IF a shop like Madoff has SIPC insurance.... I think they SHOULD cover up to the stated limit. I think that SIPC should have something in place to make sure the the firms they are covering actually have what they say they do...
Who has a better shot at determining is someone is cheating or not.... the average investor off the street or the SIPC
The firm putting out that there is insurance in place is doing it to show the avg Joe that he does not have to be concerned...
The insurance is there in case of fraud by the company.... so when there is fraud.... pay up...
While it certainly sounds good for the SIPC to review their covered firms' accounts....logistically, I think it would be a sheer impossible undertaking to say the least, given the current budget and staff. (I could make a snide remark about wasteful gov't spending on ludicrous projects vs spending it on things like SIPC audits, but I'll restrain myself). Imagine how many offices there are that would need to be audited - not just Merril Lynch, but every single Merril Lynch "advisor", et. al. You would probably need as many auditors as the IRS!
And those who have more knowledge can correct me if I'm wrong - but in the case of FDIC (and Federal Reserve?) bank examiners, they don't visit each individual branch, but just the main HQ, or regional HQ, correct? Big difference between having to audit each and every single bank branch (yikes!) vs regional or main HQ. I'd imagine the SIPC would need to visit each individual investment advisor, since each one can operate independently to a certain degree (yes, investments are still held by the main clearing agent....but fraud could still happen on an individual branch level by the investment advisor, given the relative ease it would be, compared to, say, a local bank branch engaging in fraud that would likely be near impossible to pull off).
Also, I disagree about the SIPC coverage for fraud - for FDIC insurance, if there is fraud by the bank you aren't made whole by the FDIC for numbers that didn't actually exist. Just guessing, but the reason that banks haven't been engaged in fraud like Madoff, et. al, is probably because it's more difficult to offer outrageously high CDs paying insanely high, above-market rates, because you have to show all of your assets and liabilities to the bank examiners on a regular basis, and perhaps it would be more difficult to make money disappear into your pocket when they're scrubbing your books.
One final item - it's likely more difficult for a bank to open for business to the public and engage in fraud, because they have actual, significant costs (branch location, employees, etc.). It's far more easy for a con artist to visit fraternal groups, churches, civic gatherings, pass out a few business cards, and announce that they're an "investment advisor" and can generate great returns, with peoples' friends as word of mouth advertising. You can run an extremely low-overhead shop without having to spend much money to get your con going. If you had to come up with money to actually run a bank for a fraud, you've got a hell of an expense to overcome, and it's easier to overcome that big of an expense with a legit operation, rather than coming up with $5MM cash, and then trying to bilk a few million out of people and running for South America.