A Senate Banking Committee member vowed to block nominations to an obscure financial sector overseer, saying that it is riddled with systemic conflicts of interest that have sapped markets of confidence.
Sen. David Vitter (R-La.) said that reforms must be passed before the Securities Investors Protection Corporation (SIPC) can proceed with business as usual, and denounced how the non-profit government-created organization has treated victims of multibillion dollar fraudster Alan Stanford.
“Investors are led to believe that if a broker-dealer fails, SIPC will be there to help them,” he said Wednesday, at a Senate banking subcomittee hearing. “I can tell you from bitter experience, watching the Stanford case, trying to help those victims however I can that this is just patently false.”
Vitter said nominees to serve as SIPC directors, Leslie Bains and John Mendez—the former, a Citigroup director; the latter, an equity partner at Latham and Watkins, LLC—should not pass the Senate without the approval of their selection being tied to reforms.
“If they are confirmed without reforming SIPC, Ms. Bains would continue her day job, for instance, at Citi. Mr. Mendez would continue to be an equity partner at a firm that has grown into a very significant securities litigation practice,” he added.
“While they may be perfectly nice people, I don’t think they bring the necessary track record of reform and investor protection to SIPC that is desperately needed,” he also remarked.
SIPC was created in the seventies by Congress to help wind-up bankrupt brokerage firms.
It actually fought the Securities and Exchange Commission in court over the issue of compensation to Stanford’s victims. Last year, an appellate judge in Washington ruled that SIPC wasn’t responsible for the estimated 7,800 ex-customers of Stanford.
“The court concluded that those victims did not qualify as ‘customers’ eligible for compensation by SIPC, which liquidates failed brokerages. It upheld a July 2012 ruling by a federal district judge,” Reuters reported last September. The SEC did not appeal the decision.
The decision by SIPC to fight defrauded investors, statutory obligations notwithstanding, was cited by Vitter as a reason that the body is too captured by private industry to effectively act in the public interest.
“I don’t think an entity like [the Federal Deposit Insurance Corporation] would have spent tens of millions of dollars to do back somersaults to make those sorts of arguments,” he said. “I think only an entity dominated by industry members would have done those back somersaults and spent tens of millions of dollars in legal fees to make those sorts of arguments,” he told SIPC President/CEO Steven Harbeck, a witness before the Wednesday hearing.
The importance of asset managers has increased significantly since the 2008 global financial collapse, and their industry has turned into something of a growing shadow banking sector. An annual Treasury Department report published late last year noted that there has been increased risk “concentrated in nonbank entites that are not directly regulated by banking supervisors.”
“Assets under management have increased ten-fold over the last five years, driven by a search for yield and a hedge against an eventual rise in interest rates,” the report noted.
Last week, the SEC unanimously agreed to propose rules that aim to make mutual funds and exchange-traded funds more transparent about the type of risks they ask investors to take.
