A House committee is narrowly passing along a change to the Uniform Commercial Code.
Backers say it will protect consumers from certain investment activities, but critics say those protections already exist and would put the stability of the state’s capital market at risk.
Proponents of the bill say it will protect people’s investments, pensions and 401ks in the event a broker faces financial difficulty or bankruptcy.
Rep. Julie Auch, R-Yankton, who is also a financial consultant, is bringing the bill.
Auch said the Uniform Commercial Code allows banks or brokers to seize collateral or stocks and bonds in the event they go bankrupt. She used the analogy of a toy car in testimony at the House Commerce Committee.
“One day that toy car is taken and it’s put in a box with a whole bunch of other cars. This is the pool. And, that box of toy cars is used as collateral by someone else. That someone else goes broke and you never get your toy car back," Auch said. "That’s what we’re talking about.”
However, the law states that can only happen if the creditor has control over the asset. State officials say no loss like this has ever occurred in South Dakota.
The Uniform Commercial Code is identical in all 50 states. It requires consent for a bank or broker to use someone’s assets as collateral — like how banks use CDs.
Critics say the change would negatively affect these voluntary arrangements and lead to investors doing business elsewhere.
Others furthered the toy car analogy.
“I consent to you having control over my financial asset and loaning it out as collateral so that I can get money from you that I’ll then go turn around and invest in other toy cars or Legos or whatever I want to buy. You pass this, you’re taking away my right as a consumer to do that," said Justin Smith, a lobbyist with the Greater Sioux Falls Chamber of Commerce.
The bill was also opposed by the South Dakota Retailers Association, the Bankers Association, and other business and financial groups. The House Commerce and Energy committee passed the bill seven to six. It now heads to the full House for a vote.
