SEC’s Oversight of the Securities 

Investor Protection Corporation’s 

Activities

 

March 30, 2011

Report No. 495
SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

ii

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

O"F,<::I': 0"

'NSPECTOR GEN" ....

MEMORANDUM

March 30, 2011

To: Robert W. Cook, Director, Division of Trading and Markets

Carlo V. di Florio, Director, Office of Compliance Inspections and

Examinations

Mark D. Cahn, General Counsel, Office of the General Counsel

From: H. David Katz, Inspector General, Office of Inspector General (OI

Subject: SEC's Oversight of the Securities Investor Protection Corporation's

Activities, Report No. 495

W;7V

This memorandum transmits the U.S. Securities and Exchange Commission

DIG's final report detailing the results on our audit of the SEC's oversight of the

Securities Investor Protection Corporation's activities. This audit was conducted

as part of our continuous effort to assess management of the Commission's

programs and operations and as part of our annual audit plan.

The final report contains 12 recommendations which if fully implemented will

enhance the SEC's monitoring of the Securities Investor Protection Corporation's

activities. The respective offices concurred with all the report's

recommendations. Your written responses to the draft report are included in

Appendix V.

Within the next 45 days, please provide the DIG with a written corrective action

plan that is designed to address the recommendations. The corrective action

plan should include information such as the responsible official/point of contact,

timeframes for completing required actions, and milestones identifying how you

will address the recommendations.
SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

iii

Should you have any questions regarding this report, please do not hesitate to 

contact me. We appreciate the courtesy and cooperation that you and your staff 

extended to our auditor during this audit.

Attachment

cc: Kayla J. Gillan, Deputy Chief of Staff, Office of the Chairman

Luis A. Aguilar, Commissioner

Troy A. Paredes, Commissioner

Elisse B. Walter, Commissioner

Diego T. Ruiz, Executive Director, Office of the Executive Director

Lori J. Schock, Director, Office of Investor Education and Advocacy

Jacob H. Stillman, Solicitor, Office of the General Counsel

John S. Polise, Associate Director, Office of Compliance Inspections and

 Examinations

John H. Walsh, Associate Director and Chief Counsel, Office of 

 Compliance Inspections and Examinations

John M. Ramsay, Deputy Director, Division of Trading and Markets
SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

iv

SEC’s Oversight of the Securities Investor 

Protection Corporation’s Activities

Executive Summary

Background. As a result of the collapse or near collapse of several brokerdealers in the late 1960s,

1 Congress enacted the Securities Investor Protection 

Act (SIPA) in 1970 to provide investors protection against losses caused by the 

failure of broker-dealers. SIPA created the Securities Investor Protection 

Corporation (SIPC), which is a not-for-profit membership corporation.2 SIPC or a 

SIPC employee either acts as trustee or works with an independent courtappointed trustee in liquidations of troubled brokerage firms to recover funds for 

investors with the assets of bankrupt or financially troubled brokerage firms.3

 All 

broker-dealers registered with the U.S. Securities and Exchange Commission 

(SEC or the Commission) under Section 15(b) of the Securities Exchange Act of 

1934 are members of SIPC with certain limitations.4

 The Commission is 

responsible for monitoring the activities of SIPC. Pursuant to SIPA, the 

Commission also has delegated authority to conduct inspections of SIPC,5

review SIPC annual reports,6 and approve SIPC’s bylaws,7 rules,8 and any 

amendments to the bylaws and rules.

9

Objectives. The audit’s objectives were to assess if SEC monitors SIPC’s 

activities in accordance with governing legislation. In addition, our audit was 

performed to examine if the Commission performs periodic and systematic 

inspections of SIPC’s activities. Our audit also focused on determining whether 

the Commission conducts meaningful reviews of SIPC’s annual reports. The 

Office of Inspector General (OIG) also determined where improvements and best 

practices could be implemented for the SEC’s oversight process of SIPC. 

Prior OIG Audit Report. The OIG performed an audit of the SEC’s oversight of 

SIPC in 200010 and made 11 recommendations in its report on that audit. The 

Division of Trading and Markets (TM),11 the Office of Compliance Inspections and 

Examinations (OCIE), and the Office of Investor Education and Advocacy (OIEA)12

implemented most of the prior OIG report’s recommendations. However, TM has 

 

1

 SEC, Inspection Report of Securities Investor Protection Corporation (Apr. 30, 2003), p. 7. 2 15 U.S.C. §§ 78ccc(a)(1) and (2). 3 http://www.sipc.org/media/release2.cfm. See also 15 U.S.C. § 78eee(b)(3). 4 15 U.S.C. § 78ccc(a)(2). 5 15 U.S.C. § 78ggg(c)(1). 6 15 U.S.C. § 78ggg(c)(2). 7 15 U.S.C. § 78ccc(e)(1). 8 15 U.S.C. § 78ccc(e)(2). 9 15 U.S.C. §§ 78ccc(e)(1) and (2). 10 OIG Report No. 301, Oversight of Securities Investor Protection Corporation (Mar. 31, 2000). 11 TM was known as the Division of Market Regulation in 2000. 12 OIEA was known as the Office of Investor Education and Assistance in 2000.
SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

v 

not implemented the OIG’s recommendation to inform SIPC that it should provide 

written documentation of its reasons for denying coverage in particular cases upon 

the request of TM and the Division of Enforcement. TM stated that it provided a 

copy of the issued OIG audit report to SIPC.13 Additionally, TM and OCIE have not 

implemented the OIG’s recommendation to decide on a review schedule and 

inspection scope for future inspections of SIPC as of this date. See Finding 2 for 

further discussion. 

Finally, TM, OCIE, and the SEC’s New York Regional Office initially implemented 

the OIG’s recommendation to conduct periodic briefings on SIPC-related 

issues.14 However, they currently communicate on an as-needed basis and no 

longer conduct periodic briefings because such briefings were deemed to be 

inefficient in years when there were no SIPC liquidations, such as 2007,15

2009,16 and 2010.17

Results. The OIG found that the SEC’s oversight of SIPC is generally in 

compliance with SIPA. However, our audit found that significant improvements 

could be made to enhance the process of the SEC’s monitoring of SIPC. We 

found that TM and the Office of the General Counsel (OGC) currently do not 

have adequate written procedures and policies for monitoring SIPC’s activities. 

The written procedures and policies in place for TM’s oversight of SIPC are 

limited to a 1999 memorandum that merely lists the SEC’s responsibilities for 

monitoring SIPC pursuant to SIPA.18 The 1999 memorandum does not provide 

detailed information about TM’s internal procedures for oversight activities, such 

as how to process proposed bylaws or amendments that SIPC submitted or how 

reviews of SIPC’s annual reports (including SIPC’s financial statements) are to 

be performed. In addition, we found that some of the limited information 

contained in the 1999 memorandum is outdated. 

Our audit also found that there is inadequate documentation for the SEC’s 

oversight role in OGC. OGC provides legal guidance to TM related to SIPA 

liquidations and monitors SIPA proceedings that are handled by independent 

court-appointed trustees and SIPC. Our audit revealed that internal policies or 

procedures regarding OGC’s role relating to SIPC’s oversight are not adequately 

documented.

19 Moreover, during the timeframe in which we conducted our audit, 

there was a significant staff turnover in the OGC bankruptcy group, as the OGC 

 

13 SEC, memorandum to the OIG, Information Request on Implementation of Prior OIG Recommendations ̧ 

Jan. 24, 2011.

14 Id. 15 According to SIPC’s annual report for 2007. See 

http://www.sipc.org/pdf/SIPC_Annual_Report_2007_FINAL.pdf. 

16 According to SIPC’s annual report for 2009. See http://www.sipc.org/pdf/2009%20Annual%20Report.pdf. 17 According to the OIG’s review of SIPC’s website and inquiry with TM. 18 TM memorandum, The Commission’s Oversight Role of the Securities Investor Protection Corporation 

(“SIPC”), Jun. 24, 1999. 19 OGC prepared a memorandum for the Commission related to entering notices of appearance in SIPA 

liquidations. The memorandum briefly discusses OGC’s monitoring of SIPA liquidations and reviewing fee 

applications. However, the memorandum is limited to certain matters and does not list other responsibilities.
SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

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attorney who provided oversight of SIPC for a number of years retired and was 

replaced by another attorney. Due to the inadequate documentation of internal 

OGC procedures and policies, we found opposing opinions regarding how SIPC 

monitoring activities should be performed. For instance, the new OGC attorney 

questioned whether he should conduct certain monitoring efforts that the 

previous attorney believed were effective mechanisms for scrutinizing SIPA 

liquidations, stating his opinion that such efforts would be too time-consuming for 

large SIPA liquidations. 

Our audit further found that the SEC does not inspect SIPC’s activities in any

systematic fashion. The SEC last performed a full inspection of SIPC in 2003 

and a follow-up inspection in 2005. Despite having made six findings in its 2003 

inspection, the SEC does not have any definite plans to inspect SIPC in the near 

future.

We found that the Government Accountability Office (GAO) performed an audit of 

SIPC in 1992, which included a review of the SEC’s monitoring of SIPC.20 In that

audit, GAO found that since 1985 the SEC had evaluated SIPC’s operations only 

one time and that the SEC had not followed up on the 1985 evaluation to 

determine if SIPC addressed its recommendations. GAO recommended that the 

SEC periodically review SIPC’s operations and its efforts to ensure timely and 

cost-effective liquidations.21 In response to this recommendation, TM agreed to 

inspect SIPC “every four to five years.”22 The OIG performed an audit of the 

SEC’s oversight of SIPC’s activities in March 2000. The OIG found that since 

SIPC’s inception in 1970, the SEC had inspected SIPC only two times, once in 

1985 and a second time in 1994. The OIG also identified several areas not 

addressed in past SIPC inspections that could improve oversight effectiveness 

and recommended that TM and OCIE decide on a review schedule and 

inspection scope for future SIPC inspections. In response to this 

recommendation, TM and OCIE agreed to prepare a review schedule and 

inspection scope for future SIPC inspections. Notwithstanding this agreement 

and this recommendation being closed, our inquiry with TM and OCIE regarding 

this matter revealed that TM and OCIE had never developed a review schedule 

or an inspection scope for future SIPC inspections.

In the SEC’s 2003 inspection of SIPC, the SEC identified several deficiencies in 

SIPC’s operations regarding its controls over fees, an improperly denied claim, 

internal policies and guidance, education initiatives, and funding options. Yet 

without additional inspections, the SEC is unable to ensure that these 

deficiencies have been appropriately addressed. The SEC has indicated that as 

a result of its involvement with the liquidations of Lehman Brothers, Inc. 

(Lehman) and Bernard L. Madoff Investment Securities, LLC (Madoff), it is not 

 

20 GAO, Securities Investor Protection: The Regulatory Framework Has Minimized SIPC’s Losses,

GAO/GGD-92-109 (Sept. 28, 1992). 21 Id. at 62. 22 OIG Report No. 301, Oversight of Securities Investor Protection Corporation (Mar. 31, 2000), p. 5. 
SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

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necessary to conduct further inspections in the near future. Due to the lack of 

periodic and systematic inspections of SIPC by the SEC, 14 liquidations,23 from 

2003 to date, have not been subject to the scrutiny of an SEC inspection.24 

The audit also found that the SEC does not perform a review of trustee fees on a 

systematic basis. We further found that such reviews are particularly necessary 

because of the statutory structure in place regarding trustee fees, which provides 

for few, if any, limits on the fees that may be awarded. First, although SIPA 

liquidations are similar to ordinary bankruptcy cases, it does not provide any limit 

on the amount of trustee fees in SIPA liquidations, unlike bankruptcy cases. 

Second, under SIPA, where payments are made out of the SIPC fund, courts 

have no discretion whatsoever to limit fees that SIPC has recommended for 

trustees or their counsel. Thus, even if a court finds the amount of fees awarded 

to the trustee to be excessive, it is required to approve such excessive fees if 

SIPC determines that the fees are reasonable. We found that in one case, a 

Southern District of New York bankruptcy judge deemed fees to be awarded to 

the trustee in a liquidation to be excessive, but found that he had no choice but to 

approve the fees.25 In another instance, a 1974 case decided prior to the 

amendment of SIPA in 1978,26 a court refused to allow SIPC to pay what it 

deemed excessive trustee fees. In this case, a Southern District of New York 

judge stated, “[We] simply cannot and will not blindly acquiesce—as SIPC 

apparently has done—in assessing the fees requested against the trust fund 

administered by SIPC. This case points up the probable need for legislative 

readjustment of the SIPA and the functions of its administrators.”

27 The Southern 

District of New York judge further stated that, “To be sure, the Trustee and his 

counsel were additionally faced with somewhat unenviable task of uncovering 

Charisma’s assets—which here totaled less than $15.”28 Third, even where 

SIPC advances the funds and there is reasonable expectation of recoupment, 

the statute provides the courts with only limited discretion. 

In addition, we found that significant criticism and concern have been expressed 

about the amount of trustee fees awarded in the two largest liquidations in 

SIPC’s history, Lehman and Madoff. According to the latest published report, the 

fees paid to the trustee and his counsels processing the Lehman claims for the 

period from September 2008 to September 2010 (24 months) totaled 

 

23 According to the OIG’s comparison of the liquidations reviewed by the SEC based on OCIE’s inspection 

records and the liquidations initiated in 2003 and 2004, as noted in SIPC’s annual reports for 2003 and 

2004. See http://www.sipc.org/who/annual.cfm for SIPC’s 2003 and 2004 annual reports. 24 OGC stated that the predecessor attorney monitored the 14 liquidations to ensure that they were 

processed timely. The OIG was unable to verify whether such monitoring occurred because there was no 

evidence of review.

25 See In re First State Securities Corp., 48 B.R. 45 (Bankr. S.D. Fla. 1985). 26 TM stated that, “The Court had discretion to reject fees when this case was decided. Congress overruled 

this case when it amended the SIPA in 1978. This case was relied upon by Congress to mandate that 

recommendations by SIPC would be binding on the court in ‘no-assets cases’ unless it results in a 

controversy with the applicant.”

27 Securities Investor Protection Corp. v. Charisma Sec. Corp., 371 F. Supp. 894, 899 (S.D.N.Y. 1974), aff’d, 

506 F.2d 1191 (2d Cir. 1974).

28 Id.
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approximately $108 million.29 According to the fourth interim fee application, as 

of September 30, 2010, the entire administrative fees, including fees for 

accountants, consultants, etc., totaled approximately $420 million.30 We also 

found that the fees paid to the trustee and his counsels processing the Madoff 

claims for the period from December 2008 to September 2010 (21 months) 

totaled approximately $102 million.31 The OIG’s review of the trustee fee chart 

that SIPC prepared revealed that the hourly rate for trustees assigned to the 

Madoff case ranged from $698 to $742. For the Lehman liquidation, SIPC’s 

trustee fee chart combined both the trustee’s and the counsels’ time, and the 

hourly rate ranged from $437 to $527. Moreover, the fees paid to date for both 

the Lehman and Madoff liquidations are a mere fraction of the amounts that will 

eventually be sought because while there has been significant progress with 

respect to resolving certain customer claims, significant work relating to customer 

claims with pending litigation remains to be done. Because the outcome of the 

Lehman liquidation is uncertain and SIPC is advancing its own funds to pay the 

administrative expenses for the Madoff liquidation, the possibility exists that SIPC 

could deplete its $2.5 billion fund. If the SIPC fund is or reasonably appears to 

be insufficient, the SEC is authorized to make loans to SIPC by issuing the 

Secretary of the Treasury notes or other obligations in an aggregate amount not 

to exceed $2.5 billion.32 

Finally, our audit disclosed that many investors are still confused about SIPA 

coverage. As indicated by TM and evidenced by OIEA’s log of complaints and 

questions regarding SIPC from investors, it is difficult for investors to understand 

protection against losses available under SIPA and which securities are covered 

under SIPA. We found that certain public service campaigns by SIPC do not fully 

describe exceptions to SIPA coverage and are misleading. Due to various 

factors that determine coverage under SIPA, it is difficult to explain limitations of 

SIPA and inform investors. In addition, many investors do not know about SIPA 

until they become aware of the failure of their broker-dealer. 

