GAO-04-848R Follow-Up on SIPC 

July 9, 2004 

The Honorable John D. Dingell 

Ranking Minority Member 

Committee on Energy and Commerce 

House of Representatives 

The Honorable Barney Frank 

Ranking Minority Member 

Committee on Financial Services 

House of Representatives 

The Honorable Paul E. Kanjorski 

Ranking Minority Member 

Subcommittee on Capital Markets, 

 Insurance and Government Sponsored Enterprises 

Committee on Financial Services 

House of Representatives 

Subject: Follow-Up on GAO Recommendations Concerning the Securities Investor 

Protection Corporation 

The Securities Investor Protection Act of 1970 (SIPA), which established the Securities 

Investor Protection Corporation (SIPC) to provide certain financial protections to the 

customers of insolvent securities firms, gave the Securities and Exchange Commission 

(SEC) responsibility to oversee SIPC. Our May 2001 report Securities Investor 

Protection: Steps Needed to Better Disclose SIPC Policies to Investors stated that both 

SIPC and SEC could better disclose information on SIPC’s policies, practices, and 

coverage to investors.1

 In July 2003 we reported that SEC had taken steps to improve its 

oversight of SIPC and that both SEC and SIPC had enhanced their efforts to educate 

investors but additional steps were needed.2

 In that report, we 

• noted that both entities could still do more to disseminate information to 

investors about SIPC and how to avoid investment fraud; 

 

1

U.S. General Accounting Office, Securities Investor Protection: Steps Needed to Better Disclose SIPC 

Policies to Investors, GAO-01-653 (Washington, D.C.: May 25, 2001). 2

U.S. General Accounting Office, Securities Investor Protection: Update on Matters Related to the 

Securities Investor Protection Corporation, GAO-03-811 (Washington, D.C.: July 11, 2003). 

United States General Accounting Office

Washington, DC 20548 
2 GAO-04-848R Follow-Up on SIPC 

• summarized a 2003 SEC examination report of SIPC that recommended, among 

other things, that SIPC improve its controls over trustee fees and establish 

guidance to determine the validity of unauthorized trading claims;3

• found that three of the four major insurance companies that offered excess SIPC 

insurance—private insurance that securities firms can purchase to cover claims 

that are in excess of the $500,000 (which includes $100,000 cash) limits set by 

SIPA—had stopped underwriting such policies; and 

• found that disclosures were lacking concerning the scope and terms of excess 

SIPC coverage and the claims process. 

This letter responds to your August 11, 2003, request that we report on the status of our 

recommendations relating to SEC’s oversight of SIPC and investor education. As 

requested, this letter also includes information on SIPC’s progress in implementing SEC’s 

recommendations from its January 2003 examination of SIPC and the status of excess 

SIPC coverage. Specifically, our objectives were to (1) determine the status of our 

recommendations to SEC and SIPC from our two previous reports on SIPC, (2) review 

recent actions SIPC has taken to address recommendations from the 2003 SEC 

examination report, and (3) determine the status of excess SIPC coverage after three 

U.S. insurers ceased offering the product. 

To determine the status of our recommendations to SEC and SIPC, we interviewed 

officials from SEC, SIPC, the New York Stock Exchange (NYSE), and the National 

Association of Securities Dealers (NASD) and reviewed sections of SIPC’s Trustee Guide 

and other relevant documents. To review SIPC’s progress in implementing SEC’s 

recommendations, we interviewed representatives from SEC’s Office of Compliance, 

Inspections, and Examinations (OCIE) and reviewed sections of SIPC’s Trustee Guide 

regarding SIPC’s policies on documentation of fees and services and record retention. 

To determine the status of excess SIPC coverage, we interviewed officials representing 

the only two insurers currently offering the product, the Customer Assets Protection 

Company (CAPCO), a consortium of 14 large securities firms created in response to the 

three insurance companies leaving the market; and Lloyd’s of London. We conducted 

our work from April through June 2004 in accordance with generally accepted 

government auditing standards. 

