Most consumers are familiar with the FDIC (Federal Deposit Insurance Corporation) that insures bank accounts and offers blanket protection for any deposits made to member banks. You may be less familiar with the SIPC (Securities Investor Protection Program) but every investor or potential investor at any level should be aware of the protection services that the SPIC offers.
What is the Securities Investor Protection Program (SIPC)?
Congress created the SIPC in 1970. SIPC helps when individuals have money, stocks and other securities stolen by brokers or when they are put at risk because a brokerage firm fails. In these cases the SIPC asks a federal court to appoint trustees to liquidate the firm and protect its customer’s assets. In the cases of smaller brokerage firms, the SIPC may deal directly with customers. Its primary mission is to try to quickly and efficiently mitigate the losses to customers in the event of these circumstances. By 2007, the SIPC had made possible the recovery of assets totaling over 15 billion dollars for approximately 625,000 investors. They estimate that no less than 99% of eligible persons have their funds returned by SIPC. Without the SIPC, investors at bankrupt or financially troubled firms could lose their money and securities forever or at best their assets may be tied up in court for years. So it is very important to know that when you invest, you are investing with a member of the SIPC. However, the SPIC does not cover individuals who purchase worthless stocks or other securities, only those with valid claims.
How can you know if your brokerage/investment firm is a SIPC member?
The language of “Member Securities Investor Protection Corporation” or “Member SIPC” should appear in ALL signs and ads of SIPC members. You can confirm memberships by calling the membership department at 202-371-8300 or you can visit www.sipc.org. Only customers who have invested in institutions that are legitimate members of the SIPC are eligible for assistance and recovery of assets.
Some SIPC members have affiliated companies or individuals that conduct investment businesses but are not members of SIPC. The primary institution may be the company that is a member. The affiliates may have similar names, share the same employees or even operate from the same office space. Be sure to receive written confirmation of any transaction in your securities account and double check that it is issued by the SIPC member and not an affiliate.
One other method for verifying membership in the securities investor protection corporation is to check your periodic statements to insure that your brokerage firm is still operating and still a member of the SIPC. In some cases membership begins, but fails to continue, and consumers need to be aware of those changes to their investment firm’s status.
In many cases, investment or brokerage service providers may be fraudulently presenting themselves as members of the SIPC. This is done for two reasons. One is to obtain customers, but in many cases it is to simply obtain customer information, setting the customer up for schemes which may steal their investment or their identity. One form of this scheme includes the set up of web sites that use the name of a brokerage firm that is an actual member of SIPC but list a different address. In other scenarios, the frauds may use the name or name and address of a broker registered with the SIPC and then sets up a fictional entity. In an effort to make their site appear to be more legitimate, a statement may even direct potential clients/victims to verify the firm’s membership in the SPIC website as proof of the firm’s legitimacy. In this case, the theft is also of the identity of a true member of the SIPC. Now they are provided with the identity of legitimate brokerage firms, as well as the customer’s identity for whatever purpose the thief may choose.
According to SIPC President Stephen Harbeck, “SIPC has recently received information from more than a dozen U.S. and non-U.S. victims of this type of fraud. Experience tells us that most investors who lose money never follow up with a regulatory authority. So, we believe that the complaints we are seeing are just the tip of an iceberg. In addition to issuing this warning, we have sent our files to state and federal securities regulators in the hopes of identifying and shutting down these ‘brokerage ID theft’ rings.”
Connecticut Securities Director and NASAA President Ralph A. Lambiase shares that: “Brokerage identity theft joins a long list of scams that rely on the Internet to stalk millions of potential victims at minimal cost. Identity theft is inherently difficult to detect. For that reason alone, investors should refuse any unsolicited online contact from anyone seeking personal information or money by simply hitting the delete key. I urge investors to contact their state securities regulator if they suspect they have been defrauded by this scheme.”
Consumers should make every effort to avoid anyone who solicits their information on-line. In most cases legitimate firms will not do so. Brokerage firms are encouraged to regularly search the Internet for any misuses of their corporate name and to notify regulators if any misuses are discovered. The most important thing for investors and consumers alike prior to any investment transaction is to verify each and every time that they interact the validity of the brokerages membership in the Securities Investor Protection Corporation as only those who are truly members are protected in their investment opportunities.