Summary of Recommendations. Our audit determined that several 

improvements in the SEC’s monitoring of SIPC’s processes are needed to 

ensure proper oversight of SIPC by the SEC pursuant to SIPA.

Specifically, we recommend the following: 

(1) TM should document its procedures and processes for its oversight 

and monitoring of SIPC pursuant to SIPA. 

 

29 “Trustee’s Fourth Interim Report for the Period May 11, 2010 Through October 26, 2010,” Exhibit 2, last 

accessed Mar. 26, 2011, http://dm.epiq11.com/LBI/Project/default.aspx#. Go to Public Reports/Trustee’s 

Interim Reports to the Court/Trustee’s Fourth Interim Report: October 26, 2010. 30 Id. 31 “Trustee’s Fourth Interim Report for the Period Ending September 30, 2010,” last accessed Mar. 1, 2011, 

http://www.madofftrustee.com/documents/FourthInterimReport.pdf. See “Cash Disbursement” chart located 

in the back of the Madoff trustee’s Fourth Interim Report. 

32 15 U.S.C. §§ 78ddd(g) and (h).
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(2) TM should complete its efforts to update its internal memorandum 

which describes its oversight responsibilities under SIPA and include 

its current practices and, where appropriate, the legislative 

amendments that were made to SIPA in July 2010 by the Dodd-Frank 

Wall Street Reform and Consumer Protection Act. 

(3) OGC should consult with TM to clarify its role in monitoring SIPC and 

document the responsibilities and procedures it follows in regard to the 

Commission’s oversight of SIPC. 

(4) OGC should consider the costs and benefits related to certain activities 

that the retired attorney performed and determine what, if any, other 

activities are appropriate to adequately monitor SIPC. 

(5) TM and OCIE should conduct meetings, on at least an annual basis, to 

determine when an inspection of SIPC should occur, based on the 

ongoing liquidations, to ensure systematic and risk based monitoring of 

SIPC’s operations. In these meetings, TM and OCIE should develop a 

schedule for future inspections based upon objective criteria or defined 

risk-factors, such as conducting inspections based upon the number of 

SIPC liquidations. 

(6) TM and OCIE should perform a risk assessment to determine 

problematic areas or liquidations that are deemed to be complex prior 

to the next inspection of SIPC, as they did prior to the commencement 

of the 2003 inspection of SIPC. The scope of each future inspection

should take into consideration the risk assessment conducted prior to 

the inspection. 

(7) TM, in coordination with OGC, should conduct additional oversight of 

SIPC’s assessments of the reasonableness of trustee fees and 

encourage SIPC to negotiate with outside court-appointed trustees 

more vigorously to obtain a reduction in fees greater than 10 percent.

(8) The bankruptcy group in OGC and TM should decide on the scope and 

frequency of the Commission staff’s monitoring of SIPC’s assessments 

of the reasonableness of trustee fees paid by SIPC, rather than relying

only on inspections of SIPC, which do not occur on a systematic basis.

(9) TM, in consultation with the Commission, shall determine whether to 

request that Congress modify SIPA to allow bankruptcy judges who 

preside over SIPA liquidations to assess the reasonableness of 

administrative fees in all cases where administrative fees are paid by 

SIPC. 
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(10) TM, in coordination with OIEA, should encourage SIPC to 

designate an employee whose responsibilities include improving 

investor education and preventing further confusion among investors 

about coverage available under SIPA. 

(11) TM should support SIPC’s efforts to improve investor education, 

including encouraging SIPC to strongly consider and, as appropriate, 

implement OIEA’s suggestions to improve investor awareness.

(12) TM, in coordination with OIEA and in consultation with the 

Commission, should utilize more effective methods to communicate 

with investors in case of the failure of broker-dealers, such as notifying 

investors of the status of the Commission’s efforts throughout the 

liquidation process or designating an employee, as appropriate, who 

can communicate directly with investors on matters unique to each 

liquidation case.

A detailed list of our recommendations can be found in Appendix IV. 
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TABLE OF CONTENTS

Executive Summary................................................................................................

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Table of Contents ..................................................................................................

Background and Objectives ...........................................................................

Background ................................................................................................

Objectives ...................................................................................................

Findings and Recommendations...................................................................

Finding 1: TM and OGC Do Not Maintain Adequate Written Procedures 

and Policies for Oversight of SIPC..............................................................

Recommendation 1................................................................

Recommendation 2................................................................

Recommendation 3................................................................

Recommendation 4................................................................

Finding 2: TM and OCIE Do Not Inspect SIPC’s Activities in a Systematic 

Fashion ......................................................................................................

Recommendation 5 ................................................................

Recommendation 6 ................................................................

Finding 3: The SEC Does Not Review Fees SIPC Pays to CourtAppointed Trustees on a Periodic or Systematic Basis...............................

Recommendation 7 ................................................................

Recommendation 8 ................................................................

Recommendation 9 ................................................................

Finding 4: SIPA Investor Education Coverage Still Needs Improvement ....

Recommendation 10..............................................................

Recommendation 11..............................................................

Recommendation 12..............................................................

Appendices

Appendix I: Acronyms/Abbreviations. .........................................................

Appendix II: Scope and Methodology..........................................................

Appendix III: Criteria....................................................................................

Appendix IV: List of Recommendations ......................................................

Appendix V: Management’s Comments ......................................................

Appendix VI: OIG Response to Management’s Comments.........................
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Background and Objectives 

Background 

In 1970, several prominent broker-dealers, including Walston & Co., Bache & 

Co., McDonnell & Co., and F.I. duPont, Glore Forgan & Co.,

33 became insolvent 

or experienced near collapse. From August 1970 to December 1970, three 

members or former members of the New York Stock Exchange were forced to go 

into bankruptcy or to commence liquidation proceedings.34 On December 30, 

1970, Congress created the Securities Investor Protection Corporation (SIPC) to 

provide protection against losses to customers from the failure of a securities firm 

under the Securities Investor Protection Act (SIPA).35 SIPA was created to 

establish a substantial reserve fund that would provide protection to customers of 

broker-dealers and to reinforce investors’ confidence in the securities industry.36

Organizational Structure of SIPC. SIPC is a not-for-profit membership 

organization37 that does not regulate its members or examine their financial 

condition.38 All broker-dealers registered with the U.S. Securities and Exchange 

Commission (SEC or the Commission) under Section 15(b) of the Securities 

Exchange Act of 1934, are members of SIPC, with the following exceptions: 

 (i) Persons whose principal business, in the determination of SIPC, taking 

into account business of affiliated entities, is conducted outside the United 

States and its territories and possessions;

(ii) Persons whose business as a broker or dealer consists exclusively of (I) 

the distribution of shares of registered open end investment companies or unit 

investment trusts, (II) the sale of variable annuities, (III) the business of 

insurance, or (IV) the business of rendering investment advisory services to 

one or more registered investment companies or insurance company 

separate accounts; and 

(iii) Persons who are registered as a broker or dealer pursuant to section 

78o(b)(11)(A) of this title.

39

SIPC has a board consisting of seven directors who determine policies that 

govern its operations.40 SIPC’s board of directors is made up of five directors 

who are appointed by the President of the United States and subject to the U.S. 

 

33 SEC, Unsafe and Unsound Practices of Brokers and Dealers (Dec. 1971), pp. 63-65. 34 H.R. Rep. No. 91-1613 (1970). 35 Id. 36 Id. 37 15 U.S.C. §§ 78ccc(a)(1) and (2). 38 SEC, Inspection Report of Securities Investor Protection Corporation (Apr. 30, 2003), p. 7. 39 15 U.S.C. § 78ccc(a)(2)(A). 40 15 U.S.C. § 78ccc(c)(1). 
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Senate’s approval.41 Three of the five directors represent the securities industry 

and two are from the general public.42 One of the five directors is appointed by 

the Secretary of the Treasury and another director is appointed by the Federal 

Reserve Board.43 The Chairman and the Vice Chairman of SIPC’s board of 

directors are appointed by the President from the public directors.44

SIPC’s Role. Pursuant to SIPA, SIPC or a SIPC employee either acts as a 

trustee or works with an independent court-appointed trustee in liquidations of 

troubled brokerage firms to recover funds for investors with assets held by

bankrupt or financially troubled brokerage firms.

45 The customers of a failed 

brokerage firm may receive all non-negotiable securities that are already 

registered in their name or negotiable securities that are in the process of being 

registered in their name.

46 SIPA protects the custody function that brokerage 

firms perform for customers; however, it does not provide protection against a 

decline in value of any investment, even if the SIPC member defrauded the 

customer into purchasing the investment.

47 

SIPC Fund. SIPC maintains a fund that consists of assessments paid by SIPC 

members48 and interest income earned on SIPC investments. Upon consultation 

with self-regulatory organizations, SIPC determines assessments based on the 

amount necessary to maintain the fund and repay any borrowings by SIPC.49 If 

the SIPC fund is insufficient for payments to customers who have valid SIPA 

claims, SIPA allows SIPC to borrow from the Commission, which in turn may 

borrow up to $2.5 billion from the Department of the Treasury.50 The SIPC fund 

may be used to cover valid customer claims against a failed broker-dealer, to pay 

the costs of administering the liquidation of an estate of a failed broker-dealer, 

and for other purposes.

51 Advances from the SIPC fund are limited to $500,000 

per customer for claims,

52 and up to $250,000 of the $500,000 can be used to 

satisfy claims for cash.53

SIPA Coverage. SIPA defines “customer” as “any person (including any person 

with whom the debtor deals as principal or agent) who has a claim on account of 

securities received, acquired, or held by the debtor in the ordinary course of its 

business as a broker or dealer from or for the securities accounts of such person 

 

41 15 U.S.C. § 78ccc(2). 42 Id. 43 Id. 4415 U.S.C. § 78ccc(c)(3). 45 http://www.sipc.org/media/release2.cfm. See also 15 U.S.C. § 78eee(b)(3). 46 Id. 47 Letter from Stephen Harbeck, President of SIPC, to Ralph Janvey, Receiver of Stanford, August 14, 2009. 48 15 U.S.C. § 78ddd(c)(1). 49 15 U.S.C. § 78ddd(c)(2). 50 15 U.S.C. § 78ddd(g) and (h). 51 SEC, Inspection Report of Securities Investor Protection Corporation (Apr. 30, 2003), p. 8. 52 15 U.S.C. § 78fff-3(a). 53 15 U.S.C. § 78fff-3(d). 
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for safekeeping, with a view to sale, to cover consummated sales, pursuant to 

purchases, as collateral, security, or for purposes of effecting transfer.”

54

Under SIPA, the term “security” means: 

“any note, stock, treasury stock, bond, debenture, evidence of 

indebtedness, any collateral trust certificate, preorganization 

certificate or subscription, transferable share, voting trust certificate, 

certificate of deposit, certificate of deposit for a security, or any 

security future as that term is defined in section 78c(a)(55)(A) of 

this title, any investment contract or certificate of interest or 

participation in any profit-sharing agreement or in any oil, gas, or 

mineral royalty or lease (if such investment contract or interest is 

the subject of a registration statement with the Commission 

pursuant to the provisions of the Securities Act of 1933 [15 U.S.C. 

77a et seq.]), any put, call, straddle, option, or privilege on any 

security, or group or index of securities (including any interest 

therein or based on the value thereof), or any put, call, straddle, 

option, or privilege entered into on a national securities exchange 

relating to foreign currency, any certificate of interest or 

participation in, temporary or interim certificate for, receipt for, 

guarantee of, or warrant or right to subscribe to or purchase or sell 

any of the foregoing, and any other instrument commonly known as 

a security.”

55

SIPA coverage extends to those persons who meet the definition of customer 

and to property that meets the definition of security.56 

SIPA liquidations are conducted in U.S. Bankruptcy Courts,57 with the exception

of certain cases where SIPC can institute a direct payment proceeding if certain 

criteria are met.58

 

 

SEC’s Oversight. The Commission monitors the activities of SIPC. Pursuant to 

SIPA, the Commission also has the authority to conduct inspections of SIPC,

59

review SIPC annual reports,

60 and approve SIPC’s bylaws,61 rules,62 and 

amendments to the bylaws and rules.

63

 

54 15 U.S.C. § 78lll(2).

 The Office of Broker-Dealer Finances in 

55 15 U.S.C. § 78lll(14). 56 SEC, Inspection Report of Securities Investor Protection Corporation (Apr. 30, 2003), p. 9. 57 15 U.S.C. § 78eee(b)(2) and (4). 58 15 U.S.C. § 78fff-4. According to SIPC, Task Force Materials, Tab 3. Topics and Issues, E. Direct 

Payment Procedure, Direct Payments (single-page, no date), “in certain situations, SIPC may choose to use 

an out-of-court Direct Payment Procedure instead of initiating a liquidation proceeding. The Direct Payment 

Procedure allows SIPC to act quickly and inexpensively to return property to customers.” 59 15 U.S.C. § 78ggg(c)(1). 60 15 U.S.C. § 78ggg(c)(2). 61 15 U.S.C. § 78ccc(e)(1). 62 15 U.S.C. § 78ccc(e)(2). 63 15 U.S.C. §§ 78ccc(e)(1) and (2).
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the SEC’s Division of Trading and Markets (TM) has primary responsibility for 

monitoring SIPC. If the Commission is aware of facts that lead it to believe that 

any broker-dealer is approaching financial difficulty, the Commission must 

immediately notify SIPC.

64 The Office of the General Counsel (OGC) monitors 

SIPA liquidations and provides legal guidance. On September 18, 2000, the 

Commission authorized OGC to enter notices of appearance in SIPA 

proceedings pursuant to a one-year pilot program, which became permanent on 

May 20, 2002. The Office of Compliance Inspections and Examinations (OCIE) 

performs inspections of SIPC jointly with TM. SIPC is required to submit its 

annual report to the Commission for review, and the Commission must transmit 

the annual report to the President and Congress.65

If SIPC refuses or fails to commit its funds for the protection of customers of any 

member of SIPC, the Commission may apply to the U.S. district court in which 

the principal office of SIPC is located for an order requiring SIPC to discharge its 

obligations under SIPA.

66 

According to interviews we conducted, we learned that SIPC personnel and SEC 

personnel communicate frequently. The Associate Director from the Office of 

Broker-Dealer Finances in TM, which has the primary responsibility for 

monitoring SIPC, attends SIPC’s quarterly board of directors meetings. The 

Chairman of SIPC’s board of directors and the SEC’s Chairman meet periodically 

to discuss, among other things, ongoing liquidations and current matters that 

may impact SIPC’s operations and the broker-dealer industry. In particular, the 

SEC and SIPC have been meeting to discuss matters related to two of the 

largest liquidations in SIPC’s history, Lehman Brothers, Inc. (Lehman) and 

Bernard L. Madoff Investment Securities, LLC. (Madoff). TM also had numerous 

phone conversations with SIPC about matters related to the failure of Stanford 

Group Company (Stanford). 

Lehman’s liquidation under SIPA commenced in September 2008.67 The trustee 

overseeing the $110 billion customer estate68 Lehman liquidation reported that 

the liquidation process is complicated because of the size and complexity of the 

firm and the trustee's limited access to Lehman's books and records. The trustee 

further stated that the liquidation process is difficult because Lehman did not 

prepare a preliquidation disaster plan.

69 Hence, concrete provisions for the 

mechanics of asset transfers were lacking, which contributed to difficulties in the 

Lehman bankruptcy.70 As of October 28, 2010, there were approximately 3 

 

64 15 U.S.C. § 78eee(a)(1). 65 15 U.S.C. § 78ggg(c)(2). 66 15 U.S.C. § 78ggg(b). 67 http://dm.epiq11.com/LBI/Project/default.aspx#. 68 “SIPA Trustee for Lehman Brothers, Inc. Files Preliminary Investigation Report: Lessons Learned and 

Recommendations to Protect Broker-Dealer Customers,” accessed Mar. 25, 2011, See 

http://dm.epiq11.com/LBI/Project/default.aspx. Go to Trustee’s Investigation/Preliminary Report. 69 Id. 70 Id.
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5 

percent of unresolved customer claims in the Lehman case.71 The SEC has 

played a role in the Lehman liquidation from its inception and has met with the 

trustee assigned to the Lehman case and SIPC throughout the liquidation 

process to discuss pertinent matters related to the case. 

