Follow-Up on GAO Recommendations Concerning the Securities Investor Protection Corporation.

GAO-04-848R July 9, 2004

This letter responds to a Congressional request that GAO report on the status of our recommendations relating to the Securities and Exchange Commission's (SEC) oversight of the Securities Investor Protection Corporation (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, GAO'S 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.

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 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 self-regulatory organizations the New York Stock Exchange and the National Association of Securities Dealers--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--the Customer Assets Protection Company (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.