Results in Brief 

SEC has implemented three of the five outstanding recommendations from our previous 

two reports on SIPC and is still responding to two of them, and SIPC has implemented 

our recommendation. First, in response to our recommendation that SEC establish a 

formal procedure to share information about SIPC among its various divisions and 

offices, SEC held a few formal meetings and subsequently determined that holding 

informal meetings on an as needed basis was more effective. In our discussions, SEC 

 

3

A trade is considered as unauthorized when the securities firm buys or sells securities from a customer’s 

account without approval. 
3 GAO-04-848R Follow-Up on SIPC 

staff representing the various divisions and offices involved with SIPC issues agreed that 

this format allowed for the sharing of relevant information; therefore, we considered this 

to be an effective response to our recommendation. Second, SEC has implemented our 

two recommendations aimed at improving the information that securities firms provide 

to investors about excess SIPC protection. As recommended, SEC directed the selfregulatory organizations (SRO)—NYSE and NASD—to send notices to member firms 

instructing them to tell their customers about any changes in or loss of excess SIPC 

protection and to provide them with meaningful disclosures about the protections the 

policies now offer. However, SEC is still in the process of responding to our 

recommendations requiring (1) that clearing firms include information on account 

statements about documenting unauthorized trades in writing and (2) that securities 

firms distribute SIPC brochures to new customers. SIPC has also taken steps to 

implement our recommendation on improving investor awareness of SIPC and 

cautioning investors to avoid unintentionally ratifying an unauthorized trade. As 

recommended, SIPC has updated its brochure and Web site to provide links to specific 

Web pages to help investors access relevant information about investment fraud and 

other potentially useful information on investing. 

SEC staff are currently following up on SEC’s recommendations to SIPC contained in the 

SEC’s examination report of SIPC dated January 2003. Although SEC staff are in the 

process of determining whether all of SIPC’s responses to their 2003 recommendations 

are adequate, their preliminary findings indicate that SIPC has taken steps to improve its 

policies and operations. In response to SEC’s recommendations, SIPC has updated its 

Trustee Guide to include (1) additional guidance on establishing valid unauthorized 

trading claims, (2) additional requirements for trustees and counsel concerning record 

keeping and filing of invoices for their services and expenses, and (3) a requirement 

governing record retention on liquidation proceedings. 

Currently, only two insurers underwrite excess SIPC policies—CAPCO and Lloyd’s of 

London. After three major domestic insurers discontinued offering excess SIPC 

coverage in December 2003, a consortium of 14 securities firms organized and 

capitalized CAPCO to offer excess SIPC coverage to customers of the securities firms. 

CAPCO’s policy is similar to those previously offered by the domestic insurers. To help 

the securities firms provide meaningful disclosures on the level of coverage, CAPCO 

designed its Web site to include information on its excess SIPC policy, instructions on 

filing claims for excess coverage, a sample copy of the policy, and a sample claim form. 

We provided a copy of the draft report to SEC and SIPC for comment and both SEC and 

SIPC generally agreed with the contents of our report. 

Background 

SIPC’s statutory mission is to promote confidence in securities markets by allowing for 

the prompt return of missing customer cash or securities held at a failed securities firm. 

As required under law, SIPC either liquidates a failed securities firm itself (in cases 

where the liabilities are limited and there are fewer than 500 customers) or a trustee 

selected by SIPC and appointed by the court liquidates the securities firm. When 
4 GAO-04-848R Follow-Up on SIPC 

possible, accounts at a failed securities firm are transferred to another securities firm, 

and when necessary, SIPC or a trustee attempt to satisfy the “net equity” claims of 

customers.4 SIPC is not intended to keep securities firms from failing or to shield 

investors from losses caused by changes in the market value of securities. 

Customers of a failed brokerage firm will receive all securities (such as stocks and 

bonds) that are already registered in their name or are in the process of being registered. 

After this first step, the firm’s remaining customer assets are then divided on a pro rata 

basis, with funds shared in proportion to the size of claims. If sufficient funds are not 

available in the firm’s customer accounts to satisfy claims within these limits, the reserve 

funds of SIPC are used to supplement the distribution, up to a ceiling of $500,000 per 

customer, including a maximum of $100,000 for cash claims. For example, if only 98 

percent of a liquidated firm’s customer assets could be accounted for, customers would 

receive 98 percent each of their net equity claims. Thus, a customer with net equity of 

$10 million would receive 98 percent, or $9.8 million. SIPC would then use its reserve 

fund to purchase $200,000 in securities, assuming that the customer had a valid claim for 

securities, and the customer would recover the entire $10 million. 

To protect customers who have claims in excess of the SIPC limit, insurers began 

offering excess SIPC coverage to securities firms. However, such claims above the SIPA 

limit have been rare. The amount of customer funds recovered determines if the investor 

will have a loss and whether excess SIPC coverage would be triggered. For example, if 

the trustee determined that 50 percent of the customer assets were missing, a customer 

who is owed $1 million in assets would receive a $500,000 pro rata share from the estate 

and an advance from SIPC at its statutory limit of $500,000. However, a customer with 

$5 million in net equity with the same 50 percent pro rata share would receive a pro rata 

share of $2.5 million from the firm’s customer assets and an SIPC advance of $500,000, 

and would have an unsatisfied net equity claim of $2 million that could be eligible for 

excess SIPC coverage, if offered by the securities firm. Conversely, a customer with $5 

million in assets and a pro rata share of 90 percent or higher would be made whole by 

SIPC. 

