout the financial community and threatens to weaken the public's confidence in our capital markets.
The legislation reported by the committee will provide the customers of brokerage firms with protection in the event the brokerage firm fails. Customers who maintain credit balances or securities with their broker would be insured for up to $50,000 in the evnt the brokerage firm failed. This, of course, has been modified by the McIntyre amendment. The legislation is similar in concept to Federal deposit insurance provided to the customers of commercial banks, savings and loan associations, or credit unions. It insures that the investing public will not be called upon to pay for the financial troubles of brokerage firms which overextend themselves.
In most respects, the bill reported by the committee is a fair and workable bill. However, in my view there is one serious deficiency. This is the lack of membership requirements.
As presently drafted, all broker-dealers or members of national securities exchanges would automatically be entitled to membership in the Securities Investors Protection Corporation – SIPC – and would thus have their customer accounts in it. This is a substantial departure from the procedures established by'the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation, and the National Credit Union Administration.
Commercial banks, savings and loan associations, and credit unions are not automatically entitled to deposit insurance. They must, apply for insurance and meet certain standards before they can be insured. The reason is to protect the assets of the insurance fund. If deposit insurance were extended to any financial institution regardless of its solvency or managerial capacity, the losses could increase substantially. These losses would, of course, be borne by the more soundly managed financial institutions. They would be paying the premiums to support the insurance program.
In the case of the broker-dealer insurance bill, there is no way the SIPC can reject brokerage firms who present an undue risk to the insurance fund. It is somewhat analogous to a life insurance company agreeing to insure all applicants without conducting an examination. Under these circumstances, the life insurance company would soon go broke. A similar financial threat is presented to the SIPC and to the U.S. Treasury which is obligated to lend up to $1 billion to the SIPC in the event that it cannot cover its losses. So, the customer is ultimately responsible.
For that reason, we have a particular obligation to provide as much protection as possible.
Moreover, the SIPC has no authority to revoke the insurance of a broker-dealer if it engages in unsafe or unsound practices. By way of contrast, the FDIC, the FSLIC, and the National Credit Union Administration can revoke the deposit insurance of a commercial bank, a savings and loan association, or a credit union if it engages in unsafe or unsound practices. While this authority is rarely used, it does strengthen the effectiveness of the Federal government's supervision over insured banks, savings and loan associations, or credit unions Thus, the potential losses to the insurance fund and to the public are minimized
During the committee's executive session on the legislation, I offered an amendment which would have required the SIPC to screen all broker-dealers and reject those who were not financially qualified to receive Federal insurance. This is the same procedure which was established when deposit insurance was set up for commercial banks and other financial institutions. However, in the case of broker-dealers, there are certain practical difficulties. Given the present climate of uncertainty on Wall Street, if a broker-dealer were to be denied Federal insurance, such denial could easily trigger a run upon the brokerage firm. If the firm were forced to liquidate, its customers could suffer a severe financial hardship, which is directly contrary to the objectives sought by the legislation.
For this reason I withdrew the amendment. However, I believe it is possible to establish membership requirements to protect the solvency of the insurance fund without creating the psychological problems entailed by an immediate rejection. I therefore have sent to the desk an amendment designed to achieve these ends:
First of all, the amendment would provide that all brokers or dealers or members of national securities exchanges who were in operation prior to the effective date of the legislation would be automatically entitled to insurance as provided in the reported legislation.
Secondly, new firms which were established after the effective date of the legislation would be required to apply for insurance and meet certain standards of financial eligibility before they were given insurance. These standards would be similar to those contained in the Federal Deposit Insurance Act and the National Credit Union Share Insurance Act which was recently approved by the Congress. The SIPC would be directed to consider the history, financial condition, and management policies of the applicant, the economic advisability of insuring the applicant without undue risk of the fund, and the general character and fitness of the applicant's management.
These are the same standards which have been applied for 37 years by the Federal Deposit Insurance Corporation with respect to commercial banks. I believe they constitute a sound precedent for administering the broker-dealer insurance program.
Mr. President, I would hope that the distinguished manager of the bill could accept this amendment. It is based upon the sound precedents which have been established in other Federal insurance programs. I see no reason to depart from those precedents in this legislation. To do otherwise would open the insurance fund to potentially heavy losses, and risk the funds provided by the U.S. Treasury. As long as the Federal taxpayers are standing in back of the SIPC, he is entitled to reasonable safeguards. In my view, it would be unsound and unwise to establish an insurance program without at the same time providing for specific standards of eligibility and for revoking the insurance where necessary and in the public interests.
Third, my amendment would require SIPC to compile a list of unsafe or unsound practices by brokerage firms and report on what actions it is taking to eliminate those practices under the authority of existing law. The SIPC must also give Congress its recommendations on any additional legislation which may be added to curb unsafe or unsound practices. This report would be due in 6 months.
The Senator from Maine (Mr. MUSKIE) has indicated there are a number of questionable practices engaged in by brokerage firms. Now that the U.S. Government is making a direct financial commitment to the securities industry, I believe it is essential to eliminate any unsafe or unsound practices as soon as possible.
Mr.BENNETT. Mr. President, will the Senator yield?
Mr. PROXMIRE. I am happy to yield to the distinguished Senator from Utah.
Mr. BENNETT. Mr. President, the Senator from Wisconsin knows of the concern of the Senator from Utah that inadvertently his amendment might transfer some of the authority and responsibility of the SEC to this new private corporation. It is my understanding this has been corrected.
Mr. PROXMIRE. As I understand it, the amendment specifically provides that SEC can reject any action in this regard by SIPC.
Mr. BENNETT. So SIPC cannot take any action with respect to anyone it is insuring or refusing to insure, which SEC cannot review.
Mr. PROXMIRE. The Senator is correct.
Mr. BENNETT. I thank the Senator.
Mr. MUSKIE. Mr. President, will the Senator yield?
Mr. PROXMIRE. I yield.
Mr. MUSKIE. I have discussed this amendment at considerable length with the Senator from Wisconsin. The amendment undertakes to implement amendments that were added to the bill in committee that insure or supplement the insurance program. The Senator from Wisconsin, since the bill was reported, has developed this mechanism to implement that objective.
I recommend that the Senate agree to the amendment.
Mr. PROXMIRE. I wish to say to the Senator that, as he knows, this amendment was somewhat different when I first proposed it. The Senator from Maine did suggest a moderation or change in the amendment which I think made it much more practical and acceptable. Thanks to his assistance, I think the amendment would provide both protection and meet the practical objections he raised.
Mr. MUSKIE. Mr. President, at this point I think it would be helpful to have printed in the RECORD the first 14 lines of page 52 of the bill, which, in effect; are supplemented by the Senator's amendment.
I ask unanimous consent that the excerpt may be printed in te RECORD.
There being no objection, the excerpt was ordered to be printed in the RECORD, as follows:
"(4) In addition to and without limiting the powers of the Commission under this subsection, the Commission may request the corporation to adopt any specified alteration of or supplement to the bylaws, rules, or regulations of the corporation, or to repeal any such bylaw, rule, or regultion. If the corporation fails to adopt such alteration or supplement or to erect such repeal within thirty days after such request, the Commission is authorized by order to alter, supplement, or repeal the bylaws, rules, or regulations of the corporation in the manner requested, or with such modifications of such alteration or supplement as it determines, after appropriate notice and opportunity for hearing, to be necessary or appropriate in the public interest or to effectuate the purposes of this section.
The PRESIDING OFFICER. The question is on agreeing to the amendment of the Senator form Wisconsin.
The amendment was agreed to.