When you open a stock brokerage account, you are safeguarded by the Securities Investor Protection Corp. But what, exactly, are you covered for? Not as much as you think.
Investors are bringing lawsuits to challenge what they say is SIPC’s stingy view of its duties. SIPC says it’s doing what the law directs.
But its view of the law has been expanded before, both by courtroom decisions and pressure from the Securities and Exchange Commission. Maybe that could happen again.
On paper, SIPC’s covenant appears straightforward. You’re covered if your brokerage house fails and your cash or securities can’t be found. Maybe your broker misappropriated your assets. Maybe its records don’t mention all the stocks you own.
Either way, you’re supposedly guaranteed to get most or all of your assets back.
SIPC covers you for up to $500,000 ($100,000 of which can be cash). The money comes from an industry-supported fund that currently tops $1.16 billion.
Customer losses that exceed $500,000 might be paid from the assets or a private insurance policy covering the failed firm.
But what constitutes misappropriation? What proof do you need? And how should SIPC value the securities you lost?
You’re not covered for losses you suffer if your stocks drop in price. Nor does SIPC cover fraud, but it covers theft.
In the right circumstances, you might also collect for losses due to unauthorized trading in your account. Say, for example, that you’re dealing with a dishonest firm that buys tiny stocks for pennies a share and then artificially raises the price. The broker purchases some of the stock for your account, without your consent.
Eventually, the brokerage firm’s insiders sell and the stock keels over, leaving investors holding the bag. SIPC used to call that fraud and refuse to pay. But the SEC persuaded SIPC to change its mind.
But even though these losses are now covered, it’s almost impossible to collect, complains Indianapolis attorney Mark Maddox, president of the Public Investors Arbitration Bar Association.
Maddox is pursuing around 350 cases of unauthorized trading at the notorious penny-stock firm, Stratton Oakmont, that failed two years ago.
Investors have to be able to prove that the purchase was unauthorized. The proof SIPC wants, according to general counsel Stephen Harbeck, is a copy of a letter that you sent to your broker within 10 days of getting confirmation of the trade.
That 10-day limit isn’t in the SIPC law. It’s in your brokerage agreement, and in the fine print on the back of your confirmation statement.
But how many people know that? And even if you complained in time, why would you write? “Unless you’re a lawyer or highly sophisticated investor, you’d pick up the phone and call,” Maddox says.
In the Stratton Oakmont case, SIPC accepted written complaints that went to the broker one to three months after the trade, Harbeck says. So SIPC can take whatever proof it wants.
It won’t take your word. After all, memory can fail. But it seems harsh not to take your handwritten notes, taken during a protracted struggle by phone.
If you did complain to your broker by phone, you might have been talked into holding the stock. Harbeck says that ratifies the trade.
Says Maddox, “No, it doesn’t” not if the broker told you lies about the stock.
Even if SIPC does accept your claim, it doesn’t necessarily make you financially whole. Say, for example, you own Penny-Stock A. Your broker sells it for $10,000 and buys Penny-Stock B without telling you. You object, but the broker ignores you. The firm fails. All the stocks that it was manipulating collapse.
SIPC might agree to cancel the transaction. But it merely returns your shares in Penny-Stock A, which now might be worth only $100 or less.
Says Harbeck, “Our job is to replace the securities that were in the account on the day the firm failed.”
Says Maddox, “Investors should get back the value of the stock on the day the unauthorized transaction occurred.” In this example, that would be $10,000.
Investors have yet another beef. When a firm is manipulating the prices of penny stocks, it might not accept your order to sell. You can’t get out until after the stock folds. Maddox thinks that’s just another form of theft. But SIPC won’t cover that loss, and so far the courts have agreed.
This issue, too, is on appeal. Whether the law allows you any more protection is up to the higher courts.
Low-cost college loans
Competition is slashing the cost of federal student loans. Up-front fees are coming down and borrowers can find special deals on interest rates.
What sparked this change was the federal government’s direct loan program introduced in 1994. It forced the private lenders to improve. Now some of the private lenders are giving the government program a run for its money.
The guaranteed student loan program is providing $32 billion for fiscal year 1999, to 8.7 million students. A federal formula determines whether you have financial need. If so, the government pays the loan interest while you’re in school. If not, you pay.
Traditionally, loans were offered solely through private or state-linked lenders (some 4,100 of them today) and administered by special guaranty agencies. The business is virtually risk-free. Congress sets the fees and interest rates that students pay. Lenders receive subsidies to ensure them a reasonable return. If a student defaults, the Treasury covers 98 percent of the loss.
For years, this system rattled on inefficiently, driving schools and students nuts. The lenders all had different application forms, and worked with the guaranty agencies in different ways. Almost nobody was competing on price. Every time Congress proposed a cut in student costs, the lenders screamed that they couldn’t manage on a nickel less.
Today’s official price structure calls for 4 percent in up-front fees that includes a 3 percent origination fee, to offset some of the government’s costs, and a 1 percent loan-insurance fee, to cover potential defaults. Interest rates, which change every July 1, currently stand at 6.92 percent, for the majority of student borrowers.
The federal direct loan program smashed this comfortable cartel. It let students borrow directly from the Treasury, through their school’s office of student aid. That cut out the banks and other middlemen at potential savings of many billions of dollars in taxpayer subsidies. So far, around one-third of the schools have joined the plan.
At first, the private lenders lobbied to snuff the program. When they failed, they entered prayer mode hoping the Education Department would make a royal mess of things. When direct loans succeeded, the lenders took a radical step. They decided to compete and cut their prices.
To stay in the game, the federal direct loans program will cut 1 percent from its borrowers’ up-front costs, effective Aug. 15. It also announced small interest-rate cuts for electronic payments and for graduating students who gather their various borrowings into a single loan.
Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.