SIPA gives SEC oversight responsibility for SIPC. SEC must approve all proposed 

changes to rules or bylaws and may require SIPC to adopt, amend, or repeal any of them. 

In addition, SIPA authorizes SEC to conduct inspections and examinations of SIPC and 

requires SIPC to furnish any reports and records that SEC believes fulfill the purposes of 

SIPA, are necessary or appropriate, or are “in the public interest.” A number of the SEC’s 

divisions and offices have various responsibilities with respect to SIPC, with the Division 

of Market Regulation having the primary responsibility for ensuring SIPC’s compliance 

with SIPA. 

 

4

SIPA generally defines net equity as the value of cash or securities in a customer’s account as of the filing 

date, less any money owed to the firm, plus any indebtedness the customer has paid back with the trustee’s 

approval within 60 days after notice of the liquidation proceeding was published. The filing date typically 

is the date that SIPC applies to a federal district court for any order initiating proceedings. 
5 GAO-04-848R Follow-Up on SIPC 

SEC and SIPC Have Taken Steps to Address Our Recommendations 

Our 2003 report on SIPC noted that SEC and SIPC had made significant progress toward 

addressing our concerns about SEC’s oversight of SIPC and the information SEC and 

SIPC provided to investors about SIPC’s policies and practices. However, we also found 

that additional work needed to be done. Since then, SEC has taken actions to address all 

five of the outstanding recommendations either directly or indirectly by delegating 

implementation to the SROs. SIPC has also responded fully to our recommendation. 

SEC Has Worked with the SROs to Address Our Recommendations

First, we recommended in our 2001 report that SEC implement a recommendation made 

by the SEC’s Inspector General in a 2000 review that the Division of Market Regulation, 

the Division of Enforcement, the Northeast Regional Office (NERO), and OCIE conduct 

periodic briefings to share information related to SIPC. When our 2003 report was 

issued, SEC officials said they had begun to hold quarterly meetings but questioned 

whether these meetings were useful. The SEC officials said that holding informal 

meetings as SIPC issues arise would be more effective. During this review, SEC officials 

said they have since met several times when SIPC-related issues have arisen. For 

example, officials representing General Counsel, Market Regulation, OCIE, and NERO 

have met a few times in 2004 to discuss the progress of OCIE’s recent follow-up work at 

SIPC. In the view of the SEC officials involved, a reasonable amount of coordination on 

SIPC issues has occurred across SEC offices. Officials from several SEC offices, 

including Market Regulation, General Counsel, and NERO, agreed that in their view 

periodic meetings, as the need arises, provided effective oversight of SIPC. As long as all 

of the relevant SEC units continue to meet and share information about SIPC-related 

issues, this approach effectively responds to the concern our recommendation was 

intended to address. 

Second, to ensure that investors were told about any changes in their excess SIPC 

coverage, in 2003 we recommended that SEC and the SROs monitor how securities firms 

informed customers of any changes in or loss of protection. In March 2003, SEC had 

begun a limited review of SIPC-related issues. However, because most of the securities 

firms that had excess SIPC coverage were NYSE members, SEC asked NYSE to gather 

information about excess SIPC coverage and information about the policies. When 

several underwriters decided to stop providing coverage, SEC suspended most of its 

review activity. Given the concerns that we and others had raised about excess SIPC 

coverage, in 2003 SEC agreed to work with the SROs on our recommendation. In July 

2003, both NASD and NYSE instructed their member firms to provide customers with 30 

days’ notice before any reduction in or termination of the securities firms’ excess SIPC 

coverage. 

Next, we recommended in 2003 that SEC and the SROs ensure that securities firms 

offering excess SIPC coverage provide investors with meaningful disclosures about the 

protections the policies offer. According to SEC and CAPCO officials, in response to our 

findings CAPCO began including in its policies a more detailed explanation of how and 

when claims for excess SIPC coverage would be paid. Our review of CAPCO’s Web site 
6 GAO-04-848R Follow-Up on SIPC 

revealed that it had posted a detailed description of policy coverage and a sample copy 

of the policy and had included procedures for filing a claim and a copy of the claim form. 

In addition, an NYSE official said that its examiners reviewed a member firm’s Web site 

during an examination of the securities firm to ensure that the Web site contained 

meaningful disclosures about excess SIPC protection. 

