WASHINGTON, D.C. August 1, 2001 - A substantial 85 percent of U.S. investors do not know enough to pass a "survival" quiz gauging their awareness of what to do in times of market downturns and other financial difficulties, according to a survey conducted for the Securities Investor Protection Corporation (SIPC) and the National Association of Investors Corporation (NAIC).   In particular, investors are ill informed about their recourse when they have lost money due to investment fraud or market reverses, how to deal with problem brokers, and the workings of both limit orders and margin accounts.

The nonprofit SIPC maintains a special reserve fund authorized by Congress to protect investors at bankrupt brokerage firms.  NAIC, based in Madison Heights, Michigan, is the nonprofit organization of 35,500 investment clubs and 500,000 individual member investors in the U.S.

SIPC President Michael Don said:  "It has become increasingly evident to us over the last few years that many investors either have no knowledge or, even worse, the wrong information about a number of key issues that can haunt them during tough financial times.  SIPC is committed to working with other organizations to help raise the level of investor awareness about such issues, including the need to document complaints in writing against bad brokers and the extent and limits of coverage for investors when brokerage firms collapse.   The General Accounting Office has correctly pointed out that it is incumbent upon SIPC to get out the word to as many people as far and wide as possible and we will do so."

NAIC Vice President Robert O'Hara said:  "We've been at this for 50 years now and we see the same problem over and over again:  New investors come in during bull markets and then don't know what to do when things go sour later.   People need to take the time to learn the basics about investing and then put them into practice.   Our experience is that investors who work together in investment clubs get a chance to share their knowledge and help each other out."

In addition to releasing the national investor "survival quiz" survey, SIPC launched an overhauled Web site (www.sipc.org) and plain-English brochure describing the extent and limits to SIPC coverage.   The new SIPC Web site features a detailed, step-by-step claim form fill-in process that significantly simplifies and automates the process by which investors make liquidation claims to court-appointed trustees or, in some cases, directly to SIPC.

KEY INVESTOR SURVIVAL QUIZ FINDINGS

SIPC and NAIC developed a five-question "investor survival" quiz to measure investor awareness of what to do in turbulent markets or when faced with other financial problems.   The survey conducted by Opinion Research Corporation International (ORCI) included a weighted sample of 933 adult investors.  The key findings were as follows:

    Fewer than one in five U.S. investors pass a basic "survival" quiz.   Do most American investors know what to do when the market, a particular stock, or their relationship with a broker goes bad?   The answer in nearly all cases is "no."  With a total of five basic questions asked, 85 percent of investors surveyed failed to get a passing grade by picking the right answers for at least three of the questions.   In fact, a tiny 1 percent of those surveyed got four or five of the questions correct, only 15 percent got three or more questions right.   A slightly greater share of investors (16 percent) answered only one question correctly.   The mean score (including none) of all those surveyed was 1.5, exactly half of a passing score.

    Almost two in three investors do not know what to do first when they suspect they are dealing with a problem broker.   Just 36 percent of those surveyed knew that they should "set out (their) concerns in writing to the brokerage firm and keep a copy for self."   A nearly equal number (33 percent) incorrectly answered that they would create no documentation and, instead, "call the stockbroker and give him or her a chance to work out the problem."   Another quarter (23 percent) said that they also would skip the documentation stage and proceed directly to "call the branch office manager or compliance department and make a complaint by phone."   Note:   The existence of a documented complaint can be crucial to the ability of investors to recover money from brokerage firms that collapse due to fraud or other factors.   Investors should always set out their complaint to a brokerage firm in writing and keep a copy for their records.

    More than four in five investors do not understand how margin calls work.   Only 14 percent of those surveyed knew that, under Federal Reserve rules, 25 percent is the level in a margin account below which a brokerage firm may issue a margin call requiring an investor to deposit additional funds or stocks.   Nearly two in five investors (39 percent) offered no guess as to the margin call "trigger" level.   Nearly half of the investors (47 percent) said that the margin equity minimum was at some level other than 25 percent, with specific answers ranging from 10-60 percent.   Note:  While 25 percent is the minimum margin level, most brokerage firms impose a higher margin requirement.

