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Wall Street Scams Main Street: SIPC Investor Insurance for $150 Premium

Posted by Larry Doyle on November 2, 2009 12:25 PM |

Of all the insults, and all the fraud, and all the arrogance that has emanated from Wall Street over the last few years, there is no doubt that one of the greatest unknown travesties perpetrated on the American public is the insurance purchased by Wall Street firms to protect investor interests.  How so?

For those listening to my interview with noted attorney Helen Davis Chaitman of Phillips Nizer last evening, you would have heard how the Securities Investor Protection Corporation funds itself. Who exactly is SIPC? From SIPC’s website we learn:

When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers’ cash, stock and other securities. Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever or wait for years while their assets are tied up in court.

Although not every investor is protected by SIPC, no fewer than 99 percent of persons who are eligible get their investments back from SIPC. From its creation by Congress in 1970 through December 2008, SIPC advanced $520 million in order to make possible the recovery of $160 billion in assets for an estimated 761,000 investors.

Thus we learn SIPC is an insurance fund launched in 1970 to protect investor interests. Sounds like a good idea.

Ms. Chaitman informed us that SIPC has reserves of $1.7 billion dollars. Is that good, bad, or indifferent? Well, for an industry with trillions in exposure, reserves of $1.7 billion seem rather light.

Who funds SIPC? From SIPC’s 2008 Annual Report:

The resources required to protect customers beyond those available from the property in the possession of the trustee for the failed broker-dealer are advanced by SIPC. The sources of money for the SIPC Fund are assessments collected from SIPC members and interest on investments in United States Government securities. As a supplement to the SIPC Fund, a revolving line of credit was obtained from a consortium of banks. In addition, if the need arises, the SEC has the authority to lend SIPC up to $1 billion, which it, in turn, would borrow from the United States Treasury.

SIPC’s internal investment portfolio totals approximately $1.7 billion. To SIPC’s credit, those funds are invested in U.S. government securities. Those securities generated interest of approximately $67 million in 2008, implying approximately a 4% coupon. Nice, but not nearly enough to cover potential liabilities and claims.

Ms. Chaitman informed us that SIPC’s insurance is sponsored by the financial services industry. In fact, SIPC, a Congressionally chartered entity, has the ability to assess its member firms a premium of .25 of 1% of its revenues to fund itself. Has SIPC chosen to make that assessment? Anything but.

How much had SIPC chosen to assess its member firms since 1996 up until April 1, 2009? Are you sitting down?

As Ms. Chaitman informed us last evening, SIPC assessed its member firms $150 annually since 1996. That’s right. Every SIPC member has been able to send out brokerage statements with the SIPC stamp of approval for a mere $150 annual premium. Yes, Goldman Sachs and every other SIPC member firm has paid a whopping $150 to buy the SIPC stamp of approval on their brokerage statements. SIPC’s Annual Report provides a full history of these premiums:

History of Member Assessments*
1971: ½ of 1% plus an initial assessment of 1⁄8 of 1% of
1969 revenues ($150 minimum).
1972–1977: ½ of 1%.
January 1–June 30, 1978: ¼ of 1%.
July 1–December 31, 1978: None.
1979–1982: $25 annual assessment.
1983–March 31, 1986: ¼ of 1% effective May 1, 1983 ($25 minimum).
1986–1988: $100 annual assessment.
1989–1990: 3⁄16 of 1% ($150 minimum).
1991: .065% of members’ net operating revenues ($150 minimum).
1992: .057% of members’ net operating revenues ($150 minimum).
1993: .054% of members’ net operating revenues ($150 minimum).
1994: .073% of members’ net operating revenues ($150 minimum).
1995: .095% of members’ net operating revenues ($150 minimum).
1996–2008: $150 annual assessment. !!! (LD’s emphasis)
* Rates based on each member’s gross revenues (net operating revenues for 1991–1995) from the securities business. Effective April 1, 2009 member assessments will be ¼ of 1% of member’s net operating revenues ($150 minimum).

