SEC Has Taken Steps to Address Our Recommendations

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. 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. SEC officials expressed concern about imposing another rule  on securities firms. 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. NASD and SEC have  also begun to make disclosures about SIPC and market risk to investors. 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. Attorneys familiar with the  policies also agreed that the disclosure of the coverage and the terms of  coverage could be improved. 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. Three of the Four Major Insurers Identified Stopped Underwriting Excess SIPC Policies in 2003

During our review, three of the four major insurers that offered excess  SIPC coverage in 2002 stopped underwriting these policies beyond 2003. 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. Purchasing policies from the remaining major insurer. 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. 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. More specific links to investor education Web pages  within each Web site would mitigate this problem. 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.”

	Objectives, Scope, and Methodology

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. 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.
Why GAO Did This Study

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.

What GAO Found

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.