Congress Looks to Overhaul the SIPC

The recent fraud conviction of R. Allen Stanford comes amid a congressional hearing pitting the Securities and Exchange Commission (SEC) against the Securities Investor Protection Corp.

At issue is the SIPC’s responsibility in compensating victims in Stanford’s $7 billion fraud scheme. The SIPC, which runs the special reserve fund designed to protect customers of failed brokerage firms, says Stanford’s victims are ineligible to get their money back. The SEC disagrees, as do several Congressmen.

The SIPC contends it is unable to help Stanford’s victims because the fake certificates of deposit involved in the fraud were issued by Stanford’s offshore bank and not by Stanford Group Co., which is the SIPC-member brokerage in Texas. Any protection therefore falls outside of the SIPC’s scope, according to the SIPC.

A number of lawmakers and legal experts have weighed in on the matter, including Steven Caruso, a partner with Maddox, Hargett & Caruso, P.C. Caruso, who provided suggestions for improving the SIPC before members of the House Financial Services Committee, Capital Markets and Government Sponsored Enterprises subcommittee, Washington, D.C., on March 7. Among his recommendations: Increasing investor protections allotted by the SIPC to $1.3 million, eliminating the distinction between protection levels offered for cash and securities, and introducing legislation that would require all brokers and investment advisers to have insurance.