Securities Investor Protection: Update on Matters Related to the Securities Investor Protection Corporation
Published: 2003-07-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As result of ongoing concerns about the adequacy of disclosures provided to investors about the Securities Investor Protection Corporation (SIPC) and investors' responsibilities to protect their investments, GAO issued a report in 2001 entitled Securities Investor Protection: Steps Needed to Better Disclose SIPC Policies to Investors (GAO-01-653). GAO was asked to determine the status of recommendations made to the Securities and Exchange Commission (SEC) and SIPC in that report. GAO was also asked to review a number of issues involving excess SIPC insurance, private insurance securities firms purchase to cover accounts that are in excess of SIPC's statutory limits.
section_title: What GAO Found
paragraphs: SEC has taken steps to implement each of the seven recommendations directed to SEC in GAO's May 2001 report. SEC has updated its Web site to provide investors with more information about SIPC's policies and practices, particularly with regard to unauthorized trading and nonmember affiliate claims. SEC has taken other steps consistent with our recommendations to improve its oversight of SIPC and is working with self-regulatory organizations (SRO) to increase investor awareness of SIPC's policies through distribution of the SIPC brochure and disclosures on account statements. Likewise, SIPC has taken steps to implement the three recommendations directed to SIPC in our 2001 report, but additional work is needed on one. SIPC has updated its brochure and Web site to clarify that investors should complain in writing to their securities firms about suspected unauthorized trades. SIPC also expanded a statement in its brochure that discusses market risk and SIPC coverage and amended its advertising bylaws to require firms that display an expanded statement about SIPC to include a reference or link to SIPC's Web site. Moreover, SEC, the NASD, and many securities firms provide the recommended disclosures about the scope of SIPC coverage to investors on their Web sites. SIPC also added links to Web sites in its brochure that offer information about investment fraud. However, investors could benefit from more specific links to investor education information. Until this year, certain well-capitalized, large, and regional securities firms were able to purchase and provide excess SIPC coverage from four major insurers. The insurance policies varied by firm and insurer in terms of the amount of coverage offered per customer and in aggregate per firm. Attorneys familiar with the policies agreed that the disclosure of the coverage and the terms of coverage could be improved. During the review, GAO found that three of the four major insurers that offered excess SIPC coverage in 2002 stopped underwriting these policies in 2003. Consequently, as the policies expire in 2003, most insurers are not renewing their existing policies and have stopped underwriting new policies. At this time, holders of the insurance policies have not decided what to do going forward. However, several options are being explored including self-insuring and purchasing policies from the remaining major insurer.

section_title: Letter
paragraphs: Disclosure has an important role in securities market regulation, and the  Securities Investor Protection Corporation (SIPC) has a responsibility to  inform investors of actions they can take to protect their investments and  help ensure that investors are afforded the full protections allowable under  the Securities Investor Protection Act of 1970 (SIPA). In our 2001 report,  we concluded that many investors were unaware of the steps they should  take to protect their investments. We found that SIPC and the Securities  and Exchange Commission (SEC), which play vital roles in investor  education, had missed opportunities to disclose information on SIPC’s  policies, practices, and coverage to investors. Our report contained 10  recommendations to SEC and SIPC about ways to improve the information  available to the public about SIPC and SEC’s oversight of SIPC.
This report responds to your August 16, 2001, and October 30, 2001,  requests that we followup on our 2001 report recommendations. As  requested, this report also includes information about “excess SIPC,”  which refers to private insurance that securities firms can purchase to  cover customer claims that are in excess of the $500,000 (which includes  $100,000 cash) limits established by SIPA. Excess SIPC policies typically  cover cash and securities like SIPC, but the dollar amount of the coverage  can vary from net equity coverage to a specific dollar amount. Although the  policies are advertised as excess SIPC, not all policies may be consistent  with SIPA. In light of these concerns, you asked that we review  implications for investors and possible investor misunderstanding about  these policies.
To determine the status of our 2001 report recommendations to SEC and  SIPC, we interviewed relevant officials from SEC and SIPC to determine  what steps they had taken to implement our recommendations since May  2001. We verified changes to SEC and SIPC Web sites and SIPC’s brochure  to determine what SEC and SIPC disclosed to investors regarding SIPC’s  policies and practices regarding unauthorized trading and nonmember  affiliate issues. We also spoke with self-regulatory organization (SRO)  officials about related disclosure issues. To address issues surrounding  excess SIPC coverage, we interviewed SEC, SIPC, and SRO staff;  representatives from underwriters and insurance brokers; securities firms  (policy holders); SIPC trustees; and attorneys knowledgeable about excess  SIPC. We also reviewed a sample of excess SIPC policies, including one  policy from each of the four major underwriters that provided coverage in  2002. We conducted our work from October 2002 through July 2003 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: SIPA established SIPC to provide certain financial protections to the  customers of insolvent securities firms. As required under law, SIPC either  liquidates a failed firm itself (in cases where the liabilities are limited and  there are less than 500 customers) or a trustee selected by SIPC and  appointed by the court liquidates the firm. In either situation, SIPC is  authorized to make advances from its customer protection fund to  promptly satisfy customer claims for missing cash and securities up to  amounts specified in SIPA. Between 1971 and 2002, SIPC initiated a total of  304 liquidation proceedings and paid about $406 million to satisfy such  customer claims.
subsections: section_title: SIPC’s Mission
paragraphs: SIPC was established in response to a specific problem facing the  securities industry in the late 1960s:  how to ensure that customers recover  their cash and securities from securities firms that fail or cease operations  and cannot meet their custodial obligations to customers. The problem  peaked in the late 1960s, when outdated methods of processing securities  trades, coupled with the lack of a centralized clearing system able to  handle a large surge in trading volume, led to widespread accounting and  reporting mistakes and abuses at securities firms. Before many firms could  modernize their trade processing operations, stock prices declined sharply,  which resulted in hundreds of securities firms merging, failing, or going out  of business. During that period, some firms used customer property for  proprietary activities, and procedures broke down for proper customer  account management, making it difficult to locate and deliver securities  belonging to customers. The breakdown resulted in customer losses  exceeding $100 million because failed firms could not account for their  customers’ property. Congress became concerned that a repetition of these  events could undermine public confidence in the securities markets.
SIPC’s statutory mission is to promote confidence in securities markets by  allowing for the prompt return of missing customer cash and/or securities  held at a failed firm. SIPC fulfills its mission by initiating liquidation  proceedings when appropriate and transferring customer accounts to  another securities firm or returning the cash or securities to the customer  by restoring to customer accounts the customer’s “net equity.” SIPC 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 by the customer, 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 an  order initiating proceedings.  SIPA sets coverage at a maximum of  $500,000 per customer, of which no more than $100,000 may be a claim for  cash. SIPC is not intended to keep firms from failing or to shield investors  from losses caused by changes in the market value of securities.
