The Securities Investor Protection Corp. is taking issue with a warning from the SEC's inspector general that the cost of liquidating Bernard Madoff's firm and Lehman Brothers could deplete the SIPC's reserve fund.
Those cases won't be a problem, SIPC chief executive Stephen Harbeck said April 1.
The SIPC has $1.3 billion in its fund, he said, and is generating $450 million a year through broker-dealer assessments.
“SIPC had a draw[down] on its funds [because] for 20 years, the regulatory system failed to uncover a Ponzi scheme,” Mr. Harbeck said, referring to the Madoff case.
In 2009, the SIPC irked the broker-dealer community when it significantly increased assessments on firms. SIPC fees are now 0.25% of net operating revenue, up from a flat $150 prior to the Madoff scandal.
Even for small firms, the new fees amount to thousands of dollars.
The inspector general issued the warning as part of a larger report on the Securities and Exchange Commission's oversight of the SIPC, released last month.
FORMALIZE OVERSIGHT
The report said that while SEC staff members have reviewed SIPC actions over the years, the commission hasn't had a standardized process for doing so. SEC officials agreed with most of the report's recommendations to formalize oversight.
The inspector general paid particular attention to the level of fees paid to SIPC trustees in broker-dealer liquidations.
The SIPC has long been criticized for running up huge legal bills, most recently in the liquidations of Lehman Brothers Holdings Inc. and Bernard L. Madoff Investment Securities LLC.
“The SEC does not perform a review of trustee fees on a systematic basis,” the inspector general found. “Such reviews are particularly necessary because [the law] provides for few, if any, limits on the fees that may be awarded.”
The inspector general noted that SIPC trustees through September had charged $102 million in the Madoff case, with trustees being paid from $698 to $742 per hour. In the Lehman Brothers case, the total bill so far, including administrative costs, is $420 million, with trustees' and counsel's fees running from $437 to $527 per hour.
Mr. Harbeck noted that the report said that SIPC attorneys performed detailed reviews of the trustee billings. Still, the report urged the SIPC to push for bigger discounts beyond the usual 10% it asks for.
The inspector general also recommended that the SEC work with Congress to change the law, which doesn't allow courts to reject fee requests approved by the SIPC.
The SIPC's board and an internal task force “will certainly look at [a legislative change]” in response to the report, Mr. Harbeck said.
SEC staff members told the inspector general that they plan to review trustees' fee applications.
The report is “eye-opening,” said Peter Mougey, president of the Public Investors Arbitration Bar Association, which represents plaintiff's attorneys.
The plaintiff's bar has been critical of the SIPC for denying some customer claims.
The report uncovers “a huge laundry list of significant problems” with SIPC oversight, said Mr. Mougey, who is also a shareholder at Levin Papantonio Thomas Mitchell Echsner Rafferty & Proctor PA.
He said that the SEC should be more transparent in how it oversees entities such as the SIPC and the
Financial Industry Regulatory Authority Inc.
SEC spokesman John Nester declined to comment.
E-mail Dan Jamieson at [email protected].
