Securities Investment Protection That Every Consumer Should Know About

What is the Securities Investor Protection Corporation (SIPC)?

The Securities Investor Protection Corporation was created by the U.S. Congress in 1970. The primary purpose of the SIPC is to help individuals who have lost money, stocks and other securities stolen by brokers or when their investments are at risk because a brokerage firm fails. Protection is provided sometimes through a request to a federal court to appoint trustees to liquidate the firm and protect its customer’s assets however, in the case of smaller brokerage firms, the SIPC may deal directly with customers. The goal is to quickly and efficiently mitigate the losses to customers that have made investments in firms that are members of the SIPC and that are experiencing bankruptcy or financial difficulty and now are in danger of going out of business. By 2007, the SIPC had made possible the recovery of assets totaling over 15 billion dollars for approximately 625,000 investors. This service estimates that approximately 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. No protection is available to consumers who invest in firms that are not members of this protection corporation, and membership is not mandatory.

How can you know if your brokerage/investment firm is a SIPC member?

Investment and brokerage firms that are members of the SIPC will have the language of “Member Securities Investor Protection Corporation” or “Member SIPC” on all signs and advertisements. However, consumers should not rely on that information alone as some firms may not truly be members, or their membership may have lapsed. Confirmation of current memberships of a firm may be made 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.

In some cases, SIPC members may have affiliated companies or individuals that work contractually for them. The "parent" company membership does not transmit to the affiliate or contracted individual. Those firms must obtain their own membership in the program. It is also not unusual for the affiliates to have have similar names, share the same employees or even operate from the same office space, but even in those cases, membership is not shared nor transferable. Each consumer should receive confirm that their investment services provider is a member as well as carefully review written confirmation of any transaction in your securities account and double check that it is issued by the SIPC member and not an affiliate.

Consumers may also verify membership by reviewing their periodic statements to determine if your brokerage firm is still operating as a member of the SIPC. In some cases membership has lapsed, and consumers need to be aware of those changes to their investment firm’s status, as any claims made on a lapsed member can not be processed.

One scam used by some so-called investment or brokerage service providers may be to fraudulently present themselves as members of the SIPC in an effort to either obtain customers or to obtain customer information, setting the customer up for schemes which may steal their investment or their identity. Quite often this is done through the use of web sites, that use the name of a legitimate brokerage firm that is a member of SIPC but list a different address. In other instances, the frauds may use the name or name and address of a broker registered with the SIPC and then sets up a fictional entity. Sometimes these fraudulent providers even issue a statement directing potential clients to verify the firm’s membership in the SPIC website as proof of the firm’s legitimacy. These scams result not only in the identity theft of the consumer, but of the legitimate member of the SIPC.

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 on line 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.”

The warnings for potential investor’s is two-fold, first be sure that you are using a legitimate member of the Securities Investor Protection Corporation for your investment opportunities. Only by using a member is your investment that much safer. Secondly, be careful especially of on-line investment firms, brokers and other invitations or opportunities. Quite often they are scams, and every effort should be made to not only verify the authenticity of the firm, but of the firms participating in the SIPC program.