SIPC is a nonprofit corporation governed by a seven-member Board of  Directors that includes two U.S. government, three industry, and two public  representatives. SIPC has 31 staff located in Washington, D.C. Most  securities firms that are registered as broker-dealers under Section 15(b) of  the Securities Exchange Act of 1934 automatically become SIPC members,  regardless of whether they hold customer property. As of December 31,  2002, SIPC had 6,679 members. SIPA excludes from membership securities  firms whose principal business—as determined by SIPC subject to SEC  review—is conducted outside of the United States, its territories, and possessions. Also, a securities firm is not required to be a SIPC member if  its business consists solely of (1) distributing shares of mutual funds or unit  investment trusts, (2) selling variable annuities, (3) providing insurance,  or (4) rendering investment advisory services to one or more registered  investment companies or insurance company separate accounts. SIPA, as  recently amended, also exempts a certain class of firms that are registered  with SEC solely because they may affect transactions in single stock  futures.
SIPA covers most types of securities such as notes, stocks, bonds, and  certificates of deposit. However, some investments are not covered. SIPA  does not cover any interest in gold, silver, or other commodity; commodity  contract; or commodity option. Also, SIPA does not cover investment  contracts that are not registered as securities with SEC under the  Securities Act of 1933. Shares of mutual funds are protected securities; but  securities firms that deal only in mutual funds are not SIPC members, and  thus their customers are not protected by SIPC. In addition, SIPA does not  cover situations where an individual has a debtor-creditor relationship,  such as a lending arrangement, with a SIPC member firm.
Investors who attain SIPC customer status are a preferred class of  creditors compared with other individuals or companies that have claims  against the failed firm and are much more likely to get a part or all of their  claims satisfied. This is because SIPC customers share in any customer  property that the bankrupt firm possesses before any other creditors may  do so. Although bankers and brokers are customers under SIPA, they are  not eligible for SIPC fund advances. SIPA states that most customers are  eligible for SIPC assistance, but SIPC funds may not be used to pay claims  of any failed brokerage firm customer who is   a general partner, officer, or director of the firm;   the beneficial owner of 5 percent or more of any class of equity security  of the firm (other than certain nonconvertible preferred stocks);  a limited partner with a participation of 5 percent or more in the net  assets or net profits of the firm;  someone with the power to exercise a controlling influence over the  management or policies of the firm; and   a broker or dealer or bank acting for itself rather than for its own  customer or customers.
The SIPC fund was valued at $1.26 billion as of December 31, 2002, which it  uses to make advances to trustees for customer claims and to cover the  administrative expenses of a liquidation proceeding. Administrative  expenses in a SIPA liquidation include the expenses incurred by a trustee  and the trustee’s staff, legal counsel, and other advisors. The SIPC fund is  financed by annual assessments on all member firms—periodically set by  SIPC—and interest generated from its investments in U.S. Treasury notes.  SIPC, after consultation with the SROs, sets the amount of member  assessments based on the amount necessary to maintain the fund and  repay any borrowings by SIPC. At different times during the 1970s, 1980s,  and 1990s members were assessed at a higher rate. Rates fluctuated  depending on the level of expenses. SIPC’s board of directors attempted to  match assessment rate increases with declines in the fund balance, so that  years of high SIPC expenses were followed by periods of higher  assessments. Since 1996, SIPC has charged each broker-dealer member an annual assessment of $150. If the SIPC fund becomes or appears to be  insufficient to carry out the purposes of SIPA, SIPC may borrow up to   $1 billion from the U.S. Treasury through SEC (i.e., SEC would borrow the  funds from the U.S. Treasury and then relend the funds to SIPC). In  addition, SIPC has a $1 billion line of credit with a consortium of banks.
section_title: SEC Oversight of SIPC
paragraphs: SIPA gives SEC oversight responsibility over SIPC. SEC’s primary mission  is to protect investors and the integrity of the securities markets. SEC  seeks to fulfill its mission by requiring public companies to disclose  financial and other information to the public. SEC is also responsible for  conducting investigations of potential securities law violations and  overseeing SROs such as securities exchanges, as well as broker-dealers  (securities firms), mutual funds, investment advisors, and public utility  holding companies. SEC may sue SIPC to compel it to act to protect  investors. SIPC must submit all proposed changes to rules or bylaws to  SEC for approval; and SEC may require SIPC to adopt, amend, or repeal  any bylaw or rule. In addition, SIPA authorizes SEC to conduct  inspections and examinations of SIPC and requires SIPC to furnish SEC  with reports and records that it believes are necessary or appropriate in the  public interest or to fulfill the purposes of SIPA.
section_title: SEC Rules Strengthen Customer Protection in the Securities Market
paragraphs: The law that created SIPC also required SEC to strengthen customer  protection and increase investor confidence in the securities markets by  increasing the financial responsibility of broker-dealers. Pursuant to this  mandate, SEC developed a framework for customer protection based on  two key rules: (1) the customer protection rule and (2) the net capital rule.  These rules respectively require broker-dealers that carry customer  accounts to (1) keep customer cash and securities separate from those of  the company itself and (2) maintain sufficient liquid assets to protect  customer interests if the firm ceases doing business. SEC and SROs, such  as NYSE, are responsible for enforcing the net capital and customer  protection rules.
section_title: Excess SIPC Coverage Was Introduced in the 1970s
paragraphs: Under a typical SIPC property distribution process, SIPC customers are to  receive any securities that the firms holds that are registered in their name  or that are being registered in their name, subject to the payment of any  debt to the firm. If some of the customer assets are missing and cannot be  found by the trustee, the customer will receive a pro rata share of the firm’s  remaining customer property. In addition, SIPC is required to replace  missing securities and cash in an investor’s account up to the statutory  limits. For firms with excess SIPC policies, this coverage would be  available as well. For example, if a firm is liquidated by a SIPC trustee that  should have $10 billion in customer assets, but the trustee can account for  only $9.8 billion or 98 percent of the $10 billion in assets, each customer  would receive 98 percent of their net equity (pro rata share). A customer  with net equity of $10 million would receive 98 percent or $9.8 million of  their $10 million. In addition the trustee may use up to $500,000 advanced  from the SIPC fund to satisfy the customer’s claim, but only $100,000 may  be advanced for cash. With a $200,000 advance from SIPC, the customer in  this example would have received the entire $10 million in assets owed. To  protect customers who have claims in excess of the SIPC limit, Travelers  Bond first began offering excess SIPC coverage to brokerage firms in  1970, soon after SIPA was enacted. Other companies began to join the  market in the mid-1980s. However, such claims above the SIPA limit are  rare and regulatory and industry officials confirmed that most customers  would not be affected by such policies because their accounts are within  the SIPA limits.
