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Insuring Your Investments


For commercial banks there's FDIC, for brokerages there's SIPC, but they're not the same.

A number of Minyans have asked about protecting their investments against brokerage bankruptcy. Thanks to Bear Stearns, (BSC) this question no longer seems far-fetched.

Most people are familiar with the Federal Deposit and Insurance Corporation, or FDIC. Created in 1933 by the Glass-Steagall Act, the FDIC guarantees deposits held in commercial banks for up to $100,000. But the FDIC does not cover brokerage accounts. If Citigroup (C) were to go bankrupt, asks Minyan George, what would happen to stocks and bonds here there as investments?

In 1970 the U.S. government created the Securities Investors Protection Corporation, or SIPC, to protect customers in the event a brokerage firm fails. But the SIPC is not an FDIC for brokerages. According to its website:

"It is important to understand that SIPC is not the securities world equivalent of FDIC. With a reserve of slightly more than $1 billion, SIPC could not keep its doors open for long if its purpose was to compensate all victims in the event of loss due to investment fraud."

Instead, the SIPC acts on behalf of customers to replace securities if a brokerage firm goes belly-up. The SIPC does not protect all types of assets (detailed below), but will provide up to $500,000 for claims not covered by the liquidation of the failed firm.

In addition to the standard SIPC coverage, most major brokerages have "Excess SIPC" insurance via Customer Asset Protection Company, or CAPCO. Formed in 2003, CAPCO provides potentially unlimited protection to clients of failed brokerages. Minyans should contact their broker to inquire about specific levels of this coverage.

The SIPC is not a catch-all insurance policy so it's important to understand how it operates:

  • The SIPC doesn't bail out investors for fraud or a drop in the value of assets. SIPC replaces missing stocks and other securities if a failed brokerage does not do so by its own accord.

  • The SIPC will ask a federal court to appoint a trustee to liquidate the firm and protect its customers.

  • Non-negotiable securities, including stocks and bonds are eligible for protection.

  • Securities including commodity futures contracts, fixed annuity contracts, currencies and other investment contracts not registered with the SEC are not eligible for protection.

  • The SIPC or the appointed trustee will act on the customers' behalf to replace all protected securities owned at the time of the bankruptcy filing.

  • If the SIPC is not able to recover all protected securities, it will pay customers a maximum of $500,000 including up to $100,000 for cash holdings.

  • Claims on assets not covered by the SIPC will be allocated to customers after liquidation on a pro-rata basis.

  • The trustee typically moves investment accounts to another brokerage, at which point the customer may elect to keep his or her account at the new brokerage or choose a new one.

  • Asset values are determined at the time of the filing data. The SIPC will make customers whole up to that level, regardless of whether asset values have north or south since that time.

  • The SIPC doesn't cover general partners, officers or directors of the failed institution. Nor does it cover beneficial owners of more than 5% of the company's outstanding shares, other persons with the power to exercise a controlling interest over management policies, or a broker, dealer or bank acting on its own behalf rather than on behalf of its customer.

  • The SIPC appointed trustee will contact effected customers with instructions on how to file claims, usually within 30-60 days of the filing event.

  • Claims must be filed promptly and in compliance with the trustee's instructions in order to be honored.

  • Claimants must describe all securities believed to be held at the brokerage account, but the SIPC and trustee will assume brokerage records are accurate.

  • If brokerage records are inaccurate and there is evidence of transactions made without the client's authorization, the trustee will request trade confirmations from the customer to verify authorized activity.

In the unlikely event a brokerage does go bankrupt, investors are protected. To a point.

The most important advice to Minyans is to be prepared ahead of time, which, given the current state of affairs, means as soon as possible.

No positions in stocks mentioned.

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