    Fewer than one in four investors understand the use of limit orders.   Provided a scenario in which they hold a fast-moving stock while on vacation, only 22 percent of investors knew that the best way to lock in a profit and avoid a loss on the stock was to place a limit order, rather than a market order.   A nearly equal percentage (20 percent) of respondents incorrectly opted for a market order.   Interestingly, nearly two in five respondents (39 percent) said that the best way to make a profit or avoid a loss with the stock in question was to stay in close contact with financial news and their broker while or vacation (36 percent) or cancel their vacation outright (3 percent)!   Note:   A limit order would be the best way to set a specific price for sale of a stock in a situation where an investor did not want to watch the market constantly.

    Fewer than one in five investors know there is no "insurance" for stock market losses.   When asked to identify the "organization that insures you against losing money in the stock market or as the result of investment fraud," only 16 percent of investors knew that there is no such group.   A nearly equal number (18 percent) were unsure or did not know how to answer the question.  The balance of those surveyed incorrectly attributed then open-ended insurance role to the U.S. Securities and Exchange Commission (33 percent); the Federal Deposit Insurance Corporation (16 percent); and SIPC (16 percent).   Note:   No "insurance" against investment fraud or simple market-related losses is available from any government agency or non-profit organization, including SIPC.

    Only one of the five "survivor" questions was answered correctly by a majority of the investors.  When given different explanations of Chapter 11, almost three in five (59 percent) correct answered that it described a company that is "is seeking protection under bankruptcy law and intends to reorganize itself."  Fewer than one in four (23 percent) confused Chapter 11 with Chapter 7 proceedings in which a company is "seeking protection under bankruptcy law and ceases all operations.

ABOUT THE SURVEY

The SIPC/NAIC national opinion survey was conducted by CARAVAN Opinion Research Corporation International (ORCI) during the period, May 31-June 4, 2001.  Telephone interviews were conducted among a national probability sample of 2067 adults comprising 1013 men and 1054 women 18 years of age and older, living in private households in the continental United States.  The margin of error is plus or minus 3 percent.

ABOUT SIPC AND NAIC

From its creation by Congress in 1970 through December 2000, the Securities Investor Protection Corporation (www.sipc.org) advanced $391 million in order to make possible the recovery of $3.8 billion in assets for an estimated 443,000 investors.   SIPC estimates that more than 99 percent of eligible investors have been made whole in the failed brokerage firm cases that it has handled to date. 

SIPC either acts as trustee or works with an independent court-appointed trustee in a missing asset case to recover funds.  The statute that created SIPC provides that customers of a failed brokerage firm receive all non-negotiable securities that are already registered in their names or in the process of being registered.  At the same time, funds from the SIPC reserve are available to satisfy the remaining claims of each customer up to a maximum of $500,000.  This figure includes a maximum of $100,000 on claims for cash.   Recovered funds are used to pay investors whose claims exceed SIPC's protection limit of $500,000.  SIPC often draws down its reserve to aid investors.   Recovered funds also are used to replenish SIPC's reserve in the event that the reserve is tapped in the early stages of a liquidation proceeding. 

NAIC is a national, non-profit organization of investment clubs and individual investors, based in Madison Heights, Michigan. Founded in 1951, NAIC is dedicated to providing a sound program of investment education and information to help its members become successful, lifetime investors. NAIC is considered the pioneer of the modern investment club movement in the United States as well as the voice for the individual investor.

NAIC currently serves more than 550,000 members including over 35,500 investment clubs. On average, NAIC members invest $45 per month in an investment club portfolio, and invest in excess of $350 per month in their personal portfolios. These regular investments by NAIC members, in the aggregate, exceed $48 million invested every month in stocks and mutual funds. The combined investment portfolios of NAIC members exceed $197 billion. For more information on NAIC, visit www.better-investing.org or call 877-ASK-NAIC (877-275-6242).