As seen in table 1, the amount of customer funds recovered determines if  the investor will have a loss and whether excess SIPC 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  assets with the same 50 percent pro rata share would have $2 million in  excess of the $500,000 SIPC advance and 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 and would not have losses in excess of SIPC limits.
section_title: SEC Has Taken Steps to Address Our Recommendations
paragraphs: In our 2001 report, we made seven recommendations to SEC to address  needed improvements to information it provided to investors about SIPC’s  policies and practices, particularly regarding the evidentiary standard for  unauthorized trading claims and to expand its review of SIPC operations  among others. SEC has taken action to address all of the recommendations  either directly or indirectly by delegating the implementation to the SROs.
First, we recommended that SEC review sections of its Web site and, where  appropriate, advise customers to complain promptly in writing when they  believe trades in their account were not authorized. This advice should  include an explanation of SIPC’s policies and practices regarding claims  and a general warning about how to avoid ratifying potentially  unauthorized trades during telephone conversations. In 2001, we found that  SIPC liquidations involving unauthorized trading accounted for nearly two- thirds of all liquidations initiated from 1996 through 2000. SIPC’s policies  and practices in these liquidation proceedings generated controversy,  primarily because of the large numbers of claims that were denied and the  methods used to satisfy certain approved claims.
In addition, we found that SIPC’s policies and practices were often not  transparent to investors and SEC had missed opportunities to provide  investors with consistent information about SIPC’s evidentiary standard for  unauthorized trading.  For example, some sections of SEC’s Web site  encouraged investors to call to complain about unauthorized trades, while  other sections told the investor to complain immediately in writing.  Although the telephone-based approach SEC recommended was  reasonable if the firm acted in good faith to resolve problem trades,  fraudulently operated firms were known to have used high pressure and/or  fraudulent tactics to convince persons who called to complain about  potentially unauthorized trades to ratify these trades. In response to our  recommendation, SEC updated sections of its Web site to include  consistent information on making unauthorized trading complaints in  writing. In addition, they expanded the section entitled Cold Calling to  include warnings about high-pressure sales tactics that some brokers may  use.
Second, we recommended that SEC require firms that it determines to have  engaged in or are engaging in systematic or pervasive unauthorized trading  to prominently notify their customers about the importance of  documenting disputed transactions in writing.  In 2001, we found that  although SEC may identify and impose sanctions on firms that have  engaged in pervasive unauthorized trading long before they ever become  SIPA liquidations, it does not routinely require such firms to notify their  clients about documenting unauthorized trading claims. For example,  between 1992 and 1997, one securities firm operated under intensive SEC  and court supervision in connection with, among other violations,  pervasive unauthorized trading and stock price manipulation. However,  there was no requirement that the firm notify their customers to document  their complaints in writing. Imposing this requirement could help investors  protect their interests and benefit unsophisticated investors who may not  review the SIPC brochure or other disclosures made on account  statements. At the time the report was issued, SEC had agreed to  implement this requirement on a case-by-case basis. Since 2001, SEC  officials said that they have not had a case that required this action.  Moreover, SEC officials noted that their first course of action would be to  shut down firms that engage in pervasive unauthorized trading.
Third, we recommended that SEC update its Web site to inform investors  about the frauds that may be associated with certain SIPC member firms  and their affiliates as well as the steps that can be taken to avoid falling  victim to such frauds. SIPC’s policies and practices in liquidations of  member firms that had nonmember affiliates have also been controversial  because SIPC and trustees have denied many claims in such liquidation  proceedings. In 2001, we found that SEC had missed opportunities to  educate investors about the potential risks associated with certain  nonmember affiliates. SEC’s Web site provided limited information about  dealing with nonmember affiliates, and investors may not have been fully  aware of the risks that can be associated with certain nonmember  affiliates. In response to this recommendation, SEC updated an on-line  publication called Securities Investor Protection Corporation, which  discusses the problems that can occur when investors place their cash or  securities with non-SIPC members. Investors are also told to always make  sure that the securities firm and clearing firm are members of SIPC  because firms are required by law to tell you if they are not.
Next, we recommended that SEC take several actions to improve its  oversight of SIPC. Specifically, we recommended that SEC implement the  SEC IG’s recommendation that the Division of Market Regulation, the  Division of Enforcement, the Northeast Regional Office (NERO) and the  Office of Compliance, Inspections, and Examinations (OCIE) conduct  periodic briefings to share information related to SIPC. In 2000, SEC’s IG  found that communication among SEC’s internal units regarding SIPC  could be improved. Although the SEC IG report found that SEC officials  tried to keep each other informed about relevant SIPC issues, there was no  formal procedure for doing so. At the time our report was issued, SEC had  not yet implemented this recommendation, and we recommended that they  do so. SEC officials said that they began to hold quarterly meetings, but  determined that more frequent, informal meetings were more effective.  They said that they meet to discuss SIPC as issues arise, which is typically  more than once every quarter. As long as SEC continues to meet frequently  and share information among all the relevant units, this approach  effectively responds to the concern our recommendation was intended to  address.
Fifth, we recommended that SEC expand its ongoing examination of SIPC  to include a larger number of liquidations with claims involving  unauthorized trading or nonmember affiliate issues. SEC periodically  conducts examinations of SIPC’s operations to ensure compliance with  SIPA. In May 2000, the Division of Market Regulation and OCIE initiated a  joint examination of SIPC. As of March 2001, SEC had included four SIPA  liquidations involving unauthorized trading in its sample, but had not  included any liquidations involving nonmember affiliate issues. Given the  controversies involving SIPA’s liquidations involving unauthorized trading  and nonmember affiliates, we believed that including a larger number of  liquidations with these types of claims was warranted. SEC agreed with  this recommendation and included a larger number of liquidations  involving unauthorized trading or nonmember affiliate issues in the sample  used for the review. Of the eight liquidations in SEC’s sample, five involved  unauthorized trading and two involved nonmember affiliate issues.
SEC completed its examination in January 2003 and issued its examination  report in April 2003, which assessed SIPC’s policies and procedures for  liquidating failed securities firms and identified several areas of  improvement that warrant SIPC’s consideration.
