For decades investors have been told their accounts were protected by the Securities Investor Protection Corporation (SIPC) without being told what was covered by this insurance. Few realize this protection only provided that whatever securities and cash are in an account when a firm goes out of business would be returned to the investor. (Furthermore, such claims are difficult to file and often take years to process.)
Thus, if investors are defrauded into purchasing investments, if their accounts are churned for commissions or if other wrongdoing occurs in their accounts, they are NOT protected by this Federal insurance. Even claims for unauthorized transactions, including the sale of viable securities in order to purchase worthless securities from the firm or its officers are not always refunded. In short: Fraud is not covered by SIPC!
After years of complaints, efforts by attorneys representing investors and pressure by some consumer-friendly legislators, the National Association of Securities Dealers, Inc. (NASD) and the Securities Exchange Commission (SEC) were finally persuaded to act. However, rather than force brokerage firms to disclose the insurance coverage (or lack of it) the NASD and SEC passed a much less effective requirement.
The new rule requires members to merely advise new customers, and remind existing customers annually, that they can obtain information about the Securities Investor Protection Corporation by contacting SIPC. The phone number and Web address will be included.
As is true with most insurance companies it is very difficult to determine from the information provided by SIPC what is and is not covered by this protection. Therefore, the vast majority of investors will remain in the dark and continue to be misled into believing they can recover if they are defrauded by a broker or firm in an insured account.
Once again the SEC is serving Wall Street firms rather than protecting investors. These firms do not want securities fraud to be covered by SIPC because their premiums would be much higher. Meanwhile, these firms have the best of both worlds: The can continue to “sell” investors into a false sense of security by indicating their accounts are “insured”, yet pay low premiums because the insurance covers little and rarely pays any claims.
Additional propaganda can be found in SR-NASD-2006-124 (Release No. 34-55737, 5/10/07 and at http://www.sec.gov/rules/sro/nasd/2006/34-54871.pdf; 72 Fed. Reg. 27606, 5/16/07).