GAO Report Faults SIPC, SEC

The General Accounting Office (GAO) released a report June 22 that was critical of the Securities Investor Protection Corp. (SIPC), as well as the SEC’s role in overseeing the SIPC. The GAO is Congress’ investigative arm, and its SIPC report generally recommended that the SEC and the SIPC improve disclosures to investors. For one thing, the SIPC does not clearly disclose to investors that market losses

The General Accounting Office (GAO) released a report June 22 that was critical of the Securities Investor Protection Corp. (SIPC), as well as the SEC’s role in overseeing the SIPC.

The GAO is Congress’ investigative arm, and its SIPC report generally recommended that the SEC and the SIPC improve disclosures to investors.

For one thing, the SIPC does not clearly disclose to investors that market losses are not covered by the SIPC fund, the report said. The GAO recommended such disclosure be mandated.

Yet, the SIPC continues to argue that it is not authorized under law to require its members to make this disclosure. In a letter to the GAO, the SIPC also claimed that without providing investors with details of how SIPC handles claims, disclosure about market losses would be misleading.

Further, the GAO found that investors easily confuse SIPC coverage with FDIC coverage. Confusion may increase as securities firms and banks continue to merge, the report said.

Several issues with the SIPC have arisen primarily in the context of failed bucket shops. For example, the GAO said the SEC, the SIPC and brokerage firms have not adequately disclosed to investors the SIPC’s policy on denying claims of unauthorized trading. If a customer does not complain to his broker about an unauthorized trade within 10 days, and in writing, SIPC’s policy is to deny the claim in a liquidation proceeding. The customer would then have no right to the amount of cash used to buy the security.

The GAO said the SIPC is legally able to consider other types of evidence, such as telephone complaints, to determine whether a trade was unauthorized. The SIPC disagreed. In a letter to the GAO, it said the SIPC must maintain objective standards in paying out claims. The SEC advised the GAO against warning investors that their complaints must be in writing, since most problems can be resolved with a phone call.

GAO investigators also uncovered that between 1971 and 1999, the SEC initiated only two examinations of the SIPC (one in 1985 and another completed in 1994). These exams focused only on the adequacy of the SIPC fund and administrative issues. Even the most recent SEC exam, begun in May 2000, has looked at only four SIPC liquidations involving cases of unauthorized trading.

The report suggested that the SEC develop a comprehensive SIPC oversight program. Last fall, the agency began a pilot program to oversee liquidation proceedings; the GAO said it could not yet judge the effectiveness of that program.

The SEC also told the GAO it would consider adopting rules requiring firms to provide customers with a SIPC brochure when an account is opened, as well as a disclosure on confirms or statements that informs investors they should complain in writing when they believe a trade is unauthorized.

Meanwhile, the SIPC says it has already improved its investor communications to address issues raised in the GAO report.

Editor's note: For any comments regarding this article, or to suggest a story idea for RR Online or Registered Representative magazine, contact Editor in Chief Dan Jamieson at [email protected], Online Editor Rick Weinberg at [email protected], Online Managing Editor Cheryl Cooper at [email protected] or Senior Editor Michael Hayes at [email protected]

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