SEC found that there was insufficient guidance for SIPC personnel and  trustees to follow when determining whether claimants have  established valid unauthorized trading claims. Although the evidentiary  standards used were found to be reasonable, the standards differed  between trustees. Therefore, SEC recommended that SIPC develop  written guidance to help establish consistency between trustees and  liquidations. SIPC agreed to adopt such written guidance for reviewing  unauthorized trading claims.
Concerning SIPC’s investor education programs, SEC found that SIPC  should continue to review the information that it provides to investors  about its policies and practices. For example, SEC found that some  statements in SIPC’s brochure and Web site might overstate the extent  of SIPC coverage and mislead investors. SIPC plans to continue to  reexamine the adequacy of the information provided in its brochure and  Web site to eliminate any potential confusion.
SEC also found that SIPC should improve its controls over the fees  awarded to trustees and their counsel for the services rendered and  their expenses. SEC found that some descriptions of the work that the  trustees performed were vague, making it difficult to assess whether the  work was necessary or appropriate. SEC believed that SIPC could do a  better job of reviewing and assessing fees that were requested. SIPC  agreed to ask trustees and counsel in SIPC cases to submit invoices at  least quarterly and arrange billing records into project categories. SIPC  also agreed to instruct its personnel to document discussions with  trustees and counsel regarding fee applications and to note any  differences in amounts initially requested by trustees and counsel and  those amounts recommended for payment by SIPC.
In addition, SEC found that SIPC lacks a record retention policy for  records generated in liquidations where SIPC appoints an outside  trustee. It was found that trustees had different procedures for retention  of records, and SEC was not able to review records from one liquidation  because the trustee had destroyed the records. SIPC has agreed to  develop a uniform record retention policy for all SIPA liquidations,  following a cost analysis.
SEC also found that the SIPC fund was at risk in the case of failure of  one or more of the large securities firms. SEC found that even if SIPC  were to triple the fund in size, a very large liquidation could deplete the  fund. Therefore, SEC suggested that SIPC examine alternative strategies  for dealing with the costs of such a large liquidation. SIPC management  agreed to bring this issue to the attention of the Board of Directors, who  evaluates the adequacy of the fund on a regular basis.
Also as part of SEC’s ongoing oversight effort, in September of 2000, SEC’s  Office of General Counsel (OGC) initiated a 1-year pilot program to  monitor SIPA liquidations. According to SEC, the primary objective of the  pilot program was to provide oversight of claims determinations in SIPA  liquidation proceedings in order to make certain that the determinations  were consistent with SIPA. According to SEC officials, this program has  since been made permanent.  SEC’s OGC now enters notices of appearance  in all SIPA liquidation proceedings. The cases are followed mostly by  NERO and the Midwest Regional Office, given the significant numbers of  SIPA liquidations in these locations. The staff can recommend that  Commission staff intervene in SIPA liquidations, if appropriate.
Sixth, we recommended that SEC, in conjunction with the SROs, establish  a uniform disclosure rule requiring clearing firms to put a standard  statement about documenting unauthorized trading claims on their trade  confirmations and/or other account statements. In 2001, we found that  SEC, NASD, and the NYSE, did not have requirements that clearing firms  notify customers that they should immediately complain in writing about  allegedly unauthorized trades. A review of a judgmental sample of trade  confirmations and account statements found that many firms voluntarily  notify their customers to immediately complain if they experience any  problems with their trades, but instructions about the next course of action  varied and did not necessarily specify that the investor should complain in  writing. Initially, SEC expressed concern about promulgating a rule itself.  However, in 2003, SEC began to take steps to implement this  recommendation. Specifically, SEC has asked NYSE and NASD to explore  how this recommendation can be more fully implemented through SRO  rulemaking and Notices to Members. As of June 9, the SROs were still  evaluating how best to implement this recommendation. According to an  SRO official, concern about potentially penalizing investors who may not  complain in writing but may file claims in other forums, such as arbitration  proceedings, will need to be resolved. However, SEC believes that they will  be able to craft acceptable language that ensures that these investors are  not harmed.
Lastly, we recommended that SEC require SIPC member 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.  The SIPC informational brochure called How SIPC Protects You provides  useful information about SIPC and its coverage. However, SIPC bylaws and  SEC rules do not require SIPC members to distribute the brochure to their  customers. The authority lies with SEC or the SROs to require the firms to  provide the brochure to their customers. To date, it is unclear what action  will be taken. SEC officials expressed concern about imposing another rule  on securities firms. Instead, SEC included this recommendation in its letter  to NYSE and NASD to explore how this could be implemented through SRO  rulemaking and Notices to Members. According to SEC and SRO officials,  both NASD and NYSE are in the process of exploring how best to  implement this recommendation. SEC officials said that they did not  expect the SROs to have problems implementing this recommendation.
section_title: SIPC Has Taken Steps to Improve Investor Education
paragraphs: In our 2001 report, we made three recommendations to SIPC to improve  the information available to investors about its coverage, particularly with  regard to unauthorized trading. In addition to taking steps to implement  our recommendations, SIPC has continued a nationwide investor  education program that addresses many of the specific issues raised in our  2001 report. SIPC has a responsibility to inform investors of actions they  can take to protect their investments and help ensure that they are afforded  the full protections allowable under SIPA. Our 2001 report found that  investors might confuse the coverage offered by SIPC, Federal Deposit  Insurance Corporation (FDIC), and state insurance guarantee associations  and not fully understand the protection offered under SIPA. This was  significant because the type of financial protection that SIPC provides is  similar to that provided by these programs, but important differences exist.  To address these and other investor education issues, SIPC began a major  public education campaign in 2000. As part of the campaign, SIPC worked  with a public relations firm to make its Web site and brochure more reader  friendly and less focused on legal terminology. The changes were designed  to ensure that the Web site is easy to use and written in plain English. In  addition to revising its brochure and Web site, SIPC produced a series of  audio and video public service announcements (PSA). From June 15,  2002, to November 15, 2002, the PSAs were aired over 76,000 times.  According to SIPC’s 2002 annual report, the TV PSAs have appeared on 129  stations, in 106 cities, in 46 states; and the radio spots have aired on 415  stations, in 249 cities, in 49 states. They have also been aired nationally on  CNBC and the Fox News Channel.
SIPC and its public relations firm are continuing to work together to  improve investor awareness of SIPC and its policies. They are developing a  new television and radio campaign scheduled to begin in July 2003. They  are also working to better explain the claims process through a new  brochure and video. The claims process brochure will provide information  to individuals that do not have access to the Internet.  This investor  education campaign has increased the amount and clarity of information  available about SIPC and has provided investors who review it with  important information.
