It is a little-known law introduced in 1994, posing a threat to private investors by allowing financial institutions to use investors’ assets as collateral in times of economic crisis.
Only South Dakota is addressing this threat, with lawmakers introducing House Bill 1199 on Monday, January 29, to rewrite the commercial code in the state. The proposed legislation would ensure investors retain ownership of their assets, even when utilizing intermediaries like Fidelity or Merrill Lynch.
The law, Article Eight of the Uniform Commercial Code, changes individual property rights related to investment accounts across all 50 states. Under this framework, investors no longer own their investments.
According to Cornell Law School, under “Article 8-106. CONTROL. (3) another person has control of the security entitlement on behalf of the purchaser or, having previously acquired control of the security entitlement, acknowledges that it has control on behalf of the purchaser.”
Instead, the intermediary or stockbroker retains ownership. It allows intermediaries to use investors’ assets as collateral in their financial agreements, putting investors at risk in the event of a financial institution’s bankruptcy.
“You purchase a car outright, but the car lot from which you bought it can use your car as collateral in another automobile sale,” said a political pundit. “And if that sale falls through, you lose your car even though you paid in full for it.”
House Bill 1199 in South Dakota is a measure that preserves investors’ rights. Despite opposition from bank lobbyists and financial institutions, the bill would be a first step in rectifying a system designed to protect banks and other financial institutions while jeopardizing the investments of millions of Americans.
The outcome of the South Dakota legislation could set a precedent for similar reforms in other states, including Nevada, potentially leading to a nationwide overhaul of the law.
The Old Blog in the Desert 