Fourth, we recommended in 2001 that SEC, in conjunction with the SROs, establish a 

uniform disclosure rule requiring clearing securities firms to put a standard statement 

about documenting unauthorized trading claims on their trade confirmations, other 

account statements, or both. According to SEC officials, both NASD and NYSE are 

supportive of this recommendation and will implement it through rule making. As of 

June 25, 2004, according to an SEC official, NASD had begun to draft the rule but had not 

submitted the draft rule to SEC. 

Lastly, we recommended in 2001 that SEC require SIPC member securities firms to 

provide the SIPC brochure to their customers when they open an account and encourage 

firms to distribute the brochure to existing customers more widely. This 

recommendation was an additional step aimed at educating and better informing 

customers about how to protect their investments and the extent of SIPC coverage. The 

updated SIPC informational brochure, called How SIPC Protects You, provides useful 

information about SIPC and its coverage.5

 However, SIPC bylaws and SEC rules do not 

require SIPC members to distribute the brochure to their customers; only SEC or the 

SROs can institute such a requirement. SEC included this recommendation in its April 

15, 2003, letter about SIPC issues to NYSE and NASD and asked them to explore how it 

could be implemented through SRO rule making and notices to members. According to 

SEC and SRO officials, the SROs will not be fully implementing the recommendation 

because, among other things, they are concerned that the cost of purchasing the 

brochures would outweigh the benefits and have instead decided to require the 

securities firms to add a telephone number on the new account document that interested 

customers can call for information on SIPC. The SIPC brochures are available to 

securities firms for customer distribution, but at a cost. A SIPC official told us that SIPC 

prints only a small number of the brochures for responding to public requests that it 

receives and for the federal distribution center located in Colorado.6

 The brochures are 

available to the securities firms through NASD and the Securities Industry Association 

(SIA). SIPC sends a copy of the brochure to NASD and SIA, which are responsible for 

the printing and the cost of the brochures. According to an NASD official, securities 

firms must pay NASD $15 per 25 brochures, plus shipping costs. Similarly, SIA charges 

75 cents per brochure, plus shipping costs. We continue to believe it is important for 

investors to be adequately informed about SIPC and its coverage and that there may be 

other alternatives to getting the SIPC brochure to clients. However, if the SROs decide 

that the costs outweigh the benefits for member firms to include the SIPC brochure with 

every new account package, then at a minimum the SROs may want to consider 

 

5

For a copy of SIPC’s brochure, see http://www.sipc.org/how/brochure.cfm. 

6

The Pueblo Public Documents Distribution Center is a branch of the Superintendent of Documents, 

Government Printing Office. 
7 GAO-04-848R Follow-Up on SIPC 

encouraging securities firms to provide their customers with both SIPC’s telephone 

number and Web site address on a new account document. 

SIPC Has Taken Steps to Improve Investor Education

In our 2003 report, we made one recommendation to SIPC to take an additional step to 

ensure that investors had access to information and guidance that would help them 

protect themselves against fraud and unauthorized trading. Specifically, we 

recommended that SIPC revise its brochure to provide links to informative pages on 

relevant Web sites. In responding to our recommendation, SIPC provided a reference in 

its brochure to the SIPC Web site, which has been updated to provide links to the Web 

pages it cites. This approach addresses the intent of our recommendation. 

SIPC Has Taken Steps to Address SEC’s 2003 Recommendations 

In January 2003, SEC completed an examination assessing SIPC’s policies and 

procedures for liquidating failed securities firms. The examination identified several 

areas that needed improving and made recommendations to that effort. As of July 2004, 

SEC staff were following up with SIPC to determine whether the actions it had taken 

adequately addressed the recommendations. SEC representatives said their preliminary 

findings indicated that SIPC had begun to take steps to address SEC’s 2003 

recommendations. 

• SEC found that SIPC should continue to review the information it provides to 

investors about its policies and practices. For example, SEC found that some 

statements in SIPC’s brochure and on its Web site might overstate the extent of SIPC 

coverage and mislead investors. In response, SIPC has included in its new brochure 

statements clarifying the extent of SIPC coverage. Further, SIPC has undertaken 

other investor education initiatives to inform the public of its mission and the 

protection offered under SIPA and to explain SIPC’s role in protecting customers. 

These initiatives include, among others, radio and television public service 

announcements to publicize the extent of protection and a training program on SIPC 

and proceedings for a securities firm liquidation that was presented to the District of 

Columbia Bar Association. 