As mentioned, in addition to identifying investor education concerns in our  2001 report, we recommended that SIPC take three specific actions to  improve its disclosure. First, we recommended that SIPC revise its  brochure and Web site to include a full explanation of the steps necessary  to document unauthorized trading claims. SIPC has determined, and courts  have agreed, that an objective evidentiary standard, such as written  complaints, is necessary to protect the SIPC fund from fraudulent claims.  However, in our 2001 report, we found that SIPC had also missed  opportunities to provide investors with complete information about dealing  with unauthorized trading. For example, we found that claimants in 87  percent of the claims we reviewed telephoned complaints to their brokers.  Given that many investment transactions are largely made by telephone,  we were concerned that investors were not aware of the importance of  documenting their complaints in writing if they were ever required to file a  claim with SIPC. Furthermore, we found the SIPC brochure did not advise  investors that SIPA covers unauthorized trading and that investors should  promptly complain in writing about allegedly unauthorized trades. As  previously mentioned, the brochure was revised as part of the investor  education campaign and now includes the statement, “If you ever discover  an error in a confirmation or statement, you should immediately bring the  error to the attention of the , in writing.” In addition, SIPC has created  a Web page, entitled Documenting an Unauthorized Trade, which includes  the same information on complaining in writing to the firm about any  errors. “Most market losses are a normal part of the ups and downs of the risk-oriented world of  investing. That is why SIPC does not bail out investors when the value of their stocks,  bonds, and other investments fall for any reason. Instead, SIPC replaces missing stocks and  other securities where it is possible to do so…even when investments have increased in  value.”
In addition, SIPC amended its advertising bylaws in 2002 to require firms  that choose to make an explanatory statement about SIPC to include a link  to the SIPC Web site. This will further enable the customer to access  information about what SIPC does and does not cover. NASD and SEC have  also begun to make disclosures about SIPC and market risk to investors.  For example, the NASD Web site says, “SIPC does not protect against  market risk, which is the risk inherent in a fluctuating market. It protects  the value of the securities held by the  as of the time the SIPC trustee  is appointed.” SEC informs investors that “SIPC does not protect you  against losses caused by a decline in the market value of your securities.”  Furthermore, many securities firms also include similar statements about  SIPC protection on their Web sites. SIPC’s statement about market risk and  amended bylaws as well as the availability of other disclosures by the  regulators and firms effectively responds to the concern our  recommendation was intended to address.
Finally, we recommended that SIPC revise its brochure to warn investors to  exercise caution in ratifying potential unauthorized trades in telephone  discussions with firm officials. SIPC believes that the statement discussed  above encouraging investors to complain in writing about unauthorized  trades in its brochure and Web site will make oral ratification unlikely.  SIPC officials also maintain that this type of information is best handled in  those publications and Web pages that warn investors about securities  fraud. Therefore, in its brochure, SIPC provides links to several Web sites,  such as SEC’s, that have investor education information about investment  fraud. However SIPC provides links to only the main Web site and not to  the specific Web pages that contain the relevant information, so investors  may have difficulty locating information about specific types of fraud, such  as unauthorized trading. For example, based on the Web address provided  in the brochure, investors searching SEC’s Web site for “fraud,” would be  linked to over 5,000 possible sites. SIPC also recommends the Securities  Industry Association (SIA) Web site for information about investment  fraud. However, based on the information SIPC provided, a search for  “unauthorized trading” on this Web site yields only three results, none of  which send the investor to useful educational information contained on the  Web site. Investors are also directed to NASD’s Web site, which has a page  entitled Investors Best Practices, which includes detailed information on  cold calling and unauthorized trading. However, an investor may not be  able to find this useful information without specific links to the relevant  Web pages for this and other Web sites listed in the brochure. For example,  a search for “unauthorized trading” on NASD’s Web site only yields one  result, which provides a link to a definition for unauthorized trading but no  reference to the useful educational information.
section_title: Terms of Existing Excess SIPC Policies Vary, and Most Insurers Have Stopped Underwriting New Policies
paragraphs: Excess SIPC coverage is generally offered by well-capitalized, large, and  regional securities firms and is generally marketed by the firms as  additional protection for their large account holders. Our review of the  excess SIPC policies offered by the four major insurers found the policies  varied by firm and insurer in terms of the amount of coverage offered per  customer and in aggregate per firm. In our review of some of the policies,  we found that excess SIPC coverage was not uniform and was not  necessarily consistent with SIPC protection. Attorneys familiar with the  policies also agreed that the disclosure of the coverage and the terms of  coverage could be improved. During our review, three of the four major  insurers that offered excess SIPC coverage in 2002 stopped underwriting  these policies in 2003 for a variety of reasons. Consequently, as the policies  expire, most insurers are not renewing their existing policies beyond 2003  and have stopped underwriting new policies in general. At this time, it is  unclear what some of the securities firms that had excess SIPC coverage  plan to do going forward.
subsections: section_title: Excess SIPC Coverage Is Generally Limited to Larger Firms
paragraphs: Excess SIPC is generally limited to certain well-capitalized, large, and  regional firms that have a relatively low probability of being part of a SIPC  liquidation. Moreover, the policies—usually structured as surety bonds— are generally purchased by clearing firms. The insurance underwriters of  excess SIPC policies told us that they use strict underwriting guidelines  and have minimum requirements for a firm requesting coverage. Most  insurers evaluate a securities firm for excess SIPC coverage by reviewing  its operational and financial risks. Insurers also consider the firm’s internal  control and risk management systems, the type of business that the firm  conducts, its size, its reputation, and the number of years in business. Some  insurers also required the firms to annually submit information on the  number and value of customer accounts above the $500,000 SIPC limit, to  help gauge their maximum potential exposure in the unlikely event that the  firm became part of a SIPC liquidation. Firms below a certain dollar net  capital threshold were generally not considered for coverage.
section_title: Excess SIPC Coverage Is Not Uniform and Is Not Necessarily Consistent with SIPC Coverage
paragraphs: Although an excess SIPC claim has never been filed in the more than 30  years that the coverage has been offered, we identified several potential  investor protection issues. Our review of excess SIPC policies, which  included one from each of the four major insurers, revealed that excess  SIPC coverage is not uniform and that some policies are not always  consistent with SIPC coverage. Although the policies were advertised as  covering losses (or losses up to an amount specified in the policy) that  would otherwise be covered by SIPC except for the $500,000 limit, we  found that claims under the policies could be subject to various terms and  limitations that do not apply to SIPC coverage. Attorneys familiar with  SIPA and excess SIPC have also raised questions about who is covered in  the policies and how the claims process would work in the case of a firm’s  bankruptcy. These potential inconsistencies or concerns include  Some policies included customers that would generally be  ineligible under SIPA. The wording in some of the policies could be  interpreted as protecting individuals who are not customers eligible for  SIPC advances. Others contained specific riders that expanded the  excess SIPC policy to include classes of customers beyond those  covered by SIPC. For example, some policies have riders that extend  coverage to officers and directors of the failed firm, as long as they are  not involved with any fraud that contributed to the firm’s demise. As  mentioned previously, SIPC coverage excludes certain customers, such  as officers and directors of the failed firm and broker-dealers and banks  acting on their own behalf.