Madoff’s SIPA liquidation commenced in December 2008.

72 Among other 

matters, the method of payment for customer claims has drawn much attention. 

Madoff investors have questioned the method used to pay claims, referred to as 

the “cash-in/cash out method,” under which investors who withdrew more money 

from their Madoff accounts than they deposited would not be compensated, while 

investors who withdrew less than they put in would be compensated.73 On 

September 22, 2010, SIPC representatives testified before the Subcommittee on 

Capital Markets, Insurance, and Government Sponsored Enterprises, Committee 

on Financial Services, U.S. House of Representatives, to explain the method.74 

On March 1, 2010, Judge Burton Lifland of the U.S. Bankruptcy Court for the 

Southern District of New York upheld the Madoff trustee’s method for 

adjudicating the Madoff investors’ claims because securities positions are 

nonexistent as a result of a Ponzi scheme in which the securities positions shown 

on the customers’ account statements had not been purchased and could not 

have been purchased in real market trading.

75 This decision has been appealed 

and is now pending before the U.S. Court of Appeals for the Second Circuit. The 

Commission filed briefs on the issue of the treatment of investors’ claims in both 

the Bankruptcy Court and the Court of Appeals for the Second Circuit supporting 

the position of both the trustee and SIPC. As of February 18, 2011, there were 

approximately 2 percent of unresolved customer claims.76 

Investors who were adversely affected by the $8 billion77 alleged Robert Allen 

Stanford Ponzi scheme have sought protection under SIPA. On August 14, 

2009, SIPC stated in a letter to the receiver in the Stanford case that it had

determined that there was no basis for SIPC to initiate a SIPA liquidation 

proceeding against Stanford based on the information it had received at the 

time.

78 SIPC also asserted, based upon the information it had received, that the 

certificates of deposit issued by Stanford International Bank Ltd. were formed 

under the laws of Antigua and Barbados, and Stanford International Bank Ltd. is 

 

71 “State of the Estate October 28, 2010,” Progress To Date, Lehman trustee’s law firm, last accessed Mar. 

25, 2011, http://dm.epiq11.com/LBI/Project/default.aspx. Go to Public Reports/Trustee’s 

Presentations/Presentations to the Bankruptcy Court. 72 http://www.madofftrustee.com/Home.aspx. 73 “Bankruptcy Judge Backs Madoff Trustee’s Payout Calculations,” Noeleen G. Walder, (Mar. 2, 2010), 

accessed Oct. 18, 2010, http://www.law.com/jsp/law/LawArticleFriendly/jsp?id=1202444971605 (site 

discontinued).

74 “SIPC Chairman To Defend Method Used To Pay Claims For Madoff Victims,” Sarah N. Lynch, (Sept. 22, 

2010), accessed Nov. 8, 2010, http://online.wsj.com/article/BT-CO-20100922-711421.html (site 

discontinued).

75 Id. 76 http://www.madofftrustee.com/Status.aspx. 77 http://www.sec.gov/news/press/2009/2009-26.htm. 78 Letter from Stephen Harbeck, President of SIPC, to Ralph Janvey, Receiver of Stanford, Aug. 14, 2009, p. 

3. 
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6 

not a SIPC member.79 Our inquiry with the director and founder of the Stanford 

Victims Coalition (SVC) indicated that Stanford investors are maintaining that 

they were led to believe that the certificates of deposit were covered under 

SIPA.80 

Objectives 

As part of its annual audit plan, the OIG conducted an audit of the SEC’s 

oversight of SIPC. The overall objective of this audit was to assess the 

effectiveness of the SEC’s oversight of SIPC. The audit assessed if the 

Commission monitors SIPC’s activities in accordance with governing legislation. 

In addition, our audit was performed to assess if the Commission performs 

periodic and systematic inspections of SIPC’s activities. Our audit also focused 

on determining whether the Commission conducts meaningful reviews of SIPC’s

annual reports. The OIG also determined where improvements and best 

practices could be implemented for the SEC’s oversight of the SIPC process. 

 

79 Id. 80 Interview with Angie Kogutt, director and founder of the Stanford Victims Coalition, Nov. 22, 2010. 
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Findings and Recommendations 

Finding 1: TM and OGC Do Not Maintain 

Adequate Written Procedures and Policies for 

Oversight of SIPC 

TM and OGC currently do not have adequate written

procedures and policies for monitoring SIPC’s activities. 

Absence of TM’s Written Procedures and Policies for Oversight 

of SIPC

The written procedures and policies in place for the SEC’s oversight of SIPC are 

limited to a 1999 memorandum that merely lists the SEC’s responsibilities for

monitoring SIPC pursuant to SIPA.

81 The 1999 memorandum describes in 

general terms how the Commission monitors SIPC and its operations, as 

required under SIPA. Our audit found that TM has not documented the actual 

internal procedures it follows to provide oversight of SIPC’s activities. The 1999 

memorandum does not provide detailed information about TM’s internal 

procedures for oversight activities, such as how to process proposed bylaws or

amendments that SIPC submitted or how reviews of SIPC’s annual reports 

(including SIPC’s financial statements) are to be performed. 

Additionally, SIPA states that the independent public accountant or a firm of 

independent public accountants that audits SIPC’s financial statements and is 

selected by SIPC must be deemed satisfactory by the Commission.

82 Our 

inquiry of TM regarding its procedure for this review revealed that there is no 

written guidance that sets forth the procedures TM utilizes to determine the 

competency of an independent public accountant or a firm of independent public 

accountants hired to audit SIPC’s financial statements.

83

 

 

In addition, some of the limited information contained in the 1999 memorandum 

is outdated. For instance, the memorandum provides that the amount of SIPC 

protection available for cash claims is $100,000, even though such coverage was 

increased in 2010 to $250,000 by the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act).

84 

 

81 TM memorandum, The Commission’s Oversight Role of the Securities Investor Protection Corporation 

(“SIPC”), June 24, 1999. 82 15 U.S.C. § 78ggg(c)(2). 83 TM informed the OIG that when SIPC hired its independent auditor in 2002, a senior TM official attended

the interviews SIPC staff conducted, and the senior TM official did not oppose SIPC’s selection of its new 

auditing firm.

84 H.R. 4173, Dodd-Frank Wall Street Reform and Consumer Protection Act, Section 929H, SIPC Reforms. 
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TM acknowledges that having written policies is useful and that documenting its 

SIPC monitoring procedures would add transparency to its delegated authority 

and responsibilities under SIPA. However, TM stated that it believes that the 

absence of documented procedures has not impacted its ability to perform its

tasks related to the oversight of SIPC. TM also asserted that most of its 

employees who are responsible for monitoring SIPC’s activities are experienced 

staff members who have performed their assigned duties related to SIPC for 

many years. However, staff changes at the SEC are common, and we believe 

that having documented procedures is critical to ensuring appropriate and 

effective monitoring and oversight. 

TM informed us that it is in the process of preparing an updated version of the 

1999 memorandum, which it intends to complete and circulate to relevant TM 

staff members by March 31, 2011.85 

OGC Lacks Adequate Documentation of Its Oversight Role

Related to SIPC

Our audit also found that there is inadequate documentation for the SEC’s 

oversight role in OGC.86 OGC provides legal guidance to TM related to SIPA 

liquidations and monitors SIPA proceedings that are handled by independent 

court-appointed trustees and SIPC. Our tests and interviews with OGC staff 

members revealed that internal policies or procedures regarding OGC’s role

relating to SIPC oversight are not adequately documented. Moreover, during the 

timeframe in which we conducted our audit, there was a significant staff turnover 

in the OGC bankruptcy group, as the OGC attorney who provided oversight of 

SIPC for a number of years retired and was replaced by another attorney. Due 

to the lack of adequately documented internal OGC policies and procedures, we 

found opposing opinions on how SIPC monitoring activities should be performed. 

For instance, the retired attorney monitored Public Access to Court Electronic 

Records (PACER)87 and reviewed court documents for SIPA liquidations in order 

to monitor court proceedings to ensure that SIPA liquidations were processed 

timely and that trustees appointed to the SIPA liquidations and SIPC were 

properly handling SIPA proceedings. The retired attorney reviewed, among other 

matters, disputes arising from customer claims for SIPA liquidations. In one 

 

85 SEC, memorandum to the OIG, Information Request on Implementation of Prior OIG Recommendations ̧ 

Jan. 24, 2011. 86 In December 2001, OGC drafted a memorandum to the Commission explaining its procedures for 

monitoring claims determinations and reviewing fee applications. However, OGC prepared the 

memorandum to request that the Commission allow OGC to enter notices of appearance in SIPA 

liquidations permanently. Additionally, the memorandum focuses on certain issues and does not discuss 

other monitoring activities OGC performs, such as identifying significant legal issues that could lead to filing 

briefs in court. 

87 According to its website (http://www.pacer.gov), PACER “is an electronic public access service that allows 

users to obtain case and docket information from federal appellate, district and bankruptcy courts, and the 

PACER Case Locator via the Internet. PACER is provided by the federal Judiciary in keeping with its 

commitment to providing public access to court information via a centralized service.” 
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9 

instance during her review of filed dockets on PACER, she disagreed with SIPC’s 

denial of a claim and consulted with a TM staff member who agreed with her. 

The retired attorney and the TM staff member notified SIPC about the 

disagreement. On the contrary, the new successor OGC attorney has indicated 

that monitoring PACER could be time-consuming due to the large number of 

court documents that are filed in some cases, such as Lehman and Madoff. 

Hence, he questioned whether such a practice would be efficient. 

This example illustrates the necessity that procedures be documented so that 

decisions on how to conduct oversight can be made in a careful and reasoned 

manner and do not depend solely on a particular staff member who is working at 

the SEC at a given time. 

Recommendation 1: 

The Division of Trading and Markets should document its procedures and 

processes for its oversight and monitoring of the Securities Investor 

Protection Corporation pursuant to the Securities Investor Protection Act. 

Management’s Comments. TM concurred with this recommendation. See 

Appendix V for management’s full comments.

OIG Analysis. We are pleased that TM concurred with this recommendation

Recommendation 2:

The Division of Trading and Markets should complete its efforts to update its 

internal memorandum which describes its oversight responsibilities under the 

Securities Investor Protection Act (SIPA) and include its current practices 

and, where appropriate, the legislative amendments that were made to SIPA 

in July 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection 

Act. 

Management’s Comments. TM concurred with this recommendation. See

Appendix V for management’s full comments.

OIG Analysis. We are pleased that TM concurred with this recommendation. 

Recommendation 3:

The Office of the General Counsel should consult with the Division of Trading 

and Markets to clarify its role in monitoring the Securities Investor Protection 

Corporation (SIPC) and document the responsibilities and procedures it 

follows in regard to the Commission’s oversight of SIPC. 
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Management Comments. OGC concurred with this recommendation. See 

Appendix V for management’s full comments.

OIG Analysis. We are pleased that OGC concurred with this 

recommendation. 

Recommendation 4:

The Office of the General Counsel should consider the costs and benefits 

related to certain activities that the retired attorney performed and determine 

what, if any, other activities are appropriate to adequately monitor the 

Securities Investor Protection Corporation. 

Management’s Comments. OGC concurred with this recommendation. See 

Appendix V for management’s full comments.

OIG Analysis. We are pleased that OGC concurred with this 

recommendation. 

Finding 2: TM and OCIE Do Not Inspect SIPC’s 

Activities in a Systematic Fashion

TM and OCIE performed a full inspection of SIPC in 2003 

and a follow-up inspection in 2005 to assess whether SIPC 

implemented recommendations from the 2003 inspection. 

Notwithstanding the SEC’s representation to the 

Government Accountability Office (GAO) that it would 

inspect SIPC “every four to five years,”88 the SEC has not 

conducted a full inspection in nearly 8 years. Currently, the 

SEC has no definitive plans to inspect SIPC in the near 

future. 

Findings From Previous Audits of SEC’s Oversight of SIPC

GAO performed an audit of SIPC, which included a review of the SEC’s 

monitoring of SIPC, in 1992.

89 In that audit, GAO found that since 1985, the SEC 

had evaluated SIPC’s operations one time and had not followed up on the 1985 

evaluation to determine if SIPC addressed its recommendations, such as 

speeding up the payment of customer claims through an automated liquidation 

system.90 GAO recommended that the SEC periodically review SIPC’s 

 

88 OIG Report No. 301, Oversight of Securities Investor Protection Corporation (Mar. 31, 2000), p. 5. 89 Report No. GAO/GGD-92-109, GAO, Securities Investor Protection: The Regulatory Framework Has 

Minimized SIPC’s Losses, GAO/GGD-92-109 (Sept. 28, 1992). 90 Id. at 61.
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operations and its efforts to ensure timely and cost-effective liquidations.

91 In 

response to this recommendation, TM agreed to inspect SIPC “every four to five 

years.”

92 

The OIG performed an audit of the SEC’s oversight of SIPC’s activities in March 

2000.93 The OIG found that since SIPC’s inception in 1970, the SEC had 

inspected SIPC only two times, once in 1985 and a second time in 1994.

94 The 

OIG also identified several areas not addressed in past SIPC inspections that 

could improve oversight effectiveness95 and recommended that TM and OCIE 

decide on a review schedule and inspection scope for future SIPC inspections. 

Based on this recommendation, TM and OCIE agreed to prepare a review 

schedule and inspection scope for future SIPC inspections. Notwithstanding this 

agreement and this recommendation being closed, our inquiries of TM and OCIE 

regarding this matter revealed that TM and OCIE never developed a review 

schedule or an inspection scope for future SIPC inspections. 

The SEC’s Inspection of SIPC in 2003 and Follow-up Inspection 

in 2005

As previously mentioned, TM and OCIE performed an extensive inspection of 

SIPC in 2003 and a follow-up inspection of SIPC in 2005; however, they have not 

since performed any inspections of SIPC. The scope of the 2005 inspection 

included follow-up work on the recommendations from the 2003 inspection to 

ensure that SIPC had implemented TM’s and OCIE’s recommendations. During 

the 2005 inspection, TM and OCIE staff also reviewed additional liquidations that 

were not reviewed in the 2003 inspection. However, we learned that TM and 

OCIE reviewed the liquidations solely to follow up on the recommendations from 

the 2003 inspection. For example, TM and OCIE staff reviewed the billing 

records of those additional liquidations to follow up on its 2003 recommendations 

regarding controls over trustee fees, but they did not review customer claims in 

those liquidations. 

Results of the SEC’s Inspection of SIPC in 2003 and 2005

The six findings TM and OCIE made during their 200396 SIPC inspection support 

the need for the SEC to conduct systematic inspections of SIPC. TM’s and 

OCIE’s SIPC inspection findings were as follows:97

 

91 Id. at 63. 92 OIG Report No. 301, Oversight of Securities Investor Protection Corporation (Mar. 31, 2000), p. 5. 93 Id. 94 Id. at 5. 95 These areas included (1) adequacy of SIPC policies and procedures used to determine whether a 

customer request to bring a liquidation proceeding has merit under SIPA, (2) sufficiency of SIPC guidance 

given to trustees regarding evidence necessary to establish a valid customer claim and recognition of legal 

precedents in liquidation proceedings, and (3) propriety of SIPC decisions made regarding claims submitted 

to the trustee during a proceeding. Id. at 5-6. 96 SEC, Inspection Report of Securities Investor Protection Corporation (Apr. 30, 2003), pp. 1-2.
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(1) SIPC should improve its controls over fees.

(2) SIPC should provide written guidance to SIPC personnel 

and individual trustees to use in assessing whether 

claimants have established valid unauthorized trading 

claims. 

(3) One claim in a specified liquidation of a brokerage firm 

(the brokerage firm liquidation), out of approximately 300 

customer claims reviewed by TM and OCIE in the 

liquidation, was improperly denied by the trustee as time 

barred. 

(4) SIPC lacks a record retention policy for records 

generated in liquidations where SIPC appoints an outside 

trustee.

