Securities Investor Protection:

Steps Needed to Better Disclose SIPC Policies to Investors

GAO-01-653: Published: May 25, 2001. Publicly Released: Jun 21, 2001.

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The Securities Investor Protection Act of 1970 created the Securities Investor Protection Corporation (SIPC) to help protect customers against losses from the failure of a securities firm. However, the large number of claims denied in several recent SIPC liquidation proceedings has raised concerns that some SIPC policies and practices may unduly limit the actual protection afforded customers. This report discusses (1) the basis for SIPC policies involving unauthorized trading and the extent that these policies are disclosed to investors; (2) the basis for SIPC policies involving the affiliates of SIPC member firms and the extent that these policies are disclosed to investors; (3) SEC oversight of SIPC; and (4) the disclosure rules for SIPC, the Federal Deposit Insurance Corporation, and state insurance guarantee associations, as well as the related implications for consumers as the financial services industry consolidates.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Although SIPC still does not agree with the statement recommended by GAO, it has expanded a statement in its brochure that discusses market risk and SIPC coverage. In addition, SIPC has amended its advertising bylaws to require firms that display a statement about SIPC coverage to include a link to the SIPC web site. This will further enable the customer to access information about what SIPC does and does not cover.

    Recommendation: The Chairman, SIPC, should amend SIPC advertising bylaws to require that the official explanatory statement about a firm's membership in SIPC include a statement that SIPC coverage does not protect investors against losses caused by changes in the market value of their securities.

    Agency Affected: Securities Investor Protection Corp.

  2. Status: Closed - Implemented

    Comments: SEC sent a letter in April 2003 to NYSE and NASD asking them to explore how this recommendation can be implemented through SRO rulemaking.

    Recommendation: SEC can take steps to improve the information it provides to investors about SIPC and about how to protect investor interests. Moreover, it can help ensure that more investors receive the SIPC brochure. To improve investor awareness and education, the Chairman, SEC require SIPC member firms to provide the SIPC brochure to their customers when they open an account and encourage firms to distribute to its existing customers more widely.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: SEC overhauled its web site and updated its investor education section. SEC includes a more detailed guide to addressing cold calls and advises investors to be cautious about sales pitches that occur over the phone and high-pressure tactics. It also includes links to SIPC (and the brochure). It also alerts investors to review their trade confirmations and to look for trades they did not authorize. Finally, it includes information about how to complain.

    Recommendation: SEC can take steps to improve the information it provides to investors and that investors receive about SIPC and about how to protect investor interests. Moreover, it can help ensure that more investors receive the SIPC brochure. To improve investor awareness and education, the Chairman, SEC review the sections of SEC's Web site and, where appropriate, advise customers to complain promptly in writing when they believe trades in their account were not authorized, including an explanation of SIPC's policies and practices and about how to avoid ratifying potentially unauthorized trades during telephone conversations.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Implemented

    Comments: SEC expanded its sample to include additional liquidations that dealt with unauthorized trading and nonmember affiliate issues. For example, SEC had planned to focus on three such cases, but they expanded their sample to include two additional liquidations involving unauthorized trading, and two nonmember affiliate cases.

    Recommendation: To improve SEC's oversight of SIPC operations, the Chairman, SEC, should ensure that Office of Compliance Inspections and Examinations and Market Regulation include in their ongoing SIPC examination a larger sample of liquidations involving unauthorized trading and nonmember affiliates claims.

    Agency Affected: United States Securities and Exchange Commission

  5. Status: Closed - Implemented

    Comments: SEC officials said that they began to hold quarterly meetings, but determined that more frequent, more informal meetings were more effective. They said that they meet to discuss SIPC as issues arise, which is typically every week or two.

    Recommendation: To improve SEC's oversight of SIPC operations, the Chairman, SEC, should require that Market Regulation, OCIE, General Counsel, and Enforcement establish a formal procedure to share information about SIPC issues.

    Agency Affected: United States Securities and Exchange Commission

  6. Status: Closed - Implemented

    Comments: 3/24/04: SIPC has modified its web site by adding hyperlinks to specific investment fraud education sites such as SEC's and NASD's web pages.

    Recommendation: The Chairman, SIPC, should revise the brochure to warn investors to exercise caution in ratifying potential unauthorized trades in discussions with firm officials.

    Agency Affected: Securities Investor Protection Corp.

  7. Status: Closed - Implemented

    Comments: SEC updated an online publication called "Securities Investor Protection Corporation," which discussed the problems that can occur when investors place their cash or securities with non-SIPC members. Investors are also told to always make sure that the securities firm and clearing firm are members of SIPC because firms are required by law to tell you if they are not.

    Recommendation: SEC should update its Web site to inform investors about the frauds that may be associated with certain SIPC member firms and their affiliates as well as the steps that can be taken to avoid falling victim to such frauds.

    Agency Affected: United States Securities and Exchange Commission

  8. Status: Closed - Implemented

    Comments: SEC sent a letter in April 2003 to NYSE and NASD asking them to explore how this recommendation can be implemented through SRO rulemaking. On February 10, 2005, NASD filed notice of a proposed rule change relating to Customer Account Statements. NASD proposed to amend Rule 2340 to require that account statements include a statement that advises each customer to promptly report any inaccuracy or discrepancy in that person's account to his or her introducing firm and clearing firm and to re-confirm any oral communications in writing to further protect the customer's rights, including rights under SIPA. As of October 2005, the proposed amendment to Rule 2340 is pending NASD's review of public comments and finalization of the rule and it will be presented before the Commission for its approval. In September 2006, SEC approved NASD Rule 2340.

    Recommendation: SEC can take steps to improve the information it provides to investors about SIPC and about how to protect investor interests. Moreover, it can help ensure that more investors receive the SIPC brochure. To improve investor awareness and education, the Chairman, SEC, should in conjunction with the self-regulatory organizations, establish a uniform disclosure rule to require that clearing firms disclosure on trade confirmations or other account statements that investors should complain in writing about unauthorized trades in a timely manner.

    Agency Affected: United States Securities and Exchange Commission

  9. Status: Closed - Implemented

    Comments: SIPC overhauled its brochure "How SIPC Protects You" in 2001. The brochure addresses evidence needed to document an unauthorized trading claim. SIPC has also created a web page entitled "Documenting an Unauthorized Trade" which contains the same information.

    Recommendation: To improve investor awareness of SIPC's policies, practices, and coverage, the Chairman, SIPC, as part of SIPC's ongoing effort to revise the informational brochure and Web site, should include a full explanation of the steps necessary to document an unauthorized trading claim.

    Agency Affected: Securities Investor Protection Corp.

  10. Status: Closed - Implemented

    Comments: SEC officials have agreed to implement this requirement on a case-by-case basis.

    Recommendation: SEC can take steps to improve the information it provides to investors about SIPC and about how to protect investor interests. Moreover, it can help ensure that more investors receive the SIPC brochure. To improve investor awareness and education, the Chairman, SEC, should require firms that SEC determines to have engaged or are engaging or are engaging in systematic or pervasive unauthorized trading to prominently notify their customers about the importance of documenting disputed transactions in writing.

    Agency Affected: Securities Investor Protection Corp.

 

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