Some policies limited the duration of coverage. Each policy we  reviewed provided coverage only if SIPC were to institute judicial  proceedings to liquidate the firm while the policy was in effect.  Three of  the four policies provided for specific periods of time during which they  were in effect, as well as for cancellation by the insurer under specified  conditions. Although each of the three policies required the securities  firm to notify its customers of a cancellation, none of the policies  expected notification to the customers regarding expiration.
According to NYSE and NASD, there are not any specific SRO rules that  require these firms to notify their customers. However, NYSE said that  they generally expect firms to notify investors of any changes in their  excess SIPC protection under rules involving disclosure requirements  for fees changes. NASD generally expects firms to notify their  customers under NASD’s Just and Equitable Rule.
Some excess SIPC policies varied from SIPA in scope of  coverage. Certain policies also differed from SIPA in terms of the scope  of excess coverage. Specifically, customer cash, which would generally  be covered under SIPA, was not covered by two of the policies we  reviewed. One of the policies specifically restricted coverage to lost  securities; the other described coverage as pertaining only to a  customer’s claim for “loss of securities.” Also, in addition to a cap on  the amount of coverage per customer, one policy contained a cap on the  insurer’s overall exposure—the policy established an aggregate cap of  $250 million—regardless of the total amount of customer claims. SIPC  has no such aggregate cap.
The mechanics of the claims process were unclear. In addition to  limitations on coverage, at least one policy had other characteristics  that could either restrict a customer’s ability to recover losses that  exceed the amount covered under SIPA or delay a customer’s recovery  until long after the net equity covered by the insurance has been  determined. The policy conditioned the customer’s recovery upon the  customer providing the insurer with a claim notice subject to specific  time, form, and content specifications. Among other things, the  customer was required to submit a written claim accompanied by  evidence satisfactory to the insurer and an assignment to the insurer of  the customer’s rights against the firm. The other policies did not address  when a customer must file a claim.
The role of the trustee in the claims process was unclear. Another  difference we found is the role of the trustee regarding customer claims  under SIPA and excess SIPC coverage policies. Under SIPA, the trustee  acts on behalf of customers who properly file claims to see that they  recover losses as provided in SIPA. It is unclear whether the trustee  could represent customers on claims for excess insurance because, in  some cases, the policies indicate that only individual customers could  bring claims and, in any case, the trustee may not have authority under  the bankruptcy laws to do so. SIPC trustees and other attorneys  experienced with SIPA liquidations also agreed that it was not clear who  was responsible for filing the claim, the customer or the trustee.
The policies did not clearly state when a claim would be paid. The  policies also differed from SIPC coverage regarding when customers  could recover their losses. For purposes of SIPC coverage, the trustee  discharges obligations of the debtor from available customer property  and, if necessary, SIPC advances, without waiting for the court to rule  on customer property and net equity share calculations. Under the  excess coverage policies, it is unclear when customers would be eligible  to recover assets in excess of those replaced by SIPC. Some of the  policies provide for “prompt” replacement or payment of the portion of  a customer’s covered net equity. In contrast to SIPC coverage, however,  they specify that the insurer shall not be liable for a claim until the  customer’s net equity has been “finally determined by a competent  tribunal or by written agreement between the Trustee and the  Company,” which could take years. Under another policy, the insurer  could wait until after liquidation of the broker-dealer’s general estate  before replacing a customers’ missing assets. The general creditor  claims process could also take several years. An attorney  knowledgeable about SIPC and excess SIPC said that some policies  indicate that the insurance company has no liability until the customer  claim is paid by SIPC. However, in many cases SIPC does not directly  pay investors, but does so through a trustee. Therefore, the policy, if  taken literally, would preclude an investor from ever being paid through  excess SIPC insurance.
Excess SIPC coverage appears to be limited to clearing firm  failures. Most of the excess SIPC polices we reviewed provide that only  the policy holder, usually a clearing firm, is covered under the policy.  Introducing firms of clearing firms may advertise the coverage provided  by their clearing firm. For example, we reviewed the Web sites of 53  introducing firms and found that about 25 percent advertised the excess  SIPC protection provided by the clearing firm. This creates the potential  for investor confusion because the coverage would apply only in the  case of the clearing firm’s failure. Because introducing firms do not clear  securities transactions or hold customer cash or securities, the  customer’s assets should be unaffected in the event of an introducing  firm’s failure. However, there have been cases where customer funds  were “lost” before they were sent to the clearing firm, typically due to  fraudulent activity.  If the introducing firm fails while the assets are still  with the introducing firm but the clearing firm continues to operate,  investors may not be aware that the excess SIPC protection would only  apply in the event of the clearing firm’s failure. Conversely, SIPC will  initiate liquidation proceedings against introducing firms and protect  their investors in certain situations.
section_title: Three of the Four Major Insurers Identified Stopped Underwriting Excess SIPC Policies in 2003
paragraphs: During our review, three of the four major insurers that offered excess  SIPC coverage in 2002 stopped underwriting these policies beyond 2003.  The insurers provided various reasons for not continuing to underwrite  excess SIPC policies, such as their concern about the complexity of  quantifying their maximum probable loss. In addition, officials from  securities firms and attorneys knowledgeable about excess SIPC had  opinions about why the insurers are no longer underwriting excess SIPC  policies.
According to the insurers that have stopped offering excess SIPC, they  made a business decision to stop offering the coverage after reviewing their  existing product offerings. They said that this practice of periodically  reviewing product lines and profitability is not uncommon. Most of the  underwriters were property and casualty insurance companies, and the  excess SIPC product was viewed as a relatively small part of their standard  product line and provided low return in the form of premiums relative to  the significant potential risk exposure. Some of the underwriters said that  documenting and explaining the potential risk associated with excess SIPC  policies is difficult. For example, the maximum potential loss for excess  SIPC could be significant because it is simply the aggregate of all customer  account balances over SIPC’s $500,000 limit. Quantifying the probability of  loss, which would be significantly less, is much more difficult because  insurers have never had a claims-related loss associated with the excess  SIPC policies; therefore, no historical loss data exists.
