Securities Investor Protection:

The Regulatory Framework Has Minimized SIPC's Losses

GGD-92-109: Published: Sep 28, 1992. Publicly Released: Sep 28, 1992.

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Pursuant to a congressional request, GAO reviewed the operations and solvency of the Securities Investor Protection Corporation (SIPC), focusing on: (1) the exposure and adequacy of the SIPC fund; (2) supplemental funding mechanisms; (3) SIPC liquidation oversight efforts; (4) the disclosure of SIPC protections to customers; and (5) whether SIPC needs the authority to examine the books and records of its members, and to take enforcement actions.

GAO found that: (1) since regulations and routine oversight of securities firms by the Securities and Exchange Commission (SEC) and self-regulating organizations (SRO) have minimized the number of SIPC liquidations, SIPC does not need the authority to examine its members' books and records, but the regulators' continuing monitoring and supervisory efforts are critical to minimizing SIPC exposure; (2) a major SIPC liquidation may damage public confidence in the securities industry because customers do not have access to their accounts during a liquidation; (3) the SIPC customer protection fund's exposure and administrative expenses cannot be quantified, and the SIPC board set a reasonable strategy of amassing $1 billion in fund resources by 1997 by an annual 10-percent growth based on variable assessment rates, and supplementing the fund with lines of credit from banks and the Treasury; and (4) an SIPC task force concluded that a cash fund is better than alternative methods to protect customers although private insurers could supplement the fund and act as another monitoring level. GAO also found that: (1) SIPC has been very effective in liquidating relatively small firms, but it has not planned for the highly complex liquidation of a large firm, and needs to improve its collection of operational information on failing firms, and to analyze and develop plans for potential liquidations; (2) SEC needs to improve and expand its oversight of SIPC plans and operations; (3) nonmembers are not required to disclose their lack of membership in SIPC; (4) SIPC needs to improve the disclosure of covered security products, filing deadlines, and procedures to follow for broker-dealer failures or business terminations; and (5) SEC is considering requiring non-member affiliates and broker-dealers to disclose that they are not SIPC members.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The SEC A-50 response states that SEC and SIPC agree with this recommendation and that they have and will continue to implement this recommendation.

    Recommendation: The Chairman, SIPC, should periodically review the adequacy of SIPC funding arrangements, taking into account any changes in the principal risk factors affecting the fund's exposure to loss.

    Agency Affected: Securities Investor Protection Corp.

  2. Status: Closed - Implemented

    Comments: The SEC A-50 response states that SEC and SIPC agree with this recommendation and that they have and will continue to implement this recommendation.

    Recommendation: The Chairman, SEC, should review the adequacy of funding plans develop by SIPC.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Not Implemented

    Comments: SEC drafted a proposed rule (17a-24), which was informally reviewed by the industry. The rule would have required large firms (defined as those with more than 100,000 customer accounts) to maintain certain basic operational information in a central location. The industry objected to the rule on various grounds. In response, SEC pared down the rule considerably. SEC officials later deferred action on the rule because any key operational information required it required broker-dealers to keep centrally would be obsolete almost immediately. Moreover, this sort of basic operational information is kept electronically. SIPC approved of the pared down rule, but SEC has decided not to pursue further action at this time.

    Recommendation: The Chairmen, SIPC and SEC, should work with SROs to plan for the timely liquidation of a large broker-dealer by improving the timeliness of information provided to SIPC by the regulators that is needed to liquidate a troubled firm.

    Agency Affected: Securities Investor Protection Corp.

  4. Status: Closed - Not Implemented

    Comments: SEC drafted a proposed rule (17a-24), which was informally reviewed by the industry. The rule would have required large firms (defined as those with more than 100,000 customer accounts) to maintain certain basic operational information in a central location. The industry objected to the rule on various grounds. In response, SEC pared down the rule considerably. SEC officials later deferred action on the rule because any key operational information required it required broker-dealers to keep centrally would be obsolete almost immediately. Moreover, this sort of basic operational information is kept electronically. SIPC approved of the pared down rule, but SEC has decided not to pursue further action at this time.

    Recommendation: The Chairmen, SIPC and SEC, should work with SROs to plan for the timely liquidation of a large broker-dealer by improving the timeliness of information provided to SIPC by the regulators that is needed to liquidate a troubled firm.

    Agency Affected: United States Securities and Exchange Commission

  5. Status: Closed - Implemented

    Comments: SIPC and SEC are reviewing SIPC automation plans as part of an SEC ongoing review of SIPC operations. SIPC has also received an evaluation by a consulting firm, which has just been reviewed by the SIPC Board of Directors. SIPC will go ahead over the next 2 years to obtain appropriate software and hardware.

    Recommendation: The Chairman, SIPC, in coordination with the Chairman, SEC, should systematically determine SIPC automation needs for various-sized liquidations and develop appropriate plans and procedures to ensure that trustees will promptly acquire cost-effective automated liquidation systems.

    Agency Affected: Securities Investor Protection Corp.

  6. Status: Closed - Not Implemented

    Comments: SEC completed a review of SIPC in the summer of 1993 and plans to conduct regular reviews on an ongoing basis. Without further audit work, GAO cannot determine the depth of SEC's evaluation.

    Recommendation: The Chairman, SEC, should periodically review SIPC operations and its efforts to ensure timely and cost-effective liquidations.

    Agency Affected: United States Securities and Exchange Commission

  7. Status: Closed - Implemented

    Comments: SIPC has incorporated the proposed changes into a draft revision of its brochure. SIPC plans to issue the revised version of the brochure, which includes the recommended changes, soon.

    Recommendation: The Chairman, SIPC, should review and revise, as necessary, the SIPC official brochure to better inform customers of what they should do if their securities firm fails or otherwise goes out of business and to specify the amount of time that customers have to respond in order to qualify for SIPC protection.

    Agency Affected: Securities Investor Protection Corp.

  8. Status: Closed - Not Implemented

    Comments: SEC is reviewing options to address how to improve disclosure to customers. SEC does not agree that investment advisory firms should have to disclose their non-SIPC status, but it is considering requiring registered nonmember broker-dealers and affiliates to disclose their non-SIPC status.

    Recommendation: SEC should revise its regulations to require SEC-registered financial firms that serve in an intermediary role with customers and have access to customer funds or securities to disclose to their customers that they are not SIPC members.

    Agency Affected: United States Securities and Exchange Commission

 

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