R. Allen Stanford was convicted of operating a $7 billion Ponzi scheme, members of Congress pressed officials of the Securities Investor Protection Corp. to reimburse his victims.

The day after R. Allen Stanford was convicted of operating a $7 billion Ponzi scheme, members of Congress pressed officials of the Securities Investor Protection Corp. to reimburse his victims.

And if those lawmakers have their way, investment advisers might bear the brunt of higher costs.

The frustration of lawmakers from both parties is building, as SIPC maintains that the Stanford case doesn't involve custody of funds at a brokerage firm, which it says is the limit of its statutory mandate. They are also upset by the fact that they think that SIPC isn't doing enough to help investors who were bilked in the $50 billion Bernard Madoff Ponzi scheme.

“If there is one common cause between Stanford and Madoff investors, it's the way SIPC fought investors every step of the way and has absolutely refused to protect the victims of fraud,” Sen. David Vitter, R-La., said in prepared testimony to the House Capital Markets Subcommittee last Wednesday. “For three years the Stanford victims have been fighting just to have their day in court — and unfortunately, it's SIPC that they have to fight.”

BATTLING THE SEC

SIPC also is in court battling a suit filed by the Securities and Exchange Commission to force it to cover the Stanford victims.

At the same time, three bills have been introduced in Congress. Collectively, they would require SIPC to make payouts to the Stanford victims, prevent SIPC from clawing back funds from investors who profited unwittingly from the Madoff scheme, and require that SIPC rely on customers' brokerage statements to determine how much money is owed to them.

Although the outcome of all these efforts is uncertain, brokerage firms that fund SIPC are wondering how much their costs will rise if it is required to expand the universe of investors it protects when brokers fail.

Brokers are assessed 0.02% of their revenue to fund SIPC. If it casts a wider net, investment advisers may be tapped to kick in funding.

SEC member Daniel Gallagher said that SIPC's mission has to be rethought completely.

“The suit was really the cherry on top of the confusion about SIPC and [the Securities Investor Protection Act of 1970] — what it does, what it doesn't do,” he said last week in an interview at the Investment Adviser Association conference in Washington.

Mr. Gallagher said that brokers could be on the hook for substantial costs if SIPC's mandate is broadened. For instance, if a broker is held responsible for the actions of a “rogue distribution firm” that commits massive fraud, “then the costs are going to be pretty high,” he said.

“I want clarity for investors,” Mr. Gallagher said. “I want clarity for brokerage firms, too. They don't know what their liability is [as] a SIPC member.”

Stephen Harbeck, SIPC's president and chief executive, told members of the House subcommittee that SIPC shouldn't have to help Mr. Stanford's investors, because they knew that their money was being put into certificates of deposit sponsored by a bank in Antigua.

SIPC shouldn't be required to help them recoup losses from an offshore bank, he said.

“That is absolutely not what the law had in mind,” Mr. Harbeck testified.

As new laws seek to change SIPC's agenda, the challenge is finding the money to help everyone seeking assistance after a rip-off, according to Joseph Borg, director of the Alabama Securities Commission.

"NOT ENOUGH MONEY'

“I feel sorry for these victims — I really do,” he said in an interview after he testified. “There's just not enough money to pay everybody what they expected to get.”

Currently, SIPC provides customers of failed brokerage firms up to $500,000 for missing securities and cash. The SIPC Modernization Task Force has recommended increasing the limit to $1.3 million.

But if the federal legislation expands SIPC coverage, investment advisers may be tapped for funds, Mr. Borg said.

“This Congress isn't going to say, "Let's do a bailout and print more money,'” he said.

“It's got to come from other segments of the industry. We've already got the broker-dealers. Then you've got to get the mutual funds. You've got to get the investment advisers. If you need more money, you have to supply it,” Mr. Borg said.

"NO CLUE'

He emphasized that he has “no clue what Congress' intention is.” But the bills could be combined or new provisions could be added through the legislative process, increasing the possibility that investment advisers would be affected.

“It may increase the potential liability of investment advisers who don't do their homework and send [customer money] to a fund like Bernie Madoff's,” Mr. Borg said.

Financial advisers also might get pulled into SIPC activity if the organization is required to cover victims of private placements that collapse.

For now, that is speculation. But ideas will continue to be offered for future legislation.

For instance, Steven Caruso, a partner at Maddox Hargett & Caruso PC, who represents investors in disputes with brokers, suggested to the House panel that investment advisers and brokers be required to buy insurance. “There is no free lunch in this world,” Mr. Caruso said. “When we have a fiduciary who is out there as an investment professional, requiring insurance will go a long way to helping potential [fraud] victims.”