Securities Investor Protection: The Regulatory Framework Has Minimized SIPC's Losses

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

Highlights

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.

Recommendations

Recommendations for Executive Action

Agency Affected	Recommendation	Status
Other	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.	Closed – Implemented 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.
United States Securities and Exchange Commission	The Chairman, SEC, should review the adequacy of funding plans develop by SIPC.	Closed – Implemented 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.
Other	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.	Closed – Not Implemented 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. View More
United States Securities and Exchange Commission	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.	Closed – Not Implemented 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. View More
Other	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.	Closed – Implemented 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.
United States Securities and Exchange Commission	The Chairman, SEC, should periodically review SIPC operations and its efforts to ensure timely and cost-effective liquidations.	Closed – Not Implemented 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.
Other	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.	Closed – Implemented 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.
United States Securities and Exchange Commission	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.	Closed – Not Implemented 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.

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