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Sunday, May 29, 2011

Insurance fund for stocks, bonds proposed

Insurance fund for stocks, bonds proposed

A new guarantee fund for investments in Philippine stocks, bonds and other securities, similar to an existing safety net in the US, was proposed by a major political party as a fresh measure to boost confidence in financial markets.

The Nacionalista Party led by Sen. Manuel Villar Jr., a presidential aspirant, said on Monday it would push for new legislation establishing a guarantee entity patterned after the Securities Investor Protection Corp. (SIPC) in the U.S. to safeguard investors in case their securities brokers and dealers collapse.

The idea is that customers of registered broker-dealers whose securities were misappropriated, never purchased, or stolen, should be able to recover up to P500,000 of their investments, in cash and/or securities.

"We definitely need a guarantor a kin to the SIPC in the US to extend minimum protection to customers of broker-dealers ruined as a result of embezzlement or disastrous investments," NP spokesperson and former Cavite Rep. Gilbert Remulla said in a press statement.

"Just as we desperately need an insurer for planholders of failed pre-need firms, we also ought to have a protector of investors in insolvent broker-dealers of stocks, bonds and notes," Remulla said.

Contrary to popular belief, Remulla said it was not just the rich that usually ended up getting victimized when a broker was bled dry.

Many of the customers of brokers were charitable institutions, and ordinary people, through pension funds invested in stocks and bonds, he said.

"For example, an investor has 5,000 shares in Manila Electric Co. and P250,000 in cash in an account with a failed broker. The SIPC, of which the broker is a member, ensures that the investor gets back the cash and Meralco shares by buying them in the open market if necessary, and conveying them to the investor's account with a new broker," he said.

Remulla said the recent collapse of local stock brokerage HK Securities Inc. and previous failures of broker-dealers should oblige Congress to promptly install a local SIPC.

Investors are currently running after HK Securities in court after the brokerage collapsed allegedly due to the fraudulent activities of its owner, Rodolfo Cruz, former president of the Pasig City Chamber of Commerce and Industry.

HK Securities' misuse of over P106 million in its almost 900 customer accounts was exposed when it failed to settle stocks in short-selling deals and $1.15 million in broker's liabilities.

"If Congress can provide up to P500,000 insurance coverage to bank depositors, then surely it can also extend the same protection to securities investors," Remulla said.

He said the proposed Pre-Need Industry Code already had an insurance fund that would allow planholders to recoup up to P100,000 of their investments in busted firms. However, he said there has been no bill with respect to securities investors.

Established by the US Congress in 1970 via the Securities Investor Protection Act, the SIPC has a reserve fund that protects investors in case of a broker-dealer failure. Each investor is protected up to $500,000, including up to $100,000 in cash, if the customer had cash in an account, or the customer's securities are unavailable.

The SIPC distributes the cash and securities to investors once a member broker-dealer goes under, and recovers all funds from the firm's residual assets. Recovered funds are then used to pay investors whose claims exceed the $500,000 limit.

A non-profit firm funded by member broker-dealers, the SIPC is neither a US government agency nor a regulator. The US President, nonetheless, appoints some of the entity's board members. 

I hope this proposal will push through. It will drive and courage more people to invest since their investments will be insured even up to P500k only. Although 500k only but  I think this is better than nothing.

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