(5) While SIPC has recently undertaken initiatives to educate 

investors about SIPC, SIPC should review further its 

publicly disseminated information about SIPC coverage, 

including the official explanatory statement, website, and 

brochure, and determine whether revisions are 

necessary to avoid customer confusion.

(6) SIPC should consider funding options in the event of a 

catastrophically large broker-dealer liquidation.

TM’s and OCIE’s finding regarding the claim in the brokerage firm liquidation

clearly demonstrates a need for the SEC’s ongoing monitoring of customer claim 

determinations that are made by court-appointed trustees and SIPC, as the 

SEC’s ability to challenge the trustee’s determinations becomes nonexistent as 

time passes.98 The claim in the brokerage firm liquidation cited in the SEC’s 

2003 inspection report involved SIPC’s denial of a customer claim that the 

trustee believed was not timely filed.99 Certain SEC staffers indicated that the 

claim was not time barred and disagreed with the trustee’s “assertion that the 

customer did not meet the requirements that the claim contain a demand by the 

creditor on the debtor’s estate and express an intent to hold the debtor liable for 

the debt. . . .”100 According to the 2003 inspection report, “SIPC stated that even 

if the claim was timely filed, it would have been denied on the merits.”

101 

According to SIPC, the allegedly unauthorized trades that were the basis of the 

customer’s claim involved purchases for which the customer never paid and, as a 

result, the customer did not suffer any loss.102 Claimants may appeal the 

trustee’s denial, and the SEC has the right to file a brief with the court supporting 

 97 Id. 98 Neither the Commission nor SIPC has any power to overrule a decision made by a trustee even if it were 

to determine immediately that a denial was inappropriate. The Commission or SIPC could; however, 

challenge the determination in court.

99 SEC, Inspection Report of Securities Investor Protection Corporation (Apr. 30, 2003), p. 45. 100 Id. at 12. 101 SEC, Inspection Report of Securities Investor Protection Corporation (Apr. 30, 2003), p. 44, note 144. 102 Id.
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the claimant’s appeal and disagreeing with the denial. In this case, the customer 

was not made aware of the SEC’s position and did not appeal the denial. 

Because the claimant did not appeal the denial, the SEC could not take any 

further action. This example illustrates the need for the SEC’s periodic 

monitoring of SIPC’s activities and SIPA liquidations, especially in customer 

claims determinations to ensure that court-appointed trustees and SIPC properly 

administer customer claims. 

Furthermore, TM’s and OCIE’s 2003 inspection disclosed that SIPC lacked a 

record retention policy for records that are prepared in liquidations and

processed by outside trustees.103 The SEC was not able to review the records of 

a completed liquidation, since the trustee had destroyed the records shortly after 

completion of the liquidation and the SEC had not conducted its inspection in a 

timely manner.

104 As a result of the SEC’s inspection, SIPC now has a written 

record retention policy to keep records for five years, which is provided to 

trustees in the SIPC Trustee Guide.

The SEC Does Not Currently Have Definitive Plans to Inspect 

SIPC in the Near Future

As discussed previously, currently OCIE and TM do not have a review schedule 

or an inspection scope plan for future SIPC inspections.105 In early 2010, OCIE 

and TM stated that they had informally determined that an inspection of SIPC in 

2010 would not be feasible due to the ongoing liquidations of Lehman and 

Madoff. OCIE and TM indicated that as the SEC’s inspection of SIPC involves 

reviewing liquidations in which customer claims have been satisfied, an 

inspection of ongoing cases would not be efficient and could possibly disrupt the 

process of the ongoing liquidations. 

OCIE staff members indicated that they meet with TM staff members on an 

annual basis to discuss goals in preparation for issuing OCIE’s Goals 

Memorandum106 in September or October of each year. Both TM and OCIE 

agreed that they could discuss the schedule and scope for future SIPC 

inspections at the annual meeting.

OCIE and TM staff members indicated that SIPC has proper controls and 

procedures in place to process customer claims. Also, TM and OCIE believe that 

 

103 SEC, Inspection Report of Securities Investor Protection Corporation (Apr. 30, 2003), p. 2. 104 Id. at 2. 105 OCIE is in the process of transitioning to a risk-based program for all inspections. 106 OCIE stated that the purposes of the memorandum include identifying risks and areas for concentration 

for annual inspections and informing the Commissioners and the directors of divisions and offices about 

OCIE’s goals. The memorandum divides OCIE’s goals and risks by program. The risks and the areas for 

concentration are based on OCIE staff members’ observations during past inspections and discussions with 

other divisions and offices. The Director and the Deputy Director of OCIE meet with the Chairman and the 

Commissioners to discuss the memorandum, to obtain their feedback, and to ensure that they agree with 

OCIE’s focus for the inspections.
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the frequency of inspecting SIPC depends on the number of liquidations that are 

in progress. If there are no broker-dealer liquidations, then there are no cases 

for SIPC to process and none for the SEC to inspect. 

However, the OIG found that notwithstanding the SEC’s assurances to GAO and 

the OIG, and the need for continuous monitoring, there are no systematic 

inspections of SIPC and to date the SEC has not established a scope or 

schedule for future inspections of SIPC. Additionally, there have been no formal 

discussions between TM and OCIE to plan an inspection of SIPC since the 2005 

follow-up inspection.

 

SIPA Liquidations That Occurred From 2003 to Date Have Not 

Been Reviewed

In 2003, TM and OCIE reviewed 14 liquidations that were processed by an 

outside trustee and 14 liquidations where the direct payment process was used 

or where SIPC was the trustee.

107 In 2005, the SEC reviewed an additional 11 

liquidations solely to follow up on the recommendations from the 2003 

inspection.108

During the 2003 and 2005 inspections, TM and OCIE did not review 8 

liquidations that had been initiated in 2003 and 2004.109 Since the SEC’s followup inspection in 2005, there have been 9 additional SIPC liquidations to date.110 

However, the SEC has not reviewed any of these liquidations.

OCIE informed the OIG that the 8 liquidations that were initiated in 2003 and 

2004 were not reviewed in 2005 because they were ongoing cases. TM and 

OCIE further informed the OIG that they only review completed liquidations or 

liquidations where the customer claims are satisfied with certain litigation matters 

pending. OCIE indicated that the SEC reviewed liquidations where the customer 

claims process was complete, but there may still have been pending litigation 

because litigation arising out of SIPC liquidations can continue for many years. 

The SEC has been heavily involved with the Lehman and Madoff cases from the

inception of the liquidations of both entities. For instance, a TM staff member

attended SIPC board of directors meetings where the trustees for both cases 

presented the status of claims and discussed significant matters. SIPC also 

consulted with OGC and TM regarding a payout method to Madoff claimants. 

TM also meets with the trustees assigned to the Lehman and Madoff cases on a 

periodic basis. Additionally, the Commission’s Atlanta Regional Office reviewed 

claim determinations related to the SIPA liquidation of Hanover Investment

 

107 OCIE 2003 inspection records. 108 Id. 109 According to the OIG’s comparison of the liquidations reviewed by the SEC and the liquidations initiated 

in 2003 and 2004 as noted in SIPC’s annual reports for 2003 and 2004. See 

http://www.sipc.org/who/annual.cfm for SIPC’s 2003 and 2004 annual reports. 110 SIPC’s 2005, 2006, and 2008 annual reports. See http://www.sipc.org/who/annual.cfm. 
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Securities, Inc. (Hanover). One Atlanta Regional Office employee stated that she 

disagreed with SIPC’s denial of a claim in the Hanover case. SIPC did not agree 

with her conclusion, but it eventually paid the claimant.

Despite TM’s and OGC’s ongoing involvement with the Lehman and Madoff 

cases and the Atlanta Regional Office’s involvement with the Hanover case, 

there have been 14 additional liquidations111 in the past 8 years that have 

completely escaped the SEC’s scrutiny.112 Although 4113 of the 14 liquidations 

are currently ongoing, the remaining 10 liquidation proceedings have either been 

closed or the customer claims have been satisfied and thus are ripe for the SEC

to review. The SEC has reviewed cases that have been closed and the 

customer claims that have been satisfied during previous inspections.114 None of 

these liquidations have been reviewed, since the SEC has not conducted a full 

inspection since 2003.

OCIE and TM staff members informed the OIG that they have no plans to 

schedule a future inspection of SIPC until after the Lehman and Madoff cases 

are resolved. The liquidations of Lehman and Madoff commenced in September 

2008 and December 2008, respectively.115, 116 While there has been significant 

progress with respect to determining certain customer claims, substantial work 

remains to be done relating to resolving the customer claims that are being 

litigated. TM also indicated that once the claim determinations are completed, it 

is possible that additional lawsuits, if they have not already commenced, are 

expected for both the Lehman and Madoff liquidations. The majority of claims in 

Madoff have been determined, but there will be substantial work to resolve these 

claims because of objections to these determinations and the resulting ongoing 

litigation.

As TM and OCIE readily acknowledge, the estimated date for the completion of 

claim determinations, especially for Lehman, is currently unknown. Thus, there 

are no assurances or even indications that the SEC will exercise its oversight 

authority to inspect any other SIPC liquidations in a systematic manner in the 

foreseeable future. We do not believe that this approach is consistent with the 

 

111 Out of the 14 liquidations, independent court-appointed trustees processed 6 liquidations, SIPC was the 

trustee for 6 liquidations, and 2 liquidations were direct payments.

112 OGC stated that the predecessor attorney monitored the 14 liquidations to ensure that they were

processed timely. The OIG was unable to verify whether such monitoring occurred because there was no 

evidence of review.

113 Continental Capital Investment Services, Inc., North American Clearing, Lehman and Madoff. 114 According to the OIG’s review of customer proceedings in process noted in SIPC’s 2009 annual report 

and the OIG’s inquiry with SIPC management. See http://www.sipc.org/pdf/2009%20Annual%20Report.pdf 

for 2009 SIPC annual report.

115 On September 19, 2008, the United States Bankruptcy Court for the Southern District of New York 

entered an order granting the application of SIPC for issuance of a Protective Decree adjudicating that the 

customers of Lehman are in need of protection afforded by the SIPA. See 

http://dm.epiq11.com/LBI/Project/default.aspx#. 116 Pursuant to the application of SIPC, on December 15, 2008, the Honorable Louis L. Stanton, a federal 

judge in the United States District Court for the Southern District of New York, appointed Irving H. Picard as 

trustee for the liquidation of Madoff. See http://www.madofftrustee.com/Home.aspx.
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assurances provided in the SEC’s response to GAO’s 1992 SIPC report and its 

response to the OIG’s 2000 SIPC report. Based on interviews we conducted and 

our analysis, the OIG has determined that more frequent SEC SIPC inspections 

will assist claimants and SIPC. 

Recommendation 5: 

The Division of Trading and Markets (TM) and the Office of Compliance 

Inspections and Examinations (OCIE) should conduct meetings, on at least 

an annual basis, to determine when an inspection of the Securities Investor 

Protection Corporation (SIPC) should occur, based on the ongoing 

liquidations, to ensure systematic and risk based monitoring of SIPC’s 

operations. In these meetings, TM and OCIE should develop a schedule for 

future inspections based upon objective criteria or defined risk-factors, such 

as conducting inspections based upon the number of SIPC liquidations. 

Management’s Comments. TM and OCIE concurred with this 

recommendation. See Appendix V for management’s full comments.

OIG Analysis. We are pleased that TM and OCIE concurred with this 

recommendation. 

In response to TM’s comment regarding TM’s and OCIE’s possible conclusion 

not to inspect SIPC in certain years, we acknowledge that based on their

assessment, TM and OCIE may conclude that it is not appropriate to specify 

a date for the next SIPC inspection.

In response to OCIE’s comment, “In early 2010, OCIE and TM jointly 

determined that an inspection of SIPC in 2010 would not be prudent due to 

SIPC’s involvement in certain ongoing large liquidations,” OIG asserts that 

our audit found no evidence that supports this statement.

Recommendation 6: 

The Division of Trading and Markets and the Office of Compliance 

Inspections and Examinations should perform a risk assessment to determine 

problematic areas or liquidations that are deemed to be complex prior to the

next inspection of the Securities Investor Protection Corporation (SIPC), as 

they did prior to the commencement of the 2003 inspection of SIPC. The 

scope of each future inspection should take into consideration the risk 

assessment conducted prior to the inspection. 
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Management’s Comments. TM and OCIE concurred with this 

recommendation. See Appendix V for management’s full comments.

OIG Analysis. We are pleased that TM and OCIE concurred with this 

recommendation. 

Finding 3: The SEC Does Not Review Fees SIPC 

Pays to Court-Appointed Trustees on a Periodic

or Systematic Basis 

The Commission does not perform a review of the fees SIPC 

pays to independent court-appointed trustees on a periodic 

or systematic basis. TM reviewed trustee fees in 1994. TM 

and OCIE reviewed trustee fees during their extensive 

inspection of SIPC in 2003. TM’s and OCIE’s 2005 follow-up

inspection was conducted to ensure that SIPC implemented

the SEC’s recommendations from its 2003 inspection. 

However, no reviews of fees paid to trustees have taken 

place since 2003.

Background on Trustee Fees under SIPA

According to the SEC’s 1994 SIPC inspection report,

117 customers’ claims are 

paid to the maximum extent possible from the assets of the failed broker-dealer. 

Customers share on a pro rata basis in a fund of customer property and in the 

general estate, as explained below.

118 The term “customer property” means 

“cash and securities (except customer name securities delivered to the customer) 

at any time received, acquired, or held by or for the account of a debtor from or 

for the securities accounts of a customer, and the proceeds of any such property 

transferred by the debtor, including property unlawfully converted.”

119 With 

regard to the liquidation of a broker-dealer’s general estate, all costs and 

administration expenses, including the costs and expenses for which SIPC has 

made advances, must be paid from the general estate before any other claims 

are satisfied.120 The general estate is distributed to creditors in accordance with 

the priorities set forth in the Bankruptcy Code.121 To the extent that customer 

property and SIPC advances are not sufficient to satisfy a customer’s claim in 

 

117 SEC, SIPC Examination Report (Jun. 22, 1994), p. 4. 118 Catherine McGuire, Memorandum Re: SIPA, Aug. 28, 2009, p. 14. 119 15 U.S.C. § 78lll(4). 120 Id., § 78eee(b)(5)(E). 121 SEC, Inspection Report of Securities Investor Protection Corporation (Apr. 30, 2003), p. 7. See also 11 

U.S.C. §§ 503(b) and 507 (a)(1).
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full, the customer is entitled to participate in the general estate and share pro rata 

with other unsecured creditors.122

Limit on the Amount of Trustee Fees in a Bankruptcy Case. Although SIPA 

liquidations are similar to ordinary bankruptcy cases, there is no limit on the 

amount of trustee fees paid in SIPA liquidations, unlike bankruptcy cases. 

According to the U.S. Code, 

[I]n a case under Chapter 7 or 11, the court may allow reasonable 

compensation under section 330 of this title of the trustee for the 

trustee's services, payable after the trustee renders such services, 

not to exceed 25 percent on the first $5,000 or less, 10 percent on 

any amount in excess of $5,000 but not in excess of $50,000, 5 

percent on any amount in excess of $50,000 but not in excess of 

$1,000,000, and reasonable compensation not to exceed 3 percent 

of such moneys in excess of $1,000,000, upon all moneys 

disbursed or turned over in the case by the trustee to parties in 

interest, excluding the debtor, but including holders of secured 

claims.123 

However, with respect to SIPA liquidations, there is no equivalent provision 

capping fees and, thus, there is no statutory limit on the amount of fees a trustee 

can earn in a SIPA case.

The Court’s Discretion Under SIPA Is Limited. SIPA states that “[i]n any case 

in which such allowances124 are to be paid by SIPC without reasonable 

expectation of recoupment thereof as provided in this chapter and there is no

difference between the amounts requested and the amounts recommended by 

SIPC, the court shall award the amounts recommended by SIPC.”125

Accordingly, under the statute, even if the court finds the amount of fees awarded 

to the trustee to be excessive, it is required to approve such excessive fees if 

SIPC determines that the fees are reasonable. In a 1985 case, Judge Thomas 

Britton of the U.S. Bankruptcy Court for the Southern District of Florida deemed 

fees to be awarded to the trustee in a liquidation to be excessive but found he 

had no choice but to approve the fees, stating, “The approval or disapproval of 

this particular application lies exclusively within the discretion of SIPC under the 

express provisions of 15 U.S.C. § 78eee(b)(5)(C) . . . .”