After the Madoff fraud, SIPC will clearly be depleted and thus member assessments are being returned to the 1/4 of 1% of total revenues. That said, the fact that SIPC and Wall Street chose to abuse investor interests by assessing a $150 premium for a 12-year time frame speaks volumes as to how the industry views investors.

Wall Street protects investors? Please.

Insurance is never needed until it is needed. $150 premiums may be sufficient until they’re not. The simple fact is, Wall Street totally scammed Main Street in projecting a measure of protection via SIPC.

Over and above this insult, please listen to my entire interview with Helen Davis Chaitman on No Quarter Radio’s Sense on Cents with Larry Doyle Welcomes Helen Davis Chaitman (Helen joins the broadcast at the 24-minute mark of the audio player) and listen to her opinions as to how Irving Picard, the SIPC trustee designated to handle the Madoff situation, is engaged in the following:

>> conflict of interest

>> breach of fiduciary duty

>> violation of Madoff investors’ 5th Amendment Right to due process

Helen Davis Chaitman has been designated one of the nation’s top ten litigators by the National Law Journal.

If you have an interest in the markets and economy, do yourself the favor of listening to her comments on No Quarter Radio’s Sense on Cents with Larry Doyle last evening.


  • fiscalliberal

    You have realy provided information that is not out in the public despite it being a government chartered function like FDIC. Inintial impressions are that SPIC is functionaly disfunctional.

    One further question would be: What is the notional value of the claims submitted to date and still pending

    • Larry Doyle

      Recall that SIPC is a Congressionally chartered entity but not a government-backed corporation, like the FDIC. It reports to the SEC (like FINRA) but is funded by the industry (like FINRA).

  • fiscalliberal

    Wild gyrations in the market today – what does your gut tell you about what is going on

    • Larry Doyle

      Fiscal….thanks for your kind words and ongoing support.

      The market price action today indicates to me a general lack of depth and participation. Wild swings occur in the midst of light volume. Light volume occurs when there is a general lack of conviction.

  • Larry,

    Great post. I had no idea about the $150 fee. It’s ridiculous.

    I have, however, observed other troubling aspects about SIPC beyond the funding issue. For one, the agency’s communications about what they cover are unclear. Check out the website:

    SIPC will reimburse customers for securities that are missing, but it does not insure against fraud. What does this mean? Here’s an example of where we could use some clarity.

    SIPC recently noted it is paying out $500 million to Madoff victims, which suggests the securities were stolen (not fraud?). But if SIPC agrees to pay for missing securities, why pay only $500 million now? The Madoff trustee has agreed that at least $4.5 billion is eligible for payment. SIPC made the decision to pay. Why not pay more right away?

    Speaking of the Madoff trustee—there’s a huge conflict of interests. SIPC pays the Madoff trustee, and some estimates place the trustee’s compensation at $60 million. The Madoff trustee has the power, however, to distribute assets in a way that helps SIPC to the detriment of Madoff victims. That’s why there’s a huge argument over “net equity.” No matter your position on how Madoff victims should be treated, this conflict of interests is not right. I go into more detail here:

    In my opinion, this $150 fiasco is another reason why Uncle Sam should clarify what SIPC is doing for us.


  • Larry,

    Your posting is powerful.

    I am a Madoff victim and have been thrust right smack dab in the middle of this mess. As the Coordinator for the Madoff Coalition for Investor Protection group, we have been working closely with Helen Davis Chaitman so that the victims will see the fair justice they are legally entitled to.

    As victims, we have the facts and we have the law on our side. However, our frustrations are two-fold.
    First, how do we get this information out so that all investors are aware of the facade of protection offered by SIPC?

    Secondly, how is it that with statutory law and case law on our side the SEC, who has the mandated responsibility to ensure SIPC follows the rules that Congress laid out for them is not being taken to task for not stepping in?
    This is yet another failure of the SEC to take the responsibility to ensure fair and safe markets for investors.

    Your posts and your guests help to spread the word to all, and we greatly appreciate that effort.

    Yet, we need to get Congress, Wall Street and the White House to hear us. We are speaking loud, but feel as if no one is listening.

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