Another insurer said credit rating agencies began to ask questions about  potential risk exposures from excess SIPC; and rather than risk a change to  its credit rating, it opted to stop providing the coverage given the limited  number of policies it underwrote. Others in the industry said that in light  of the Enron Corporation failure and the losses experienced by the  insurance underwriters that had exposure from Enron-related surety  bonds, credit rating agencies have begun to more closely scrutinize  potential losses and risk exposures of insurance companies overall. While  surety bonds are still considered relatively low-risk products, insurers are  more sensitive to their potential risk exposures. As mentioned, given the  absence of actuarial data it is difficult for insurers to quantify the maximum  probable losses from excess SIPC.
Securities firms and others also had opinions about why insurers stopped  underwriting the policies. Some believed that a general lack of knowledge  about the securities industry and SIPC, in particular, might have  contributed to the products being withdrawn from the market. Many firms  said that the risk of an excess SIPC claim ever being filed is low for two  primary reasons. First, securities firms that carry customer accounts are  required to adhere to certain customer protection rules. Specifically, firms  must keep customer cash and securities separate from those of the firm  itself and maintain sufficient liquid assets to protect customer interests if  the firm ceases doing business. Moreover, SEC and the SROs have  established inspection schedules and procedures to routinely monitor  broker-dealer compliance with customer protection (segregation of assets)  and net capital rules. Firms not in compliance can be closed.
Second, SIPA liquidations are rare in general and claims in excess of the  SIPA limit are even more rare. For example, since 1998, more than 4,000  firms have gone out of business, but less than 1 percent or 37 firms became  part of a SIPA liquidation proceeding. This is consistent with historical data  dating back to the 1970s. Moreover, since 1971 of the almost 623,000 claims  satisfied in completed or substantially completed cases as of December 31,  2002, a total of 310 were for values in excess of SIPC limits (less than one- tenth of 1 percent). Of these 310 claims, 210 were filed before 1978 when  the limit was raised to $500,000. Only two firms involved in a SIPA  liquidation have offered excess SIPC, but no claims have been filed to date.  According to officials knowledgeable about a 2001 proceeding, which  included a firm with an excess SIPC policy, claims for excess SIPC are  likely to be filed. However, the amount of claims to be filed are unclear at  this time.
section_title: Securities Firms Are Exploring a Variety of Options
paragraphs: Most of the six holders of the excess SIPC policies we contacted are  currently exploring a number of options; but at this time, it is unclear what  most will do. Although most said that the coverage is largely a marketing  tool, some felt that the policies increased investor confidence in the firm  because an independent third party (the insurance company) had  examined the financial and operational risks of the firm prior to providing  them coverage. Several of the firms and those in the  securities industry we  contacted said that they were surprised to learn that the insurers planned  to stop providing excess SIPC coverage. Therefore, most firms are still  exploring a number of options on how best to proceed, including   Self-insuring or creating a “captive” insurance company that would offer  the coverage. However, firm officials involved in exploring the captive  expressed concerns about whether they could establish the insurance  company by the end of 2003. Others questioned whether this option was  feasible given the competitive nature of the securities industry.
Purchasing policies from the remaining major insurer. While some have  already chosen this option, officials from some of the larger firms said  that this might not be an acceptable option because the remaining  insurer generally limits the amount of the coverage per firm. Firms that  currently offer net equity coverage were concerned that their high net  worth customers may not be satisfied with a policy that has a cap on its  coverage. Additionally, the policy of the remaining underwriter raised  the most questions about its consistency with SIPC coverage.
Letting the policies expire and not replacing them. Some of the firms we  spoke with said that the larger firms really do not need the excess SIPC  because they are well capitalized and the existing customer protection  rules offer sufficient protection. However, some officials said that if one  larger firm continued to offer the coverage, they all would have to  continue to offer the coverage in order to effectively compete for high,  net worth client business. Other firm officials suggested that SIPA might  need to be reexamined in light of the numerous changes that have  occurred in securities markets since 1970. Some officials said that at a  minimum, the SIPA securities limit of $500,000 should be raised to $1.5  million. Another said that it is still possible that another insurance  company may decide to fill the void left by the companies exiting the  business. Other industry officials said that they were still in negotiations  with the remaining insurer to increase the coverage limits, which was a  concern for the larger firms.
Many of the securities firms we spoke with had policies that will expire by  the end of 2003. All planned to notify affected customers, but many had not  developed specific time frames. Most firms said that they planned to have  some type of comparable coverage, which could mitigate the importance of  notifying customers. In the interim, several securities firms have asked SIA  to produce information for the firms to use when talking to their customers  about SIPA and the protections they have under the act. The information  being developed for the securities firms is to also include information  about SIPC, excess SIPC, and how securities markets work.  As mentioned  previously, NYSE officials said that there is no specific rule that requires  securities firms to notify investors if the SIPC coverage expires without  being replaced. However, they generally expect firms to notify customers  under rules concerning fee disclosure requirements. Likewise, NASD  officials said that it had no specific rule requirements but would generally  expect firms to notify affected investors under general rules concerning  just and equitable principles.
In March 2003, in response to concerns raised about excess SIPC coverage  and the potential investor protection issues, SEC began its own limited  review of these issues. Initially, SEC planned to collect information on the  securities firms that offer the coverage, the major providers, and the nature  of the coverage offered. Because most of the firms that have excess SIPC  coverage are NYSE members, SEC asked NYSE to gather information  about excess SIPC coverage and information about the policies. In  response, NYSE compiled information on its members with excess SIPC  insurance policies and their insurers. NYSE also analyzed other data and  descriptive statistics such as assets protected under excess SIPC. NYSE  also reviewed the coverage offered by the major insurers. Out of more than  250 NYSE members, they determined that 123 had excess SIPC insurance  coverage and that most of the members were insured by one of the four  major insurance providers. However, when several underwriters decided to  stop providing the coverage, SEC suspended most of its review activity and  has not actively monitored the changes in the availability of the coverage or  the firms’ plans going forward. Given the changes occurring in this market  and the potential concerns about the policies, SEC officials agreed that  they should continue to monitor these ongoing developments to ensure  that investors are obtaining adequate and accurate information about  whether excess SIPC coverage exists and what protection it provides.
section_title: Conclusions
paragraphs: SEC and SIPC have taken steps to implement all of the recommendations  made in our May 2001 report. However, SEC has some additional work to  do with the SROs to implement two of our recommendations. Although  SEC has asked the SROs to explore actions to encourage broader  dissemination of the SIPC brochure to customers and to include  information on periodic statements or trade confirmations to inform  investors that they should document any unauthorized trading complaints,  no final actions have been taken to implement these recommendations.