126

 

122 SEC, Inspection Report of Securities Investor Protection Corporation (Apr. 30, 2003), p. 7. 123 11 U.S.C. § 326, Limitation on Compensation of Trustee. 124 Reasonable compensation for services rendered and reimbursement for proper costs and expenses 

incurred. 15 U.S.C. §78eee(b)(5)(A).

125 15 U.S.C. § 78eee(b)(5)(C). 126 See also In re First State Securities Corp., 48 B.R. 45, 46 (Bankr. S. D. Fla. 1985).
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The Court expressed its displeasure with the statutory scheme, stating, 

This statute either intentionally or inadvertently permits someone 

connected with SIPC to authorize questionable payments to 

attorneys from SIPC trust funds under the pretext that these 

payments have been reviewed, approved, authorized and directed 

by a federal court. Nothing could be more misleading. 

Reluctantly, therefore, but without a choice, this application for 

compensation is approved in the amount requested.127

The judge considered the interim allowance of $80,933 sought by the trustee to 

be excessive, but stated he had “no discretion nor any choice” but to approve the 

exorbitant amounts.

 

128

In another instance, in a 1974 case decided prior to the amendment of SIPA in 

1978,

129 a court refused to allow SIPC to pay what the court deemed excessive 

trustee fees. In a SIPC action against Charisma Securities Corp.,130 Judge 

Milton Pollack of the U.S. District Court for the Southern District of New York

disagreed with SIPC’s recommendation and ordered SIPC to pay only $3,500 to 

the trustee and $6,500 to the trustee’s law firm, rather than the $5,000 for the 

trustee and $25,000 for the law firm that SIPC had recommended.131 The court 

found that the trustee hired accountants with extensive experience in financial 

and securities matters who undertook and performed most of the significant tasks 

in the liquidation and, therefore, the trustee’s law firm’s work should have been 

minimal.

132 The court further noted, 

The liquidation before this Court is, by any and every standard, a 

small one involving small uncomplicated claims. If the fees 

requested herein were to be allowed in full, the result would signal

a radical departure from the words and intent of the Act created to 

protect customers’ net equities in the hands of enterprises that 

have foundered....This Court, therefore, simply cannot and will not 

blindly acquiesce—as SIPC apparently has done—in assessing the 

fees requested against the trust fund administered by SIPC. This 

case points up the probable need for legislative readjustment of the 

SIPA and the functions of its administrators. For one thing, all 

appointments of servicing personnel should be subject to court 

control, and all expenses should be submitted to the Court for 

 

127 Id. 128 Id. 129 TM stated that, “The Court had discretion to reject fees when this case was decided. Congress overruled 

this case when it amended the SIPA in 1978. This case was relied upon by Congress to mandate that 

recommendations by SIPC would be binding on the court in ‘no-assets cases’ unless it results in a 

controversy with the applicant.” 

130 Securities Investor Protection Corp. v. Charisma Sec. Corp., 371 F. Supp. 894, 899 (S.D.N.Y. 1974), 

aff’d., 506 F.2d 1191 (2d Cir. 1974). 131 Id. at 895 and 900. 132 Id. at 895-96.
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approval so that a balanced view of the totality thereof can be 

maintained.133 

In another case, Judge Bill Parker of the U.S. Bankruptcy Court for the Eastern 

District of Texas, Tyler Division, found that a SIPC trustee’s fee application in the 

liquidation proceeding for Sunpoint Securities, Inc. (Sunpoint), needed 

improvement and clarity.

134 The court found the following significant concerns 

with the sixth interim fee application in the amount of $439,294 that was 

submitted by the trustee assigned to the Sunpoint liquidation:135

(1) the Application provides insufficient information regarding 

the background and experience of the employed

professionals to justify the hourly rate requested; 

(2) the Application references services which were so 

insufficiently described as to effectively preclude the Court 

from evaluating the reasonableness and necessity of such 

services and, therefore, the benefit of such services to the 

estate were unclear or undemonstrated; 

(3) the Application requests compensation for services for which 

excessive time was billed for the work actually described; 

(4) the Application fails to some extent to disclose the precise 

time increments dedicated to the performance of certain

services which inhibits the Court’s ability to ascertain the 

reasonableness of the charges assessed; and

(5) the Application at times batches or lumps various services 

together in a singular item entry which effectively precludes 

the Court from evaluating the reasonableness and necessity 

of each of the particular services contained in such entries.

In the Sunpoint case, notwithstanding the concerns expressed by the court, SIPC 

recommended the fee proposed by the trustee based on the fee application 

described above, and because of the statutory language, the court had no 

discretion to compel SIPC to reduce the fees. 

While there is absolutely no discretion on the part of the court to limit fees 

recommended by SIPC in a no-asset case (i.e., a case where SIPC advances 

the fees from its fund and there is no reasonable expectation of recoupment) 

pursuant to the statute, even when there is reasonable expectation of 

recoupment, the statute only provides the courts with limited discretion. Under 

15 U.S.C. § 78eee(b)(5)(C), in determining the amount of allowances in all cases 

other than those in which there is no reasonable expectation of recoupment from 

the general estate and the amounts requested do not differ from SIPC’s 

 

133 Id. at 899 (emphasis in original). 134 In re: Sunpoint Securities, Inc., Adversary No. 99-6073 (Bankr. E.D. Tex.), Order Granting Sixth 

Application for Allowance of Interim Compensation and Reimbursement of Expenses of Jackson Walker, 

LLP, (Apr.18, 2002). 135 Id. at 3.
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recommendation, “the court shall give due consideration to the nature, extent, 

and value of the services rendered, and shall place considerable reliance on the 

recommendation of SIPC.”136 

SIPC has stated that in cases where the Court is obligated to rely on its 

recommendation, 

“The Court forms its independent judgment on whether fees should be 

allowed, but takes into account SIPC’s recommendation, bearing in mind 

that SIPC ‘functions as the entity charged with the administration of SIPA, 

as an advisor to the court, as the party initiating a liquidation proceeding, 

and as the party which, to a large extent, is responsible for overseeing the 

funds available for use in a liquidation proceeding.’ S. Rep. No. 763, 95th 

Cong., 2d Sess. at 11 (1978).”137 

SIPC’s Review of Trustee Fees

SIPC informed the OIG that since the SEC’s 2003 and 2005 inspections it has 

implemented a policy requiring trustees to file quarterly or monthly invoices, 

depending on the size and complexity of the liquidation. SIPC further informed 

the OIG that independent court-appointed trustees in complex cases send their

timesheets and fee applications to SIPC on either a quarterly or monthly basis 

and these documents are reviewed by SIPC staff attorneys. SIPC personnel 

also indicated that the monthly invoices for large cases are generally received by 

the middle of the subsequent month after the trustee and counsel have reviewed 

their own bills. SIPC asserts that it reviews in detail every page of timesheets 

and invoices submitted by the trustees. SIPC staff attorneys then prepare a 

memorandum for the Assistant General Counsel’s and the General Counsel’s

review. SIPC administrative assistants prepare a fee chart and a summary of 

ongoing fees that are approved by the Assistant General Counsel and the 

General Counsel on a quarterly basis. 

After the Assistant General Counsel and the General Counsel review and 

approve the fee applications and the timesheets, SIPC staff attorneys then 

prepare a memorandum identifying SIPC’s recommendations, which are 

submitted to the bankruptcy court for review.

SIPC stated that it usually asks for a 10 percent reduction in fees and negotiates 

fees with the trustees before the liquidation process begins. SIPC also has a 

holdback policy which allows it to hold off paying the final fee until the case has 

been completed. 

 

136 15 U.S.C. § 78eee(b)(5)(C). 137 Electronic mail from a SIPC staff member, Feb. 9, 2011, Subject: Questions on Discretion over Fees. 
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Fees Paid to the Lehman and Madoff Trustees and Trustees’ 

Counsels

According to the latest published report, the fees paid to the trustee’s counsels 

and staff members processing the Lehman claims covering September 2008 to 

September 2010 (24 months) totaled approximately $108 million.

138 According to 

the fourth interim fee application as of September 30, 2010, the entire

administrative fees, including fees for accountants, consultants, etc., totaled 

approximately $420 million.139 

The OIG found that the fees paid to the trustee’s counsel and staff members

processing the Madoff claims for the period from December 2008 to September 

2010 (21 months) totaled approximately $102 million.140 SIPC noted that in the 

Madoff case it is advancing SIPC funds to pay all the Madoff case’s 

administrative expenses and that it “is not using any customer money for 

expenses.”141 

The OIG’s review of the trustee fee chart that SIPC prepared revealed that the

hourly rate for the trustee assigned to the Madoff case ranged from $698 to 

$742. For the Lehman liquidation, SIPC’s trustee fee chart combined both the 

trustee’s time and the time charged by the law firm the trustee hired. The 

average hourly rate for the trustee and the law firm personnel involved in the

Lehman liquidation ranged from $437 to $527.

The fees paid to date for the Madoff liquidation are a mere fraction of the amount 

that will eventually be sought because, while there has been significant progress 

with respect to resolving certain customer claims, significant work remains to be 

done relating to customer claims with pending litigation.

The trustee assigned to the Madoff case has stated that he currently does not 

believe there will be sufficient funds in the debtor’s estate to make distributions to 

priority creditors, nonpriority general creditors, and/or broker-dealers.142 Also, 

the trustee “does not expect that there will be sufficient funds in the general 

estate for SIPC to recoup its advances for administrative expenses.”

143 

 

138 “Trustee’s Fourth Interim Report for the Period May 11, 2010 Through October 26, 2010,” Exhibit 2, last 

accessed Mar. 26, 2011, http://dm.epiq11.com/LBI/Project/default.aspx#. Go to Public Reports/Trustee’s 

Interim Reports to the Court/Trustee’s Fourth Interim Report: October 26, 2010. 139 Id. 140 “Trustee’s Fourth Interim Report for the Period Ending September 30, 2010,” last accessed Mar. 1, 2011, 

http://www.madofftrustee.com/documents/FourthInterimReport.pdf. See “Cash Disbursement” chart located 

in the back of the Madoff trustee’s Fourth Interim Report. 

141 The Finance Professionals’ Post, Mar. 17, 2010, “Interview: Stephen Harbeck and Irving Picard on the 

Lehman and Madoff Cases.” 142 “VII. Claims Administration,” “B. Claims of General Creditors,” Paragraph 108, p.36, accessed Feb. 1, 

2011, http://www.madofftrustee.com/documents/Claims_Process.pdf. 143 Id. 
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Because the outcome of Lehman liquidation is uncertain and SIPC is advancing 

its own funds to pay the administrative expenses for the Madoff liquidation, the 

possibility exists that SIPC could deplete its $2.5 billion fund. If the SIPC fund is 

or reasonably appears to be insufficient, the SEC is authorized to make loans to 

SIPC by issuing the Secretary of the Treasury notes or other obligations in an 

aggregate amount not to exceed $2.5 billion.144 

The SEC’s Role in Monitoring Fees

The SEC does not periodically review the fees SIPC pays the court-appointed 

trustees. OGC monitors fee applications to ensure that they are timely filed and 

prepared in a manner that allows for effective review. TM reviewed trustee fees 

and other information related to fees in 1994.

145 TM and OCIE reviewed fee 

applications and related supporting documents such as timesheets and fee 

negotiation documents during the 2003 SIPC inspection. The 2003 inspection

report found that SIPC should improve its controls over fees and stated that “[t]he 

SEC staff found indications of excessive trustee and counsel fees in some 

liquidations and is concerned about fees charged by certain trustees and their 

counsel for work related to the Staff’s inspection of SIPC.”146 The inspection also 

found that the trustees’ work descriptions were not detailed and were generic.147

In addition, the SEC’s 2003 inspection148 and 2005 follow-up inspection149 found 

that some trustees and their counsels did not file quarterly invoices with SIPC

and, in the case of large, active liquidations, monthly invoices were not filed. The

SEC also found that certain trustees and their counsels did not provide detailed 

descriptions of the services they performed in the invoices, which prevented a 

proper and thorough review of the invoices by SIPC.

150

Investors’ Concerns Over Fees

 

The SEC’s 2003 inspection report acknowledged that the amount of fees SIPC 

paid to trustees and their counsel for administering liquidation proceedings 

pursuant to SIPA had been the subject of criticism from the investing public. The 

report noted that groups such as the Public Investors Arbitration Bar Association 

had questioned the amount of fees SIPC paid trustees and their counsel. It also 

noted that the past president of the Public Investors Arbitration Bar Association

argued that SIPC spent too much money on administrative expenses (trustee 

and counsel fees) and not nearly enough on satisfying customer claims.

151 

 

144 15 U.S.C. §§ 78ddd(g) and (h). 145 SEC, SIPC Examination Report (Jun. 22, 1994), pp. 25-26. 146 SEC, Inspection Report of Securities Investor Protection Corporation (Apr. 30, 2003), p. 1. 147 Id. at 1. 148 Id. at 2. 149 Letter from the Director of OCIE to SIPC President, Re: SEC Inspection of the Securities Investor 

Protection Corporation (“SIPC”), Sept. 30, 2005, p. 2.

150 SEC, Inspection Report of Securities Investor Protection Corporation (Apr. 30, 2003), p. 1. 151 Id. at 21.
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The criticism and concern expressed with regard to the amount of trustee fees

that have been awarded have reemerged with the two largest liquidations in 

SIPC’s history, Lehman and Madoff. According to a news article, on August 20, 

2010, the trustee overseeing the Madoff bankruptcy requested that the U.S. 

Bankruptcy Court for the Southern District in New York, where the liquidation 

case is pending, approve a $96.7 million fee request for work that was conducted 

from February 2010 to May 2010.152 The former Madoff investors objected, 

stating that the trustee and his law firm should not receive any payment for the 

work because they were improperly trying to minimize SIPC payouts at the 

expense of Madoff’s victims.153 However, the judge presiding over the case 

ruled in favor of SIPC and accepted SIPC’s recommended trustee fees.

154

The OIG’s Audit Testing of Trustee Fees

The OIG’s Review of Trustee Fees.155 SIPC provided the OIG with a list of the 

fees it paid to 11 independent court-appointed trustees from January 2008 to 

November 2010, by liquidation. We selected the Hanover, North American 

Clearing, Inc. (NAC), Lehman, and Madoff liquidations as part of our review of 

billing because the SEC referred these cases to SIPC. The liquidation of these 

cases commenced in 2008.

156 There were no SIPC liquidations commenced in 

2009 or 2010.157,158

SIPC provided the first and second Lehman fee applications to the OIG for our 

review because this information is available to the public. For the OIG’s review 

of the Madoff liquidation, the trustee and SIPC provided us with redacted fee 

applications and timesheets covering our requested timeframe, February 2010 to 

May 2010. While SIPC provided us with the fee applications and invoices for 

both the Lehman and Madoff liquidations, SIPC refused to provide us with 

documents containing fee negotiations with the trustees. As recommended in

the SEC’s 2003 SIPC inspection report, SIPC adopted a policy to document all 

discussions with trustees and counsel relating to the review of fee applications

and any differences between the amounts that were initially sought by the 

trustees and counsel and those that SIPC recommended for payment.159 Our 

inquiry of SIPC revealed that SIPC attorneys documented fee negotiations with 

 

152 “Madoff victims object to trustee’s fees,” Bloomberg News, (Sept. 2, 201), accessed Dec. 6, 2010, 

http://www.crainsnewyork.com/article/20100902/FREE/100909959. 153 Id. 154 “Bankruptcy Judge Backs Madoff Trustee’s Payout Calculations,” Noeleen G. Walder, (Mar. 2, 2010), 

accessed Oct. 18, 2010, http://www.law.com/jsp/law/LawArticleFriendly/jsp?id=1202444971605 (site 

discontinued). 155 The OIG did not perform an audit of SIPC’s activities and did not review any claim determinations. 156 2008 SIPC annual report, page 6. See

http://www.sipc.org/pdf/SIPC%20Annual%20Report%202008%20FINAL.pdf. 157 2009 SIPC annual report, page 6. See http://www.sipc.org/pdf/2009%20Annual%20Report.pdf. 158 According to the OIG’s review of SIPC’s website (http://www.sipc.org) and inquiry with TM. 159 Letter from SIPC President to Director of OCIE, Inspection of Securities Investor Protection Corporation, 

June 5, 2003.
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trustees in a memorandum or an e-mail, or made notations on the fee charts or

invoices. SIPC stated that providing such information to the OIG while the 

liquidations are in process would reveal the legal strategies used by the trustees 

and could jeopardize the liquidation process.

