This week, Let’s Talk Markets returns from Spring Break energized, engaged, and rapidly approaching totality. That is to say, co-hosts Dave Lauer and Pink cover a ton of ground in the newest episode of our podcast.
But we warn you—you will need special glasses to watch.
Of course, we hope you all got out there and experienced the eclipse this week. If you missed it, you’ve got a bit of a wait until the next one.
Speaking of things that happen about once every 20 years, we tuned in to watch a Tennessee General Assembly hearing the other day. I know what you’re thinking. “I wanna party with these guys.”
Well, you’re right. You totally do.
But that’s not the point. The point is this, according to Tennessee House Bill 2806:
“If a securities intermediary does not have sufficient interests in a particular financial asset to satisfy both its obligations to entitlement holders who have security entitlements to that financial asset and its obligation to a creditor of the securities intermediary who has a security interest in that financial asset, then the claims of entitlement holders, other than the creditor, have priority over the claim of the creditor.”
Yeah. That was also our reaction, at first.
Then a guy from SIFMA got up at the hearing and explained that America has the best markets in the world and that there’s no reason to go shaking everything up now.
That got our attention. SIFMA is a group that represents the interests of the brokersfinance and securities industries. They are staunch defenders of the status quo. If this guy hates the bill, there might actually be something to itit’s probably a good one.
So we’ll try to give you the shortest explanation that we can here.
Tennessee Waltz in Double Time
Tennessee House Bill 2806 is a proposed amendment to Tennessee Senate Bill 2640. If passed, the bill would impact benefit retail investors with holdings in margin accounts.
Margin accounts allow investors to receive loans from their brokers while using the securities and cash in the account as collateral for those loans.
According to Investor.gov, a margin account “is a type of brokerage account in which the broker-dealer lends the investor cash, using the account as collateral, to purchase securities.”
Now let’s say that brokerage goes bankrupt.
And let’s say that the creditor for this collapsing brokerage also happens to be the custodian for the funds held in your margin account.
Did you know that this creditor can simply take the assets in your account?
Yes, you, the retail investor–you are the collateral when the brokerage goes under. And according to the Uniform Commercial Code, which governs commercial transactions across all the U.S., this is true in every state.
If that sounds crazy, ask anybody you know who had a margin account with Lehman Brothers leading up to the Great Recession. Turns out JPMorgan was working both sides of the game, acting as both creditor and custodian to a brokerage rapidly approaching disaster. When bankruptcy struck, JPMorgan straight up confiscated the assets of Lehman’s margin account holders.
In the five years it took investors to recover their assets, lives were ruined and businesses were pushed to extinction.
Well, Tennessee doesn’t think it’s fair. And though there was some disagreement during the General Assembly Hearing, the “ayes” won in the end. Now, the bill goes back to the state Senate, a relative lock for passage.
We spent some time discussing this one during the podcast, particularly because this state law represents a break from federal law. As a result, one of two things might happen here:
Either way, we see you, Tennessee.
Take Me To Another Place
Moving on from the Volunteer State to the state of shareholder voting.
Remember all that stuff we said a few weeks ago about how you can sell your shareholder proxy votes through a somehow-not-illegal entity called the Shareholder Voter Exchange?
Well…
Forget that ever happened.
Just days later, we spoke directly with the head of the Exchange, who indicated that the organization was “taking a step back” from its operations to reevaluate its mission. We can’t speculate about exactly what happened there. But you can no longer sell your vote.
Fortunately, there are much better things you could be doing with your shareholder vote, like, for instance, voting.
But it’s come to our attention that shareholder voting rights aren’t necessarily common knowledge. Some of you may not realize that you have access to information, materials and proxy ballots from the companies you invest in.
That’s why we strongly encourage you to register for our joint Webinar with the Shareholder Services Association (SSA) on April 18th, at 2PM EST. Attendance is free but the knowledge we’re dropping is worth a fortune. See you there!
And until then, Eid Mubarak to all who observe.
Dave Lauer is a co-founder and CEO of Urvin Finance, where he leads the team in building Urvin Terminal. Prior to founding Urvin Finance, Dave spent over a decade advocating for financial market reform after quitting his job as a high-frequency-trader.