What Is The SIPC And Does It Do Its Job?
September 25, 2000
People who put their money in banks are protected up to a point by the Federal Deposit Insurance Corporation if their bank goes belly-up. People who put their money in stocks look to the Securities Investor Protection Corporation as a safety net if their broker absconds with their funds or their brokerage firm fails.
The little-understood SIPC was created by Congress in 1970. Today, critics are charging that the organization is more interested in protecting itself against claimants than it is in compensating the victims of theft. They also point out that the SIPC has paid out more to lawyers over the years than it has to defrauded investors.
- The SIPC is financed by industry and is not backed by the federal government -- unlike the FDIC.
- The corporation is chartered to protect each investor with securities held at a member brokerage firm for up to $500,000, with claims for cash limited to $100,000.
- Rather than being charged with representing theft victims, lawyers assigned to cases are chosen and paid by the corporation.
- Many of the trustees of the corporation are the same lawyers who represent victims -- which critics charge gives them an incentive to minimize payouts, particularly if the lawyers want lucrative repeat business.
Since 1971, lawyers have received $320 million from the SIPC, while investors have only collected $233 million.
Those advocating reform argue that when the SIPC was created only one in 10 Americans owned securities. Today, the number is closer to one out of every two Americans. So the role it plays is much more important and reforms that much more urgent. Eliminating conflicts of interest would be a good place to begin, they say.
Source: Gretchen Morgenson, "Many Holes Weaken Safety Net for Victims of Failed Brokerages," New York Times, September 25, 2000.
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