The OIG reviewed fee memoranda and timesheets that were prepared by the 

court-appointed trustees and interviewed SIPC officials. We determined that 

SIPC’s attorneys performed detailed reviews of the timesheets and focused on 

the number of hours and tasks employees performed to ensure the proper 

division of work, based on the employee’s experience. For complex and large 

cases such as Lehman and Madoff, the trustees prepare a memorandum that 

describes, among other things, (1) the nature of the work performed, (2) the 

overall expenses, and (3) each month’s average hourly rate. Additionally, we 

found that a SIPC attorney reviewed the legal staff’s hours to ensure that the 

hours and the type of work assigned to each level of the legal staff appeared

reasonable. 

Errors Found on Invoices Prepared by the Trustee and His Counsels. The 

OIG’s review of trustee fees disclosed that errors in Lehman invoices related to 

expenses for travel and copying invoices, which the trustee and SIPC agreed 

that SIPC would not be obligated to pay, were properly corrected before the 

trustee submitted the invoices to SIPC. 

Based on the examples we have discussed in which courts have challenged the 

trustee fees SIPC recommended as being excessive, the limited ability of courts 

to question or reject SIPC’s determination to recommend fees, and the SEC’s 

concerns with SIPC’s fee process in the 2003 SIPC inspection, the OIG 

concludes that a more effective review process and increased oversight of these 

determinations are needed. We also believe that SIPC should consider 

additional steps it can adopt to reduce trustee fees by establishing higher 

discount rates. 

SIPC’s Response to Criticism of Trustee Fees

In the Madoff case, the trustee recovered $7.2 billion in December 2010 from the 

widow of a longtime Madoff investor.160 SIPC did not agree to request more than 

the 10 percent discount on fees during its negotiations with trustees and stated

that the fees were reasonable, considering the complexity and magnitude of the 

liquidations, especially for the Lehman and Madoff cases. SIPC further stated 

that it did not want to sacrifice the quality of work that was required to properly 

administer SIPC liquidations by trustees and their counsels by seeking further fee 

reductions.

 

160 http://money.cnn.com/2010/12/17/news/companies/madoff_picower/index.htm?hpt=T1.
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TM’s View on Trustee Fees

TM told the OIG that because it has not reviewed the Lehman and Madoff trustee 

fees, it has no ability to judge whether these fees are reasonable. However, TM 

acknowledged that it is fair to question whether the current 10 percent fee 

reduction is sufficient. Additionally, TM stated that the Commission has no basis 

to judge whether the trustee fees in the Lehman and Madoff cases are 

reasonable and has not attempted to make such determinations. A bankruptcy 

attorney in the SEC’s New York Regional Office who is familiar with SIPC cases 

stated that certain trustees appointed to non-SIPC bankruptcy cases and 

receivers in SEC enforcement-related cases offer discounts on fees of more than 

10 percent. TM acknowledged that in the Lehman and Madoff cases, which are 

the largest liquidations in SIPC’s history, it has been difficult to determine 

whether the hourly rates the trustees, their counsels, and other legal staff charge 

SIPC are reasonable. TM added that the fees the trustees collect for the 

Lehman and Madoff cases are steady income for the trustees’ law firms.

The SEC’s Study on Modernizing SIPA Supported Giving 

Bankruptcy Judges More Discretion Over Fees 

In August 2009, a special counsel in TM conducted a study highlighting issues 

with SIPA and SIPC’s rules and bylaws thereunder. TM’s study was intended to 

identify possible changes to SIPA to help modernize it. The study also explored 

some policy issues that could lead to an expansion of SIPC’s responsibilities 

under SIPA or an expansion of SIPA’s protection beyond broker-dealer’s 

customers. One of the topics in the study covered reducing administrative 

expenses at the discretion of bankruptcy judges. 

The study noted that “[w]hile in many cases administrative expenses are borne 

exclusively by SIPC, SIPC has precedence over general creditors, including 

certain defrauded investors, when seeking reimbursement for administrative 

expenses. Thus, there may be public interest in considering whether the 

requirement under the Bankruptcy Code that bankruptcy judges determine the 

reasonableness of fees paid to trustees and attorneys should be extended to 

SIPC cases. Bankruptcy judges could then make use of their experience in other 

cases to determine the reasonableness of fees.”

161 

As previously discussed, there is a lack of discretion by court under SIPA on 

trustee fees in certain cases. Although SIPA liquidations are similar to ordinary 

bankruptcy cases, there is no limit on the amount of trustee fees that may be 

paid in SIPA liquidations, unlike bankruptcy cases where a limit is imposed on 

trustee fees. Additionally, the SEC does not review trustee fees on a periodic 

basis. Hence, it would be advisable to have a second party periodically review 

the trustee fees that SIPC pays.

 

161 Catherine McGuire, Memorandum Re: SIPA, Aug. 28, 2009.
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Recommendation 7: 

The Division of Trading and Markets, in coordination with the Office of the 

General Counsel, should conduct additional oversight of the Securities 

Investor Protection Corporation’s (SIPC) assessments of the reasonableness 

of trustee fees and encourage SIPC to negotiate with outside court-appointed 

trustees more vigorously to obtain a reduction in fees greater than 10 percent. 

Management’s Comments. TM and OGC concurred with this 

recommendation. See Appendix V for management’s full comments.

OIG Analysis. We are pleased that TM and OGC concurred with this 

recommendation. 

Recommendation 8: 

The bankruptcy group in the Office of the General Counsel and the Division of 

Trading and Markets should decide on the scope and frequency of the 

Commission staff’s monitoring of the Securities Investor Protection 

Corporation’s (SIPC) assessments of the reasonableness of trustee fees paid 

by SIPC, rather than relying only on inspections of SIPC, which do not occur 

on a systematic basis. 

Management’s Comments. OGC and TM concurred with this 

recommendation. See Appendix V for management’s full comments.

OIG Analysis. We are pleased that OGC and TM concurred with this 

recommendation. We acknowledge that TM and OGC are not in a position to 

make an independent assessment of the reasonableness of trustee fees as 

they do not actively participate in the actual liquidation proceeding in a 

meaningful way.

Recommendation 9: 

The Division of Trading and Markets, in consultation with the Commission, 

shall determine whether to request that Congress modify the Securities 

Investor Protection Act (SIPA) to allow bankruptcy judges who preside over

SIPA liquidations to assess the reasonableness of administrative fees in all 

cases where administrative fees are paid by the Securities Investor Protection 

Corporation. 

Management’s Comments. TM concurred with this recommendation. See 

Appendix V for management’s full comments.
SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

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OIG Analysis. We are pleased that TM concurred with this recommendation. 

The administrative fees identified in our recommendation relate to the 

trustees and their counsel fees. Further, the recommendation refers to SIPA 

provisions in Section 78eee(b)(5)(C). 

Finding 4: SIPA Investor Education Coverage Still 

Needs Improvement 

Despite the SEC’s and SIPC’s previous efforts to clarify 

confusion about SIPC’s role and the coverage available 

under SIPA, many investors still do not sufficiently 

understand certain limitations on the coverage SIPA 

provides and the protection against losses resulting from

broker-dealer failures. 

Investors Are Still Confused About SIPA’s Coverage

As part of this audit, the OIG interviewed officials from OIEA and found that 

questions and complaints about SIPC that OIEA received from investors have

dramatically increased in the past two years as a result of the Lehman and 

Madoff cases. Further, our review of OIEA’s log of complaints and questions 

related to SIPC and SIPA from the public covering January 2008 to November 

2010 demonstrates that many investors (1) are still confused about the coverage 

available under SIPA, and (2) believe that as long as their broker-dealers are 

SIPC members they are covered under SIPA. 

The director and founder of SVC, a group of approximately 7,400 Stanford 

victims,

162 stated that she believed that Stanford investors were misled about 

their coverage, as their account statements and many of the novelty items they 

received from Stanford contained the SIPC logo. The director further stated that 

based on the materials Stanford provided to Stanford investors about SIPA

coverage, Stanford investors had no reason to believe that SIPC would not cover 

their investments up to SIPA’s $500,000 limit per customer163 for claims of 

securities. The director indicated that many Stanford investors invested only up 

to the $500,000 limit164 because they thought they would be protected up to this 

amount under SIPA. 

According to the director of SVC, Stanford investors also expressed concerns 

about the investor alerts and updates that the SEC posted on its website 

regarding its case against Robert Allen Stanford, and stated that the SEC’s 

updates and notices provided information that Stanford investors already knew 

and were not helpful. Additionally, the director of SVC stated that direct 

 

162 Interview of Angie Kogutt, director and founder of the Stanford Victims Coalition, Nov. 22, 2010. 163 15 U.S.C. § 78fff-3(a). 164 Id.
SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

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communication with employees in TM who could articulate the status of the 

SEC’s efforts would have been helpful.165 She further stated that in dealing with 

the Stanford matter, Stanford investors felt as though the SEC regarded them as 

adversaries and it seemed at times, that they had to force the SEC to do its job. 

We also found that many investors assume that SIPA’s coverage is equivalent to 

Federal Deposit Insurance Corporation (FDIC) coverage and believe they are 

guaranteed to be compensated. The amount of SIPA protection available for 

claims of cash is now $250,000,166 as amended by the Dodd-Frank Act, which is 

the same amount as the FDIC’s limit for deposit insurance.

167 

Many Investors Do Not Become Aware of SIPA Until Failure of 

Their Broker-Dealer

The OIG learned that most investors are unaware of SIPC and SIPA until they 

learn about their broker-dealer’s liquidation or failure. When an investor opens 

an account with a broker-dealer, he or she is generally not contemplating the

possible liquidation of the broker-dealer. If investors were better educated about 

SIPA coverage, they could then question the financial condition of the brokerdealer before they made an investment. 

Confusing Advertisements by SIPC

During our audit, we discussed with OIEA SIPC’s efforts to publicize its existence 

and we reviewed SIPC’s 2002 and 2007 public service campaigns. According to 

the OIEA Director, the segment shots for SIPC’s public service campaigns are 

misleading because they do not fully describe the limitations of SIPA’s coverage. 

Additionally, the Director believes that the campaigns seem to overstate SIPC’s 

role. For example, one of SIPC’s campaigns stated that as an investor, a 

person’s personal safety net includes SIPC. The campaign did not explain that 

there are several significant exceptions to SIPA. A second SIPC campaign 

compared SIPC to a glove that catches a falling egg, symbolizing an investor’s 

nest egg. The commercial further states that SIPC helps investors recover their 

securities if the investor’s broker fails. However, the commercial fails to state 

that certain securities are not covered under SIPA and that other limitations exist. 

These campaigns seem to simplify SIPA’s coverage and may lead investors to 

believe that if they lose their securities in the hands of a broker-dealer that is a 

SIPC member, they can always recover their losses through SIPC under SIPA. 

SIPC’s Response to Advertisements

SIPC stated that in March 2008, the collapse of the Bear Stearns Companies, 

Inc., led SIPC to revise and expand its investor education commitment to assure 

 

165 TM stated that TM staff members did communicate directly with Stanford investors. 166 15 U.S.C. § 78fff-3(d). 16712 U.S.C. § 1821(a)(1)(E).
SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

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investors that a brokerage firm failure involves protection under SIPA. SIPC’s 

board of directors authorized an expanded and expedited public relations effort in 

that regard.

Additionally, SIPC disclosed that in late April 2009, after the failures of Lehman 

and Madoff, SIPC suspended these efforts because SIPC was constantly in the 

news and the role of SIPC was examined in great public detail. Further, in light 

of the litigation arising from the Madoff case, SIPC believed that it would be the 

subject of criticism if it were to continue an expensive, high-profile public relations 

campaign at a time when some claimants were actively litigating with SIPC over 

the nature and the extent of protection under the statute.

SIPC also stated that it has budgeted for a renewed and revised investor 

education campaign for late 2011. 

Establishment of SIPC Task Force to Modernize SIPA and 

Improve Investor Education

According to the SIPC Modernization Task Force website,

168 SIPC created a 

SIPC Modernization Task Force (Task Force) on June 17, 2010, to perform a 

comprehensive review of SIPA and SIPC’s operations and procedures and to 

propose reforms to modernize SIPA and SIPC. The Task Force consists of 

investors, lawyers, and industry experts from different interests and groups. The 

Task Force has been soliciting public comment on a number of issues. One of 

the objectives of the Task Force is to assess how SIPC can improve investor 

education. 

A senior official from TM is participating on the Task Force as an observer. In 

addition, the OIEA Director provided the Task Force with suggestions for 

improving investor education. Specifically, the Director provided ideas to 

improve investor awareness of SIPC, such as relaying a message (through 

advertising) to investors about what SIPC is and what SIPC is not, buying Google 

Ad Words, utilizing social network websites such as Facebook, and preparing 

advertisements and messages for certain target groups. For instance, if a 

broker-dealer in Denver, Colorado, were being liquidated, SIPC could advertise 

SIPA coverage to Denver residents. Conducting research through focus group 

testing could help determine how much the average investor knows about SIPA’s

coverage. Focus group testing could also help verify the efficacy of SIPC’s 

message in its public service campaign or identify the need to modify the 

message. The OIEA Director also indicated that given today’s technology, 

broker-dealers could identify the assets that are not covered by SIPC in the 

account statements that are sent to customers. 

 

168 http://www.sipcmodernization.org.
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The President of SIPC stated that the Task Force plans to present its findings, 

conclusions, and recommendations to the SIPC board of directors by the first 

quarter of 2011. The SIPC board of directors will then review the report and vote 

on the recommendations. SIPC’s President further stated that the plan will 

contain recommendations that could be implemented by amendments to the 

bylaws which the SEC has the authority to approve under SIPA. There may also 

be some recommendations that would need to be implemented through 

legislative changes. Our inquiry with the Chairman of the SIPC board of directors

revealed that the Task Force has considered designating an employee at SIPC 

whose focus would be to improve investor education regarding the role of SIPC 

and the coverage that is available under SIPA.

TM’s Response

In regard to improving ways to communicate with investors, TM indicated that the 

updates and notices on the SEC’s website and SIPC’s website and the letters 

that were sent to Stanford investors who complained to OIEA were sufficient. TM 

further stated that it does not have the resources to answer questions directly 

from investors and that its coordination with OIEA, which is mainly responsible 

for communicating with investors, is sufficient. TM further stated that updating 

investors on matters related to ongoing investigations may jeopardize the SEC’s 

efforts in litigation. TM also stated that it is difficult to educate the public about 

SIPA coverage because of the many legal issues and different factual scenarios 

involved in an analysis of SIPA coverage, and that it has been struggling with this 

issue for the past 20 years. However, in light of the issues raised in the Lehman, 

Madoff, and Stanford matters, it would be useful to consider ways in which the 

information provided by SIPC to the investing public could be improved and 

made clearer. 

Recommendation 10: 

The Division of Trading and Markets, in coordination with the Office of 

Investor Education and Advocacy, should encourage the Securities Investor 

Protection Corporation to designate an employee whose responsibilities

include improving investor education and preventing further confusion among 

investors about coverage available under the Securities Investor Protection 

Act. 

Management’s Comments. TM concurred with this recommendation. See 

Appendix V for management’s full comments.

