SIPC Assessments: Something You Might Not Know

...but which your accountant should know.

Okay, so you know by now that SIPC assessments went from a coins-under-the-couch-cushions-amount ($150) to a revenue-based number (.0025 of annual net operating revenues). This change happened as of April 1 and there are new assessment reporting forms that apply: see http://www.sipc.org/members/members.cfm for links to the new forms: Form 7T (interim reporting) and Form 6 (general form used for semi-annual reporting/payment). Depending on your fiscal year end, SIPC will mail you the correct forms to complete. You will be given credit for the $150 you might have paid earlier this year. But be prepared to pay a bunch more: firms making millions in revenue will pay tens of thousands.

The last time SIPC imposed a revenue-based assessment was 14 years ago. When the SIPC Fund balance gets low (under $1 billion), they invoke their right to raise money this way. If you're feeling sorry for yourself, maybe because your investors are institutions or otherwise won't be relying on SIPC coverage anytime soon, here's the theory behind this universal assessment: your business is dependent on a robust market; that market consists of individuals—they drive the market by virtue of their investments. Without them you wouldn’t do the business you do. You therefore benefit from the retail market in the end. And you want those investors to have confidence, some of which is provided by SIPC coverage. So you pay for SIPC, along with every other broker, regardless of your niche.

Onto the meaningful part of this message...

When your auditor does your annual audit, he/she has to remember to do an 'e-4 report.' That refers to paragraph (e)(4) of SEC Rule 17a-5: 'Reports to be made by certain brokers and dealers.' Your accountant knows to what to provide to FINRA and SEC, based on years of service in this industry. But now that the SIPC assessment is based on revenues, he/she has to provide this new item, too--and he/she may not know about it. It's basically a 'negative assurance letter' and will include either a schedule of payments to SIPC or copies of the assessment forms that were filed for the period. The bummer is, SIPC does NOT address this on its members site....they say it's an SEC Rule, not theirs, and that's why...but hey, give a BD a break! It would be nice if they provided clear guidance on this. I guess that's why I'm writing this entry--to introduce the subject and suggest that you talk to your auditor to make sure he/she is prepared to comply.

Here's the text from the SEC Rule that applies (from http://edocket.access.gpo.gov/cfr_2002/aprqtr/17cfr240.17a-5.htm):

(4) The broker or dealer shall file with the report a supplemental report which shall be covered by an opinion of the independent public accountant on the status of the membership of the broker or dealer in the Securities Investor Protection Corporation (``SIPC'') if, pursuant to paragraph (e)(1) of this section, a report of the broker or dealer is required to be covered by an opinion of a certified public accountant or a public accountant who is in fact independent. The supplemental report shall cover the SIPC annual general assessment reconciliation or exclusion from membership forms not previously reported on under this paragraph (e)(4) which were required to be filed on or prior to the date of the report required by paragraph (d) of this section: Provided, That the broker or dealer need not file the supplemental report on the SIPC annual general assessment reconciliation or exclusion from membership form for any period during which the SIPC assessment is a minimum assessment as provided for in section 4(d)(1)(c) of the Securities Investor Protection Act of 1970, as amended.

The supplemental report, an original of which shall be submitted to the regional or district office of the Commission for the region or district in which the broker or dealer has its principal place of business, the Commission's principal office in Washington, the principal office of the designated examining authority for such broker or dealer and the office of SIPC, shall be bound separately, be dated and be signed manually, and shall include the following:

(i) A schedule of assessment payments also showing any overpayments applied and overpayments carried forward including: payment dates, amounts, and name of SIPC collection agent to whom mailed, or

(ii) If exclusion from membership was claimed, a statement that the broker or dealer qualified for exclusion from membership under the Securities Investor Protection Act of 1970, and the date and name of the SIPC collection agent with whom a Certification of Exclusion from Membership (Form SIPC-3) was filed, and

(iii) An accountant's report which shall state that in the accountant's opinion either the assessments were determined fairly in accordance with applicable instructions and forms, or that a claim for exclusion from membership was consistent with income reported. If exceptions are noted, the accountant shall state any corrective action taken or proposed.

The accountant's review on which his report is based shall include as a minimum the following procedures:

(A) Comparison of listed assessment payments with respective cash disbursements record entries;

(B) For all or any portion of a fiscal year ending in 1976 and each fiscal year thereafter, comparison of amounts reflected in the annual report as required by paragraph (d) of this section, with amounts reported in the Annual General Assessment Reconciliation (Form SIPC-7);

(C) Comparison of adjustments reported in Form SIPC-7 with supporting schedules and working papers supporting adjustments;

(D) Proof of arithmetical accuracy of the calculations reflected in Form SIPC-7 and in the schedules and working papers supporting adjustments; and

(E) Comparison of the amount of any overpayment applied with the Form SIPC-7 on which it was computed; or

(F) If exclusion from membership is claimed, the accountant shall review the annual report required by paragraph (d) of this section for all or any portion of a fiscal year ending in 1976 and each fiscal year thereafter to ascertain that the Certification of Exclusion from Membership (Form SIPC-7) was consistent with the income reported.

[Some of this is outdated due to changes in form names, but you get the idea.]

OH--and this 'e-4 report' has to go to SIPC, too. So include it in your filings with FINRA and SEC, and also send it (alone, not with the annual audited f/s) to SIPC.

Talk to your accountant; make sure this is clear. And chat it up over drinks, too. You'll impress your peers by being up on this subject way ahead of the crowd. Ah, the joys of compliance.