Who Watches the Watchers? The Securities Investor Protection Act, Investor Confidence, and the Subsidization of Failure

Southern California Law Review, Vol. 72, May 1999

Posted: 5 Aug 1999 Last revised: 30 Jan 2010

Thomas Wuil Joo

University of California, Davis - School of Law

Date Written: January 27, 2010

Abstract

The Securities Investor Protection Act of 1970 (SIPA) created a special scheme for the liquidation of insolvent securities brokerage firms and established the Securities Investor Protection Corporation (SIPC) to administer a fund to protect the customers of failed brokers. SIPA is primarily designed to passively reimburse customers for losses due to broker failures and to thereby boost public confidence in securities markets.

This Article argues that in order to truly operate as an "investor protection" scheme, SIPA should take an active role in the prevention of brokerage failures, rather than merely attempting to alleviate the harms caused by such failures. SIPA currently shifts much of the cost of broker failures away from the securities brokerage industry, thereby subsidizing it. SIPA should assign more of these costs to the brokerage industry. Such an arrangement is more consistent with the self-regulated nature of the industry. It is also more fair, in that the industry reaps the benefits of SIPA investor protection in the form of investor confidence, and more efficient in that assigning the costs to the best cost-avoider is a more efficient means to long-term customer protection and industry health.

Notes: This is a description of the paper and is not the actual abstract.

JEL Classification: G24, G28

Suggested Citation

Joo, Thomas Wuil, Who Watches the Watchers? The Securities Investor Protection Act, Investor Confidence, and the Subsidization of Failure (January 27, 2010). Southern California Law Review, Vol. 72, May 1999. Available at SSRN: https://ssrn.com/abstract=169208

Thomas Wuil Joo (Contact Author)

University of California, Davis - School of Law ( email )

Martin Luther King, Jr. Hall
400 Mrak Hall Dr.
Davis, CA 95616-5201
United States
(530) 754-6089 (Phone)
(530) 752-4704 (Fax)

Paper statistics

Abstract Views
1,543