OIG Analysis. We are pleased that TM concurred with this recommendation. 
SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

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Recommendation 11: 

The Division of Trading and Markets should support the Securities Investor 

Protection Corporation’s (SIPC) efforts to improve investor education, 

including encouraging SIPC to strongly consider and, as appropriate, 

implement the Office of Investor Education and Advocacy’s suggestions to 

improve investor awareness. 

Management’s Comments. TM concurred with this recommendation. See 

Appendix V for management’s full comments.

OIG Analysis. We are pleased that TM concurred with this recommendation. 

Recommendation 12: 

The Division of Trading and Markets, in coordination with the Office of 

Investor Education and Advocacy and in consultation with the Commission,

should utilize more effective methods to communicate with investors in case 

of the failure of broker-dealers, such as notifying investors of the status of the 

Commission’s efforts throughout the liquidation process or designating an 

employee, as appropriate, who can communicate directly with investors on 

matters unique to each liquidation case.

Management’s Comments. TM concurred with this recommendation. See 

Appendix V for management’s full comments.

OIG Analysis. We are pleased that TM concurred with this recommendation. 
Appendix I

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Acronyms/Abbreviations

Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer 

Protection Act of 2010

GAO Government Accountability Office 

Hanover Hanover Investment Securities, LLC

NAC North American Clearing, Inc.

OCIE Office of Compliance Inspections and Examinations

OGC Office of the General Counsel

OIEA Office of Investor Education and Advocacy

OIG Office of Inspector General 

Lehman Lehman Brothers, Inc.

Madoff Bernard L. Madoff Investment Securities, LLC

SEC or Commission Securities and Exchange Commission

SIPA Securities Investor Protection Act of 1970

SIPC Securities Investor Protection Corporation

Stanford Stanford Group Company

Sunpoint Securities, Inc. Sunpoint

SVC Stanford Victims Coalition

Task Force Securities Investor Protection Corporation

Modernization Task Force

TM Division of Trading and Markets
Appendix II

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Scope and Methodology

As part of its annual audit plan, the OIG conducted an audit of the SEC’s 

oversight of SIPC. We conducted this performance audit in accordance with 

generally accepted government auditing standards. Those standards require 

that we plan and perform the audit to obtain sufficient, appropriate evidence to 

provide a reasonable basis for our findings and conclusions based on our audit 

objectives. We believe that the evidence obtained provides a reasonable basis 

for our findings and conclusions based on our audit objectives. 

Scope. We obtained TM’s internal memorandum listing its responsibilities 

related to oversight of SIPC’s activities. The OIG also obtained OCIE’s 

inspection manual, which was utilized to conduct inspections of SIPC in 2003 

and 2005. Additionally, we obtained planning memoranda listing areas of 

concentration, which were prepared by TM and OCIE for the SEC’s inspection of 

SIPC. We obtained a memorandum from TM and OCIE describing the status of 

the implementation of prior OIG audit recommendations on this program 

(Oversight of Securities Investor Protection Corporation, Audit No. 301, March 

31, 2000). 

We conducted our fieldwork from late November 2010 to January 2011. We 

reviewed documentation on the SEC’s monitoring of SIPC’s activities covering 

calendar years 2008 and 2009 and from January to November 2010. 

Methodology. To accomplish the audit objective of assessing if the SEC 

monitors SIPC’s activities in accordance with governing legislation, we conducted 

interviews with TM and OGC staff members who are responsible for monitoring 

SIPC’s activities. We further conducted inquires to gain an understanding of the

SEC’s process for monitoring SIPC. The OIG reviewed SIPA and its related 

legislative history. We also reviewed bylaw amendments SIPC submitted and 

correspondence between SIPC and the SEC regarding the bylaw amendments. 

We reviewed SIPC’s fee charts that showed the trustee’s fees for SIPA 

liquidations of Lehman, Madoff, Hanover, and NAC. Additionally, the OIG 

reviewed fee applications, which included timesheets and invoices prepared by 

independent court-appointed trustees for the aforementioned SIPA liquidations. 

We also interviewed OIEA management who coordinated with TM to respond to 

investors with questions and complaints regarding SIPC. The OIG also reviewed 

OIEA’s log of investors’ questions and complaints regarding SIPC, the liquidation 

of Madoff, and the Stanford case from investors. Further, we interviewed Atlanta 

Regional Office staff members who worked on the Hanover case. 

To accomplish the audit objective of examining whether the Commission 

performs periodic and systematic inspections of SIPC’s activities, we interviewed 

TM and OCIE staff members who conducted SIPC inspections. We also 
Appendix II

SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

35

reviewed the SEC’s inspection reports of SIPC, memoranda prepared by OCIE 

and sent to the Commission regarding SIPC inspections, and responses from 

SIPC regarding the SEC’s findings. 

Further, to accomplish the audit objective of determining whether the SEC 

conducts meaningful reviews of SIPC’s annual reports, we reviewed SIPC’s 

annual reports for 2007, 2008, and 2009, and we observed evidence of the 

SEC’s review of SIPC’s annual reports. We conducted interviews of TM and 

OGC staff members who review SIPC’s annual reports. To obtain an 

understanding on the status of certain SIPA liquidations, the OIG also conducted 

inquiries of SIPC attorneys who were assigned to the Lehman, Madoff, Hanover, 

and NAC liquidations. Finally, we inquired SIPC management and the Chairman 

of SIPC’s board of directors to gain an understanding of SIPA liquidations and

the role of SIPC and the SIPC Task Force, and to obtain an interpretation of the 

SIPA provision regarding the court’s discretion over trustee fees that are paid by 

SIPC.

Internal Controls. During our audit, the OIG reviewed internal controls as they 

pertained to our audit objectives. 

Judgmental Sampling. SIPC provided the OIG with 11 listings for the fees it 

paid to trustees from January 2008 to November 2010, for each liquidation. The 

OIG selected the Hanover, NAC, Lehman, and Madoff litigations for our review of 

billing records because the SEC referred these cases to SIPC and the 

liquidations commenced in 2008,

169 during the scope of our audit. According to 

SIPC’s 2008 annual report, the Great Eastern Securities, Inc., liquidation began 

in 2008. However, since SIPC is the trustee for Great Eastern Securities, Inc., 

there were no fees paid to an outside trustee that could be reviewed. Further, 

there were no SIPC liquidations in 2009170 or 2010.171 For the OIG’s review of 

fees for Lehman, SIPC provided the OIG with fee applications and related 

supporting documents for the first and second fee applications, which are public 

records. For the Madoff case, SIPC requested that the OIG select a sample of 

invoices for our review. The OIG selected the fee applications for the quarter 

ending May 31, 2010, because the trustee fees for that quarter were substantial. 

Prior Audit Coverage. OIG report Oversight of Securities Investor Protection 

Corporation, Report No. 301, March 31, 2000. 

 

169 According to SIPC’s 2008 annual report. See

http://www.sipc.org/pdf/SIPC%20Annual%20Report%202008%20FINAL.pdf. 170 According to SIPC’s 2009 annual report. See http://www.sipc.org/pdf/2009%20Annual%20Report.pdf. 171 According to the OIG’s review of SIPC’s website and inquiry with TM.
Appendix III

SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

36

Criteria

Securities Investor Protection Act of 1970. Enacted to provide investors 

protection against losses caused by failure of broker-dealers. Created SIPC, 

which either acts as trustee or works with an independent court-appointed trustee 

in liquidations of troubled brokerage firms to recover funds for investors with 

assets of bankrupt or financially troubled brokerage firms. Adopted December

30, 1970, and last amended July 21, 2010.

Report of the U.S. House of Representatives Committee on Interstate and 

Foreign Commerce, House Report No. 95-746, 95th Congress, 1st Session 

(October 27, 1977). Contains the legislative history for the Securities Investor 

Protection Act amendments of 1978. 

Report of the U.S. Senate Committee on Banking, Housing and Urban 

Affairs, Senate Report No. 95-763, 95th Congress, 2nd Session (April 25, 

1978). Contains the legislative history for the Securities Investor Protection Act 

amendments of 1978.

SEC Division of Trading and Markets Memorandum Regarding the 

Commission’s Oversight Role of the Securities Investor Protection 

Corporation (June 24, 1999). TM’s internal memorandum that describes how 

the Commission monitors SIPC and its operations, as required under the 

Securities Investor Protection Act of 1970, and other ways the Commission 

exercises its oversight responsibilities related to SIPC.

11 U.S.C. § 326, Limitation on compensation of trustee, Pub. L. 95-598

(November 6, 1978). Sets limits on the amount of fees that trustees may be 

paid in bankruptcy cases under Chapter 7 or 11. 
Appendix IV

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List of Recommendations

Recommendation 1: 

The Division of Trading and Markets should document its procedures and 

processes for its oversight and monitoring of the Securities Investor Protection 

Corporation pursuant to the Securities Investor Protection Act. 

Recommendation 2:

The Division of Trading and Markets should complete its efforts to update its 

internal memorandum which describes its oversight responsibilities under the 

Securities Investor Protection Act (SIPA) and include its current practices and, 

where appropriate, the legislative amendments that were made to SIPA in July 

2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

Recommendation 3:

The Office of the General Counsel should consult with the Division of Trading 

and Markets to clarify its role in monitoring the Securities Investor Protection 

Corporation (SIPC) and document the responsibilities and procedures it follows 

in regard to the Commission’s oversight of SIPC. 

Recommendation 4:

The Office of the General Counsel should consider the costs and benefits related 

to certain activities that the retired attorney performed and determine what, if any, 

other activities are appropriate to adequately monitor the Securities Investor 

Protection Corporation. 

Recommendation 5:

The Division of Trading and Markets (TM) and the Office of Compliance 

Inspections and Examinations (OCIE) should conduct meetings, on at least an 

annual basis, to determine when an inspection of the Securities Investor 

Protection Corporation (SIPC) should occur, based on the ongoing liquidations, 

to ensure systematic and risk based monitoring of SIPC’s operations. In these 

meetings, TM and OCIE should develop a schedule for future inspections based 

upon objective criteria or defined risk-factors, such as conducting inspections 

based upon the number of SIPC liquidations. 
Appendix IV

SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

38

Recommendation 6:

The Division of Trading and Markets and the Office of Compliance Inspections 

and Examinations should perform a risk assessment to determine problematic 

areas or liquidations that are deemed to be complex prior to the next inspection 

of the Securities Investor Protection Corporation (SIPC), as they did prior to the 

commencement of the 2003 inspection of SIPC. The scope of each future 

inspection should take into consideration the risk assessment conducted prior to 

the inspection. 

Recommendation 7: 

The Division of Trading and Markets, in coordination with the Office of the 

General Counsel, should conduct additional oversight of the Securities Investor 

Protection Corporation’s (SIPC) assessments of the reasonableness of trustee 

fees and encourage SIPC to negotiate with outside court-appointed trustees 

more vigorously to obtain a reduction in fees greater than 10 percent.

 

Recommendation 8:

The bankruptcy group in the Office of the General Counsel and the Division of 

Trading and Markets should decide on the scope and frequency of the 

Commission staff’s monitoring of the Securities Investor Protection Corporation’s 

(SIPC) assessments of the reasonableness of trustee fees paid by SIPC, rather 

than relying only on inspections of SIPC, which do not occur on a systematic 

basis. 

Recommendation 9:

The Division of Trading and Markets, in consultation with the Commission, shall 

determine whether to request that Congress modify the Securities Investor 

Protection Act (SIPA) to allow bankruptcy judges who preside over SIPA 

liquidations to assess the reasonableness of administrative fees in all cases 

where administrative fees are paid by the Securities Investor Protection 

Corporation.

Recommendation 10:

The Division of Trading and Markets, in coordination with the Office of Investor 

Education and Advocacy, should encourage the Securities Investor Protection 

Corporation to designate an employee whose responsibilities include improving 

investor education and preventing further confusion among investors about 

coverage available under the Securities Investor Protection Act. 
Appendix IV

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Report No. 495

39

Recommendation 11:

The Division of Trading and Markets should support the Securities Investor 

Protection Corporation’s (SIPC) efforts to improve investor education, including 

encouraging SIPC to strongly consider and, as appropriate, implement the Office 

of Investor Education and Advocacy’s suggestions to improve investor 

awareness. 

Recommendation 12:

The Division of Trading and Markets, in coordination with the Office of Investor 

Education and Advocacy and in consultation with the Commission, should utilize 

more effective methods to communicate with investors in case of the failure of 

broker-dealers, such as notifying investors of the status of the Commission’s 

efforts throughout the liquidation process or designating an employee, as 

appropriate, who can communicate directly with investors on matters unique to 

each liquidation case.
Appendix V 

SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

40

Management’s Comments

TO; Office ofInspector General

FROM: Division ofTrading and Market

MarkD. Cahn

General Counsel, Office ofthe General COlUlSel

Carlo V. di Florio

Director, Office ofCompliance Inspections and Examinations

Lori J. Schock

Director, Office ofInvestor Education and Advocacy

RE: The Division ofTrading and Markets' Response to the Office ofInspector

General Report No. 495, SEC's Oversight ofthe Securities Investor

Protection Corporation's Activities

DATE: March 23, 2011

cc:

MEMORANDUM

s f)-i--

I. Introduction

Thank you for the opportunity to respond to the recommendations in your March

9,2011 draft report- SEC's Oversight ofthe Securities Investor Protection Corporation's

Activities (the "Report"). At the outset, we want to extend our appreciation for the

professionalism ofyour staffin conducting the.audit. The responses to recommendations

directed to the Division ofTrading and Markets ("TM") are set forth ,below. 1 This

includes responses to all recommendations in the Report except Recommendation 4.

D. Recommendations Directed to TM

Recommendation 1: "[TM] should document itsprocedures andprocessesfor its

oversight and monitoring ofSecurities Investor Protection Corporation r"SIPC'1

pursuant to the Securities Investor Protection Actr"SIPA '1...

TM concurs with this recommendation. As is noted in the Report, there is an

internal TM memorandum dated June 24, 1999 that describes in general tenns the

Commission's oversight responsibilities under SIPA. TM will update this memorandum

and, based on the statutory and other responsibilities identified in the memorandum,

create written procedures more specifically detailing TM's role in executing these

responsibilities. The updated memorandum and procedures will be distributed to all

relevant staff.

We have updated Recommendations 6. 7. 8. and 9 below to reflect revisions to those

recommendatiODS based on discussions between TM staffand staffin your office.
Appendix V 

SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

41

Recommendation 2: "[I'M] should complere its efforts to update its internal

memorandum which describes its oversight responsibilities under the SIPA and include

its currentpractices and where appropriate. the legislative amendments that were made

to [SIPAj in July 2010, by the Dodd-Frank Wall Street Reform and Consumer Protection

Act [the "Dodd-Frank Act "j. "

TM concurs with this recommendation. As is discussed in 1M's Response to

Recommendation I, 1M will update its internal memorandum relating to SIPC oversight,

in order to reflect 1M's current oversight practices and amendments to SIPA under the

Dodd-Frank Act.

Recomnu!1IthIlibn 3: 'The Office ofGeneral Counsel["OGC"j should consult with

[TM] to clarifY its role in monitoring [SlPCj anddocumenlthe responsibilities and

procedures itfollows in regards to the Commission's oversighJ ofSIPG. ..

1M concurs with this recommendation. TM will consult with OGC as suggested

py Recommendation 3.

Recommendation 5: "[TMJ and [OC/E] shouldconduct meetings. at least on an annual

basis, to determine when an inspection of[SIPCj should occur based on the ongoing

liquidations to ensure aystemaJic and rislvbasedmonItoring ofSlPC's operations. 1n

these meetings, TM and OClEshould dewlop a schedule forfuture inspections based

upon objective criteria or defined risk-factors, nu:h as conducting inspections based

upon the number ofSJPC liquidations. ..

TM COIlCUIS with this recommendation,. subject to our comments in the following

paragraph.. We have discussed this recommendation with ocm and have agreed to meet

at least annually to plan fOl" future SIPC inspections. As par:t ofthis planning process.

TM and OCIE will consider objective criteria and/or defined risk-based factors to be used

when assessing whether to commence an inspection of SIPC.

