In a major victory for victims of Allen Stanford's alleged Ponzi scheme, U.S. regulators have concluded that they should be compensated by a brokerage industry-backed fund.

The decision announced on Wednesday by the Securities and Exchange Commission comes nearly two years after the Securities Investor Protection Corp, which handles claims for investors if their brokerage firm fails, said it did not believe the victims were eligible to file claims.

Stanford, 61, was arrested in 2009 and faces a 14-count criminal indictment over an alleged $7 billion scheme linked to certificates of deposit issued by his Antigua-based bank. The SEC has also filed civil charges against him.

Investigators accused the one-time billionaire of using Ponzi scheme proceeds to fund other ventures and a lavish lifestyle that included several yachts, private jets, and homes around the world. Stanford has denied wrongdoing.

In its decision, the SEC said people who invested money through Stanford's U.S. brokerage arm, Stanford Group Co, are entitled to protection by SIPC.

The SEC said it would ask SIPC to institute a liquidation proceeding against the brokerage, and file a court action to compel SIPC to do so if it refuses.

SIPC's board will review the referral, and analyze the SEC's underlying documentation as quickly as possible, the agency's president Stephen Harbeck said in a statement.

The SEC's direction to SIPC came the same day it proposed greater oversight of securities brokers, a response to Bernard Madoff's massive Ponzi scheme.

SIPC is also involved in the liquidation of the imprisoned Madoff's investment firm, Bernard L. Madoff Investment Securities LLC.

It has distributed nearly all $794.9 million it had agreed to advance to Madoff victims with valid claims.

LONG TIME COMING

Angela Shaw, founder and director of the Stanford Victims Coalition, said the SEC decision was a long time coming.

It has been a big fight and cost us a lot of money and a lot of time and a lot of effort, said Shaw, who said she and her husband lost $2 million investing with Stanford. We have known from the beginning we had valid legal arguments.

In an August 2009 letter, Harbeck said the Securities Investor Protection Act did not cover the brokerage customers who bought CDs through Stanford Group, a SIPC member, because customers rather than the brokerage held custody of the CDs.

SIPC does not protect against a decline in value of any investment, even if it is true that the SIPC member firm played a part in defrauding the customer into purchasing the devalued investment, Harbeck wrote then.

But the SEC rejected what it called technical claims by Harbeck. It said that for SIPC to conclude that these customers did not in fact deposit cash with Stanford Group would elevate form over substance by honoring a corporate structure designed by Stanford in order to perpetrate an egregious fraud.

No evidence suggested the customers intended to loan money to or invest in Stanford Group, or had reason to know their money was propping up a Ponzi scheme, the SEC explained.

VITTER LIFTS HOLD

Senator David Vitter had said on Tuesday he would block the U.S. Senate from voting on two SEC commissioner nominees, who had been expected to win approval, unless the regulator gave Stanford victims an answer on the eligibility question.

Vitter and some other lawmakers have been critical of how long it has taken the SEC to make a decision.

On Wednesday Vitter said he would release his hold on the nominees -- a Democrat, Luis Aguilar, and a Republican, Daniel Gallagher -- calling the day big, big news for Stanford investors.

There will likely be litigation, and no one will be getting a check in the mail tomorrow, but still - a huge step and a sigh of relief for many, said Vitter in a statement.

Stanford's criminal trial is scheduled to begin on September 12, provided he is ruled competent to face trial.

In January, a federal judge in Houston ruled Stanford incompetent to stand trial. Stanford has since February been at a hospital in the Butner Federal Correctional Complex in North Carolina, which also houses Madoff, to treat an addiction to an anti-anxiety medication he developed while in jail.

(Reporting by Sarah N. Lynch and Jonathan Stempel; Editing by Tim Dobbyn)