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Investor Beware

Imagine this if you will… The failures of the banking industry lead to an economic meltdown. The FDIC declares that depositor insurance protection will arbitrarily change for any of the hundreds of banks that have gone belly up.  Your bank is one of them. Rather than being protected up to the statutory maximum of $250,000, your account protection will be limited to what you deposited, and will not include any interest that had accrued.

It gets worse.

Now, imagine you had that account for many years.  You wrote checks on that account, and you are living off of the money in that account. But your total withdrawals, including checks written, exceed the amount of your initial deposit. And now you’re being sued to return those funds. But you have nothing left to return.

If this came to pass, bank customers would flee in droves, heading for the comfort offered by their mattresses.

Remarkably, that is what is happening to investors today, and you should take note: it could happen to you.

The plight of the Madoff investor should be a cautionary tale for all because regulatory entities charged with protecting investors -- NASD/FINRA and the Securities and Exchange Commission (SEC) repeatedly failed to identify the fraud even when they suspected something was amiss.

Equally frightening is that the Securities Investor Protection Corporation (SIPC), modeled closely on the FDIC, has refused to properly pay its promised protection. It has declared null and void investors' account statements. After 40 years of ensuring that investor accounts would be protected up to the SIPC limit ($500,000 since 1978) as measured by the final account statement, SIPC has denied the promised protection to two-thirds of innocent investors who’ve been impacted.  Worse, thousands of innocent investors are being sued and threatened with assets seizure.

As a financial professional, I can state that it is paramount that investors, especially small investors who entrust SEC-registered and SIPC member broker-dealers with their hard earned retirement savings, know that their financial statements accurately represent their investments, and that they are protected.   That is clearly what Congress intended when the bill to create SIPC was signed into law in 1970. This law also required that investors forego ownership of actual stock certificates and depend on brokerage account statements instead.

However, SIPC is now pitting innocent investors who acted in good faith against each other and devising complicated and arbitrary formulas to determine, post-facto, who “wins” and who “loses.”

This is obviously not what Congress intended.  Rep. Scott Garrett of New Jersey has introduced legislation that would right current wrongs and provide the American investor with the confidence and protection they thought they already had.   HR 757, the Equitable Treatment of Investors Act, reaffirms the intent of a solid law that is already on the books.  It would ensure that all investors can rely on the information on brokerage statements provided by a regulated and registered brokerage firm. It is an essential piece of legislation that puts Main Street on a more even playing field with Wall Street.

Whether it is a failed bank or an egregious case of broker fraud, American investors deserve to know that their assets are protected.  Congressman Garrett’s legislation does just that.  I would like to think that’s something every Member of Congress could stand behind.

-Ron Stein, CFP