We note that your recommendation that TM and ocm "determine when 'an

inspection of[SIPC] should occur based on ongoing liquidatioruJ" could be interpreted to

suggest that each such annual meeting should result in a detennination of a specific date

for the next SIPC inspection. TM does not expect that its periodic meetings with ocm

will in all cases result in detenninations ofspecific dates for SIPC inspections. [n fact,.

TM and OCIE may conclude during a meeting that it is not yet appropriate to specify the

date for the next SIPC inspection. TM and OeIE believe that the timing and scope of

future SIPC inspections should continue to include a level offlexibility and prioritization

that provides for the efficient and effective allocation ofCommission resources. This

flexibility also should continue to enable TM: and ocm to plan inspections in a manner

that minimizes disruptions to SIPC and SrPA trustees in connection with ongoing

liquidations and to focus inspections on current areas ofinterest and concern. We

interpret your recommendation as providing this flexibility.

2
Appendix V 

SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

42

Reco_ndation 6: TM and OCIE shouldperform Q risk assessment to determine

problematic areas or liquidations that are deemed to be complex prior to the next

inspection ofSlPCas they did so prior to the commencement ofthe 200] inspection of

SIPc. The scope ofeach future inspeClion should taU into consideration the risk

assessment conductedprior to the inspection.

TM concurs with this recommendation. TM agrees that prior to inspecting SIPC.

TM and OCIE sho~d perform a risk assessment designed to detennine, with respect to

SIPC and SIPA. problematic areas or liquidations deemed to be complex. TM and OCIE

should then determine to what degree to focus their inspection efforts on these areas

andlor liquidations. This risk-based approach is consistent with the inspection planning

process employed in prior SIPC inspections and TM believes that this approach results in

an efficient and effective all~onofCommission resources.

R~datU",.7: TM, in coordination with OGC. sJwuJd conduct additional

oversight ~r SlPC's assessments ofthe reasonableness oftrustee fees and encourage

S/PC to negotiate with outsick court-oppointedtrustees more vigorously to obtain

greater than a 10 percent reduction infees.

Recommendation 7 is, in effect, two separate recommendations. First,

Recommendation 7 states that 1M, in coordination with OGC. should conduct additiooa.I

oversight over SIPC's assessments ofthe reasonableness oftrustee fees. TM concurs

with this recommendation. TM and OGC have agreed. to coordinate with each other to

determine their respective roles relating to the additional oversight as is described in

more detail in response to Recommendation 8 below.

The second part ofRecommendation 7 states that TM, in coordination with OGC.

should encourage SIPC to negotiate with outside court-appointed trustees more

vigorously to obtain greater than a 10 pen:ent reduction in fees. TM generally concurs

with this recommeDdation. 1M recognizes, however. that the size ora trustee's fee

reduction in a SIPA liquidation will likely vary from case to case based on facts and

circumstances relevant to a particular liquidation, and. in some cases, SIPC may decide to

recommend a trustee that has not agreed to a fee reduction greater than 10 percent based

on factOlS such as the size, complexity andlor location of a liquidation and the limited

availability ofqualified and experienced persons capable of effectively exercising the

powers granted to a trustee under SIPA.

RecollUNDldMiolf 8: 'I'M bankruplcy group in OGC and TMshould decide on the sco~

andfrequency oft~ SEC staffs monitoring ofSIPCassessmenb ofthe reasonobleness

oftrustee feu paid by S1PC. rather than relying only on inspection.r ofSlPCwhich do

not occur on a systematic basis.

1M concw;s with this recommendation and will consult with OGC to determine

the scope and frequency oftbe SJ;C staff"s monitoring ofSIPC's assessments ofthe

reasonableness oftrustee fees and to determine the respective roles ofTM and OGC in

the monitoring. Between inspections, TM and aGC plan to review fee applications in

3
Appendix V 

SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

43

SIPA cases to make: swe trustees follow the U.S. Trustee guidelines and that SIPC has

conducted a thorough review ofthc reasonableness oftrustee fees. TM and OGC are not

in a position to make an independent assessment ofthc reasonableness oftrustee fees,

because TM and OGC would nced to, but do not. actively participate in the actual

liquidation proceeding in a way that would permit that assessmenL

Reconunendation 9: TM. in consultation with the Commission, shall determine whether

to request that Congress modify SIPA to allow banJcruptcyjudges who preside over SIPA

liquidations, to assess the reasonableness ofadministrative fees in all cases where

administrativefees are paid by SIPC.

TM understands from the Report and this recommendation that. as a result of

judicial copunentary in case law since 1978, you would like TM, in consultation with the

Commission, to clctermine whether to request that Congress modify SIPA to provide for

judicial review of administrative fees in SIPC cases where judicial oversight docs not

cWTeI1tlyexist. We assume that when you refer to "administrative fees," you mean the

fees oftrustees and their counsel, and that you are refening to the provisions of Section

78eee(b)(5Xc) of SIPA that Congress adopted in 1978 to limit thejudicial scrutiny affee

awards to trustees and their counsel in "no-asset cases" cases in which there is no

reasonable cxpectalion that SIPC will recoup from the estate ofthe debtor allowances

awarded by the court). TM will consult with the Commission for purposes of

determining whether to make the aforementioned request to Congress.

ReCfHIfIIWlfdadmt 10: "{TM}, in coordination with {OIEA.}, slwuJd encourage {SIPC} to

designate an employu whose responribilitie.s include improving investor education and

prewmtingjitTther confiuion about coverage available under the $eC'UTities I1r1Iestor

Protection Act among investors. ..

TM CODCUXS with this recommeodation and will coordinate with OlEA to

encourage SIPC to designate an employee whose responsibilities include improving

investor education about SIPC and SIPA coverage.

As noted in the Report. in 2010, SIPC created a Task Force with a mandate to

undertake a comprehensive review of SIPA and SIPC's operations and policies, and to

propose reforms to modernize SIPA and SJPC. Among other things, the Task Force is

considering whether SIPC should employ an individual whose focus would be to improve

investor education about SIPC and SIPA. We understand that the Task Force will present

its f"mdings, conclusions, and proposals to SIPC's Board ofDirectors in the near future

and that SIPC's Board ofDi.rectors will vote on the recommendatioDS.

TM, in coordination with OlEA. wil) encourage SIPC's Board ofDirectors to

designate an employee whose responsibilities include improving investor education about

SIPC and SIPA. .

4
Appendix V 

SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

44

5

Recommendation Jl: "{I'M] should support IS/PC's] efforts to improve investor

education, including encouraging S/PC to strongly consider and, as appropriate,

implement {O/EA 's] suggestions to improve investor awareness. ..

TM' concurs with this recommendation. TM has supported, and will continue to

support. the efforts of SIPC and OlEA to improve investor education and awareness

relating to SIPA and SIPC. We will encourage SIPC to consider and. as appropriate,

implement OIEA's suggestions to improve investor awareness.

RUf;",mumdation 12: "[TM], in coordinaJlon with {OlEA} and In consultation with the

Commission, should utilize more effective me/hods /0 communicate with iffl1estors in case

ofthefai/lITe ofbrolcer-dealers such as notifying i7JVeslors ofthe status ofthe

Commission's efforts throughout/he liquidation process or designating an employee, as

appropriate, who can directly communicate with investors on mailers unique to each

liquiddtion case. ..

TM concurs with this recommendation. 1M will coordinate with OlEA to

develop more effective methods to commwticate with investors affected by broker-dealer

failures and will consult with the Commission as part ofthis process.

••• ••
Appendix V 

SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

45

MEMORANDUM

To:· Office ofInspector General

From: Office ofthe General Counsel 8-){

Subj: OIG's Draft Report - SEC's Oversight ofthe Secwities Investor Protection

Cotpmatioo's Activities

Date: March 23, 2011

IIltroduction

On February 28, 2011, the Office ofInspector General. circulated its Discussion

Draft- SEC's Oversight ofllie Secwities Investor Protection Corporation's Activities.

On. March 7, 2011 the Office ofthe General Counsel ("OGCj submitted a memorandum

offering both technical and substantive comments on this Discussion Draft. On March 9,

2011, the Office ofInspector General circulated its Draft - SEC's OverSight ofthe

Securities Investor Protection Corporation's Activities. The DIG has requested that DOC

concur or not concur with its recommendations and to provide comments on this Draft __<t.

OGC's Responses to RecommeadatiODS 01 Draft Report (as ameoded)

Rec:ommendatiOD 3 - OGC concurs.

Rec:ommendatiOD 4 - OGC CODCurs.

RecOlDmendation 7 - DOC concurs to the extent that the recommendation affects OGC.

Recommendation 8 - Joint Comment with 1M - TM and OGC generally concur with

this recommendation and will consult with each other to determine the scope and

frequency ofthe SEC staff's monitoring ofSJPC's assessment ofthe reasonableness of

trustee fees and to determine the respective roles ofTM and OGC in the monitoring.

Between examinations, TM and OGC will also review fee applications to make sure they

follow the U.S. Trustee guidelines and that SIPC has conducted a thorough review ofthe

reasonableness oftrustee fees. TM and OGC are not in a position to make: an indepc:ndcnt

assessment ofthe reasonableness oftrustee fees, because TM and OGC would need to,

but do not. activdy participate in the aetua11iquidation proceeding in a meaningful way.
Appendix V 

SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

46

MEMORANDUM

March 24, 2011

TO: H. David Kotz,.lnspector General

Office ofInspector General

FROM, John H. Walsh, Associate Direc~rrP-- l<tJ.../fk.-F /(/::,..

'efCounsel (Designated Audit LiaiSOn)

John S. Polise, Associate Directo

Helene K. McOee, Assistant Di

Office ofCompliance Inspections and Examinations

COPY: Carlo di Florio, Director

Office ofCompliance Inspections and Examinations

Robert W. Cook, Director

Division ofTrading and Markets

RE, Office ofCompliance Inspections and Examinations' Response to the Office ofInspector

Oeneral's Draft Report. SEC's Oversight ofthe Securities Investor Protection

Corporation's Activities

<J!j)Jl

The Office ofCompliance Inspections and Examinations ("ocm',) submits this Memorandum. in

response to the Office ofInspector General's \,OJO'') draft report entitled "SEC's Oversight ofthe

Securities Investor Protection Corporation's Activities," dated March 9, 2011 ("Report''). This

Memorandum responds to OIO's rcx:ommendations that OCIE and the Division ofTrading and Markets

("TM") should (1) conduct meetings to detennine when an inspection ofthe Securities Investor

Protection CoIPOration ("SIPC") should occur; and (2) continue to perfonn risk assessments of

problematic areas or liquidations prior to the next inspection of SIPC. You have requested that we

indicate whether we "concur" or "Don-concur" with each recommendation. We have consulted with TM

and are in general agreement that we concur with these recommendations.

Set forth below are our responses to the recommendations directed to ocm contained in the Report.

Reconrntendation 5: "[TlJ] and [OCIE] should conduct meetings, at least on an annual basis, to

determine when an inspection of[SIPC} should occur based on the ongoing liquidations to ensure

systematic and risk-based monitoring o/SIPC's operation. In these meetings. TMand OCIE should

develop a schedule forfuture inspections based upon objective criteria or defined risk-factors. such as

conducting inspections based upon the number ofSIPC liquidations. .,

DelE concurs that regular meeQ.ngs with TM would be useful in helping us achieve our objective of

systematic and risk·based monitoring ofSIPC's operations. As noted in the Report, ocm and TM last

performed an inspection ofSIPC in 2003 and a follow-up inspection in 2005 to assess SIPC's activities.

In early 2010, OCIE and TMjointly detennined that an inspection ofSIPC in 2010 would not be

prudent due to SIPC's involvement in certain ongoing large liquidations. The staffofTM has been
Appendix V 

SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

47

OClE's Response to OIG Audit - Report No. 495

March 24,2011

actively involved in these liquidations and a considerable amount of SIPC's resources have been

directed towards these liquidations. Based OD these factors, ocm and TM determined that our

resources would be better utilized by waiting for these liquidations to be substantially completed prior to

our next inspection ofSIPC. We also considered the possible disruption an inspection could cause to

SIPC and its activities with respect to these highly complex liquidations and determined that investors

would be better served ifwe waited to commence an inspection ofSIPC. We note also that examiners

do not review liquidations that are in progress because ofthe disruption it could cause to the liquidation

proceedings.

To date, meetings between ocm and 1M regarding the inspection of SIPC have generally been

informal in nature. For example, we consult with 1M on an annual basis in preparation of ocm's

memorandum that sets forth the annual goals and objectives ofthe National Exam Program. The

purpose ofthis memorandum includes identifying risk areas for concentration on inspections. The

memorandum generally includes our goals and objectives with respect to SIPC.

We agree that ocm and TM should conduct more formal periodic meetings regarding inspections of

SIPC. We have discussed this recommendation with 1M and have agreed to meet at least annually for

the purpose ofdetermining when an inspection ofSIPC should occur. In thesemcetin:gs, ocm and TM

will assess whether to commence an inspection of SIPC. OCIE and TM have also agreed to develop

objective criteria or defined risk-factors that will be used to develop a schedule for future inspections.

We concur with the Report's assessment that an approach that considers objective criteria or defined

risk-based factors in detennining when SIPC should be inspected is preferable to an approach that calls

for a set inspection cycle every four to five years) without due consideration to these other factors.

RUb_n4atjqn 6: "(TM) and{OCIE] shouldperform a risk. assessment to determilU! problematic

arelU or liquidations that are deemed to be complex prior to the next inspection of[SIPC] as they did so

prior to lhe commencement oflhe 2003 inspection ofSIPe. The scope ofeachfuJure inspection should

lake into consideration the risk assessment conductedprior 10 lhe inspection. .,

We arc pleased that the Report agrees with the risk-based approach OCIE and TM took prior to the

commencement ofour2003 and 2005 inspections of SIPc. ocm continues to improve and enhance i.ts

risk-based approach to examination preparation and execution and draws on multiple sources ofdata to

ensure our risk assessment process is strategic and efficient in identifYing problematic areas. For SIPC

inspections,. this would include identifying high-risk or complex liquidations. We therefore concur with

the recommendation that ocm and TM should continue to perform a risk assessment to determine

problematic areas or liquidations that are deemed to be complex prior to inspections of SIPC. We also

concur that the scope ofeach future inspection of SIPC should take into consideration these risk

assessments.

2
Appendix VI

SEC’s Oversight of the Securities Investor Protection Corporation’s Activities March 30, 2011

Report No. 495

48

OIG Response to Management’s Comments

The OIG is pleased that TM, OCIE, and OGC concurred with all of the report’s 12 

recommendations. We are also encouraged that TM, OGC, and OCIE have 

agreed to work together to implement our recommendations and to ensure the 

effectiveness of the SEC’s oversight of SIPC’s activities.

We wish to re-emphasize the importance of TM and OCIE developing schedules 

for regular inspections of SIPC and making determinations at their annual 

meetings of specific dates for SIPC inspections even if every meeting may not 

result in a determination of a specific date. We also believe that it is critical for 

TM and the bankruptcy group in OGC to engage in significant additional 

oversight of SIPC’s assessments of the reasonableness of trustee fees, including 

careful and comprehensive review of fee applications; to encourage SIPC to 

negotiate greater fee reductions; and to seriously consider requesting that 

Congress modify SIPA to allow bankruptcy judges to scrutinize fees of trustees 

and their counsel, particularly in no-asset cases. We believe that the 

implementation of these recommendations will enhance the SEC’s monitoring of 

SIPC and will further ensure that, consistent with the intent of Congress in 

enacting SIPA, the investing public is provided adequate protection against 

losses caused by the failure of broker-dealers. 
Audit Requests and Ideas

The Office of Inspector General welcomes your input. If you would like to 

request an audit in the future or have an audit idea, please contact us at

U.S. Securities and Exchange Commission

Office of Inspector General

Attn: Assistant Inspector General, Audits (Audit Request/Idea)

100 F Street, N.E.

Washington D.C. 20549-2736

Tel. #: 202-551-6061

Fax #: 202-772-9265

Email: oig@sec.gov

Hotline 

To report fraud, waste, abuse, and mismanagement at the SEC, 

contact the Office of Inspector General at:

Phone: 877.442.0854

Web-Based Hotline Complaint Form:

www.reportlineweb.com/sec_oig