A Billion for Peace of Mind

Stock-market investors have always known that they can be wiped out if they choose the wrong issues, but it has only recently dawned on them that they also can be ruined if they choose the wrong brokerage house. That threat has been raised by several brokerage failures. So far, the failures have not caused any grave losses to customers, but there is a danger that a series of future ones could do so--and that even clients of solvent brokers would be panicked into selling out everything, bringing on a stock-market collapse.

Wall Street and Washington agree that in order to avert such a calamity, brokerage accounts must be insured in the same way that bank accounts are. Last week President Nixon endorsed that idea in his economic speech. Just before the President spoke, a first-class fight broke out over how much, if any, increased Government regulation of the securities industry should accompany the insurance.

Setting Up SIPC. A securities-industry task force and the Securities and Exchange Commission last week presented separate bills to Congress. Both bills would establish a Securities Investor Protection Corp. (abbreviated SIPC and pronounced sipic) that would insure each investor's account for as much as $50,-000. SIPC would be empowered to raise an initial fund of $75 million, and eventually $150 million, from brokers. In a pinch, it could also borrow up to $1 billion from the Treasury to pay off customers of insolvent brokers; it would repay the loans by assessing solvent brokers.

The plan would benefit mostly the one active investor in every ten who buys stock on margin. Whether they realize it or not, margin buyers agree to let their brokers use their stock as collateral on bank loans, which must be repaid before the stock can be sold and the cash returned to the customer. The insurance plan would also bring greater peace of mind to investors who leave cash and fully paid securities in their accounts. Brokers are supposed to keep customers' cash and paid-up stocks separate from their own assets, but Phillip Loomis, general counsel of the SEC, says that cash and stocks "occasionally" vanish from customers' accounts. The SEC recently accused one brokerage firm, Meyerson & Co., of pledging customers' paid-up stock as collateral on bank loans.

Tough New Agency. SIPC would be more than a conduit for cash. It would be, in effect, a powerful new brokerage-regulatory agency. Its officers could, for example, examine the books of brokerages to determine if they were on the verge of insolvency, order changes in the way brokerages keep their books, arrange mergers to rescue troubled firms and, as a last resort, ask a federal court to appoint a trustee for a failing broker.

Wall Street does not want those powers exercised by the Government. To head off that possibility, an industry task force has drafted a bill that would make SIPC an almost purely industry self-regulating body. Under the industry's proposal, the insurance corporation would have twelve directors, but only two would be Government appointees; the others would be chosen by stock exchanges and industry associations. The SEC would have general authority to review SIPC operations, but at one point the industry draft specifies that there would be "no addition to" the SEC's regulatory powers.

That approach succeeded only in provoking SEC Chairman Hamer ("Judge") Budge into taking the toughest regulatory stance of his generally mild career. To the shock of brokers. Budge presented an alternative bill that would give the Government almost complete power over SIPC. Among its provisions: the President would name all SIPC directors; the SEC would have the power to order the insurance company to adopt new rules and could dictate how often its examiners should look at brokers' books. Budge also insisted that Congress give the SEC clear authority to make sure that brokers keep their hands off their customers' cash and paid-up stocks. If the industry does not agree, Budge said, Congress should not set up SIPC at all, but instead give the SEC authority to operate the insurance plan directly. Senator Edmund Muskie, the prime mover in Congress behind the idea that investors should be protected against brokerage failures, was impressed enough by the SEC's arguments to incorporate most of them into his bill to set up a corporation to insure investors.

Deeper in the Hole. Both sides are trying to negotiate a compromise. Ideally, that compromise would be closer to the SEC's idea than to the industry's position. The industry's request that the Government make $1 billion of taxpayers' money available to an agency over which Washington would have little control showed rather astonishing gall. Wall Street could use tighter regulation of brokers' financial practices anyway.

The compromise should also be worked out as speedily as possible. Wall Street's private depression is becoming worse. A study put out last week by Wright Associates, a management consulting firm, showed that eleven of the 13 major brokerage houses lost money in this year's first quarter. To drum up more business, some brokerages have begun to phone people at random and ask if they want to open accounts. Although stock prices rose sharply last week, trading volume on the New York Stock Exchange at times dropped below 7,000,000 shares daily, a level at which few if any brokers can make a profit. If volume continues to be sluggish, the likelihood of further brokerage failures will increase, and the need for investor insurance will become even more acute.

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