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SIPC Protection For Brokerage Customers Is Shown To Be Of Little Value

Tuesday, July 5, 2011 - 5:38 AM
From the Wall Street Journal
The Securities Investor Protection Corp. [SIPC] has the authority to cover a client's losses of as much as $500,000 if their brokerage house goes under. Critics say that isn't nearly enough money or a broad enough mandate, given that investors face greater risks than bankrupt brokerages these days.

The article describes the order of the SEC to force SIPC to cover Stanford's fraud victims. The SIPC said it will wait until September to announce whether it will comply. It should be noted that it has been over two years since the SEC first filed charges against Stanford.

Here's an excerpt from the SEC's press release:
The Securities and Exchange Commission today concluded that certain individuals who invested money through the Stanford Group Company – a U.S. broker-dealer owned and used by Allen Stanford to perpetrate a massive Ponzi scheme – are entitled to the protections of the Securities Investor Protection Act of 1970 (SIPA).

The SIPC maintains it only covers loss when a brokerage house goes bankrupt. What I don't understand is if a brokerage goes bankrupt, how would the investors lose if there is no fraud? The brokerage house holds securities for its clients, and the value of those investments should be based the market value of the securities regardless of the financial condition of the brokerage house.
Ken TuminKen Tumin5,472 posts since
Nov 29, 2009
Rep Points: 125,708