• SEC found that there was insufficient guidance for SIPC personnel and trustees to 

follow when determining whether claimants had established valid unauthorized 

trading claims, one of the principle sources of investor complaints. As 

recommended, SIPC adopted written guidance in its Trustee Guide for reviewing 

unauthorized trading claims. 

• SEC also found that SIPC had inadequate controls over the fees and expenses 

awarded to trustees and their counsel. To address SEC’s concern, SIPC is in the 

process of enhancing its controls for reviewing and assessing fees. First, it has 

updated the Trustee Guide to require trustees and counsel in SIPC cases to submit 

quarterly invoices and arrange billing records into project categories. In addition, 

SIPC has implemented procedures requiring SIPC personnel to document discussions 
8 GAO-04-848R Follow-Up on SIPC 

with trustees and counsel regarding fee applications and to note any differences in 

the amounts requested and the amounts recommended for payment. 

• In addition, SEC found that SIPC lacked a retention policy for records generated in 

liquidations with an outside trustee. In response to SEC’s recommendation, SIPC 

updated its Trustee Guide to include a requirement that outside trustees retain 

records of liquidation proceedings for 5 years from the date the proceeding closes. 

Two Insurers Underwrite Excess SIPC Policies 

In 2003, we reported that three of the four major insurance companies that underwrite 

excess SIPC policies would stop offering this product that year. Although no claims had 

been paid since the coverage was first offered in the 1970s and many had viewed the 

coverage as a marketing or advertising cost, some securities firms felt that excess SIPC 

coverage policies increased investor confidence in the securities firms. As a result of the 

three insurers leaving the market, many of the securities firms that offered excess SIPC 

coverage began exploring several options, including letting the coverage expire, 

purchasing coverage from the remaining underwriter—Lloyd’s of London—or creating a 

“captive” insurance company to provide the coverage.7

 Since that time, several large 

clearing and carrying securities firms that are NASD members have purchased excess 

SIPC coverage from Lloyd’s. In addition, in December 2003 a consortium of 14 NYSE 

member firms organized and capitalized CAPCO, an insurance company licensed in the 

state of New York. According to CAPCO’s December 2003 press release, the excess SIPC 

coverage offered by CAPCO will be similar to the excess SIPC coverage previously 

available from the domestic insurers. 

The policies underwritten by the two insurers differ in two areas. In addition to a cap on 

the amount of coverage per customer, one insurer capped the overall exposure—one 

policy we reviewed established an aggregate cap of $250 million—regardless of the total 

amount of customer claims. The other insurer did not set any specific dollar limits. The 

two insurers also had different customer bases that would be eligible for protection. Like 

SIPC coverage, which excludes certain customers such as officers and directors of the 

failed securities firm, one insurer also excluded these customers. Conversely, the other 

insurer extended coverage to officers and directors of the failed securities firm as long as 

they were not involved with any fraud that had contributed to the securities firm’s 

demise. 

Agency Comments 

We provided a copy of the draft report to SEC and SIPC for comment. SEC and SIPC 

generally agreed with the contents of our report and provided us with written comments, 

which are reprinted in enclosures I and II, respectively. In addition, both SEC and SIPC 

 

7

A captive insurance company is a type of self-insurance whereby an insurance company insures all or part 

of the risks of its parent. This company is created when a business or a group of businesses form a 

corporation to insure or reinsure their own risk. 
9 GAO-04-848R Follow-Up on SIPC 

provided us with technical comments, which we incorporated into this report where 

appropriate. 

As agreed with your offices, unless you publicly release its contents earlier, we plan no 

further distribution of this report until 30 days from its issue date. At that time, we will 

send copies of this report to the Chairman, House Committee on Energy and Commerce; 

the Chairman, House Committee on Financial Services; and the Chairman, Subcommittee 

on Capital Markets, Insurance and Government Sponsored Enterprises, House 

Committee on Financial Services. We will also send copies to the Chairman of SEC and 

the Chairman of SIPC and make copies available to others upon request. In addition, the 

report will be available at no charge on the GAO Web site at http://www.gao.gov. 

Please call me or Karen Tremba, Assistant Director, at (202) 512-8678 if you or your staff 

have any questions concerning this report. Nancy Eibeck also contributed to this report. 

Orice M. Williams 

Acting Director, Financial Markets 

 and Community Investment 

Enclosures 
Enclosure I 

10 GAO-04-848R Follow-Up on SIPC 

Comments from the Securities and Exchange Commission 
Enclosure II 

11 GAO-04-848R Follow-Up on SIPC 

Comments from the Securities Investor Protection Corporation

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