We also found that SIPC has substantially revamped its brochure and Web  site and continues to be committed to improving its investor education  program to ensure that investors have access to information about  investing and the role and function of SIPC. By doing so, SIPC has shown a  commitment to making its operations more transparent. We did note,  however, that SIPC’s response to our recommendation about warning  customers about unintentionally ratifying unauthorized trades, has not  completely addressed our concern that investors have specific information  about the risks of unintentionally ratifying trades when talking to brokers.  In 2001, we recommended that SIPC revise its brochure to warn investors  to exercise caution in discussions with firm officials. Rather than including  this information in its brochure, SIPC revised its brochure to provide  references or links to Web sites, such as SEC and NASD, but not to the  specific investor education oriented Web pages discussing ratifying  potentially unauthorized trades or fraud. We found that these broad  references make it difficult or virtually impossible for investors to find the  relevant information. More specific links to investor education Web pages  within each Web site would mitigate this problem.
Concerning excess coverage, three of the four major insurance companies  stopped underwriting excess SIPC policies in 2003 after reevaluating their  potential risk exposures and product offerings. Although an excess SIPC  claim has never been filed to date, insurance companies have become more  sensitive to potential risk exposures in light of their recent experience with  Enron and other high profile failures. Most made business decisions to stop  offering this apparently low-risk product. Many of the firms appear to have  been surprised by this decision and are exploring several options, including  letting the coverage expire, purchasing coverage from the remaining  underwriter, or creating a captive insurance company to provide the  coverage. Given the limitations and concerns we and others have raised  about the protection afforded investors under excess SIPC, including  limitations on scope and terms of coverage and an overall lack of  information on the claims process and when claims would be paid, SEC  and the SROs have vital roles to play in ensuring that existing and future  disclosures concerning excess SIPC accurately reflect the level of  protection afforded customers.
section_title: Recommendations
paragraphs: As SIPC continues to revamp and refine its investor education program, we  recommend that the Chairman, SIPC, revise SIPC’s brochure to provide  links to specific pages on the relevant Web sites to help investors access  information about avoiding ratifying potentially unauthorized trades in  discussions with firm officials and other potentially useful information  about investing.
Given the concerns that we and others have raised about excess SIPC  coverage, we also recommend that the Chairman SEC, in conjunction with  the SROs, ensure that firms are providing investors with meaningful  disclosures about the protections provided by any new or existing excess  SIPC policies. Furthermore, we recommend that SEC and the SROs  monitor how firms inform customers of any changes in or loss of excess  SIPC protection to ensure that investors are informed of any changes in  their coverage.
section_title: Agency Comments
paragraphs: SEC and SIPC generally agreed with our report findings and  recommendations. However, SIPC said that providing more specific  linkages in its brochure would prove problematic because of the frequency  in which Web sites are changed. Rather, they agreed to provide a reference  in the brochure to the SIPC Web site, which will provide more specific links  to the relevant portions of the sited web pages. We agree that this  alternative approach would implement the intent of our recommendation  to provide investors with more specific guidance about fraud and  unauthorized trading.
SEC agreed that securities firms have an obligation to ensure that investors  are provided accurate information about the extent of the protection  afforded by excess SIPC policies and that the policies should be drafted to  ensure consistency with SIPC protection as advertised. SEC officials  reaffirmed their commitment to work with the SROs to ensure that excess  SIPC as advertised, is consistent with the policies. Moreover, SEC agreed  that investors should be properly notified of any changes in the coverage.  Finally, SEC reiterates the recommendations it made to SIPC in its 2003  examination report, which as SEC describes are “important to enhance the  SIPA liquidation process for the benefit of public investors.”
section_title: Objectives, Scope, and Methodology
paragraphs: Our objectives were to (1) discuss the status of the recommendations that  we made to SEC in our 2001 report, (2) discuss the status of the  recommendations that we made to SIPC in our 2001 report, and (3) discuss  the issues surrounding excess SIPC coverage. Finally, SEC reiterates the  recommendations made to SIPC in its 2003 examination report, which the  letter describes as “important to enhance the SIPA liquidation process for  the benefit of public investors.”
To meet the first two objectives, we interviewed staff from SEC’s Market  Regulation, OGC, OCIE, and the Division of Enforcement as well as SIPC  officials to determine the status of the recommendations that we made in  our 2001 report. We also reviewed a variety of SEC and SIPC informational  sources, such as SIPC’s brochure and SEC’s and SIPC’s Web sites, to  determine what SEC and SIPC disclosed to investors regarding SIPC’s  policies and practices. We also reviewed the Web sites of the sources  provided by SIPC, such as SIA, NASD, the National Fraud Information  Center, Investor Protection Trust, Alliance for Investor Education, and the  North American Securities Administrators Association.
To address the third objective—to discuss the issues surrounding excess  SIPC coverage—we interviewed agency officials, regulators, SROs, and  trade associations to determine what role, if any, they play in monitoring  excess SIPC. We also interviewed representatives or brokers of the four  major underwriters of excess SIPC policies to obtain information about the  coverage, their claim history, and their rationale for discontinuing the  excess SIPC product. In addition, we interviewed six securities firms that  had excess SIPC policies to (1) obtain their views on the scope of coverage,  (2) determine what they were told about the excess SIPC product being  withdrawn, and (3) to identify what they planned to do about replacing the  coverage going forward. We also interviewed two SIPC trustees who had  liquidated firms that had excess SIPC policies to obtain their views and  opinions about the coverage. We also met with attorneys knowledgeable  about SIPC and excess SIPC policies and coverage to obtain their views  and perspectives on excess SIPC issues. Moreover, we also reviewed  sample policies from the four major excess SIPC providers to determine  the differences and similarities among the policies as well as their  consistency with SIPC’s coverage. We also reviewed a random sample of  clearing and introducing firms’ Web sites to determine if they advertised  excess SIPC protection on their Web sites and the nature of the protection.
We conducted our work in New York, NY, and Washington, D.C., from  October 2002 through July 2003 in accordance with generally accepted  government auditing standards.
As agreed with your office, we plan no further distribution of this report  until 30 days from its issuance date unless you publicly release its contents  sooner. 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 will 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.
If you or your staff have any questons about this report, please contact  Orice Williams or me at (202) 512-8678. Other GAO contacts and staff  acknowledgments are listed in appendix III.
section_title: Comments from the U.S. Securities and Exchange Commission
section_title: Comments from the Securities Investor Protection Corporation
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to those individuals named above, Amy Bevan, Emily Chalmers,  Carl Ramirez, La Sonya Roberts, and Paul Thompson made key  contributions to this report.
section_title: GAO’s Mission
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subsections: section_title: Order by Mail or Phone
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
section_title: Public Affairs