I am not a certified financial planner and therefore, do not give financial advice or investment advice. Anyone looking for financial advice is advised to see a independent certified financial planner to help them with their investments.
The Certified Financial Planner (CFP) designation is a certification mark for financial planners conferred by the Certified Financial Planner Board of Standards. To receive authorization to use the designation, the candidate must meet education, examination, experience and ethics requirements, and pay an ongoing certification fee.
But, I am very good with conducting research and I still very concerned about how we individual investors are protected in this time of banking crisis. Recently, a reader, Carolyn, prompted me to do some more research on how investors are protected in the case of financial service bankruptcies.
Use what I have found as background for a fuller conversation with your spouse and financial advisor in determining what you need to do to protect yourself. Under all circumstances, never take financial advice from someone who is not a CFP (including myself) like friends or family. Consult your financial advisor. The information here is for informational background only.
First, following the bankruptcy of IndyMac, I looked into FDIC insurance. In my post on FDIC Insurance, I laid out when and how investors are protected there:
With IndyMac having gone bust, bank shares tanking, and speculation rampant about who’s next, it’s time to consider what and how much the FDIC actually insures. This information is available at the FDIC website and I have added a blurb and a link below. But, the long and short of what they say is an individual is insured for a maximum of $100,000 across ALL of your bank and deposit accounts at one institution. This includes, checking, savings NOW accounts, and CDs. It does NOT include stocks, bonds, mutual funds, life insurance policies, or munis. Note: some IRA accounts are insured up to $250,000 per individual.
For example, if you and your wife have joint accounts for $220,000 at Acme Bank, when the FDIC steps in you are able to reclaim $100,000 each. You would be out of pocket $20,000.
The last thing to note is that the $100,000 for each individual covers each FDIC bank or holding company, meaning you had better check to make sure your money is spread around.
If you are interested in your bank’s safety, please see this post, visit the FDIC website, call your financial institution and seek advice from a CFP.
The information on brokerage forms is less clear. If anyone has better or more comprehensive information, please let me know because a lot of people are extremely worried about the safety of their brokerage accounts, IRAs, muni accounts and so on. Anything we can do to help provide useful information will ease some of the tension out there during this crisis.
It must be noted that I have no information that would suggest that individual investors would lose any money in their brokerage accounts in the case of bankruptcy. Again, if you are concerned about that, you should contact a CFP and call your broker’s firm.
As for information on the web, I went to Scottrade to see what they had to say. They said the following about protecting funds.
Scottrade is a member of the Securities Investor Protection Corporation (SIPC), which protects securities held by investors up to $500,000, including a maximum of $100,000 in cash claims*. A brochure with the details of SIPC protection is available at www.sipc.org.
Scottrade has also purchased excess coverage (excess SIPC) from our insurers of $24.5 million (inclusive of $900,000 in cash claims) to pay amounts in excess to those returned in a SIPC claim, subject to an aggregate Scottrade limit of $100,000,000. Taking into account SIPC and excess SIPC coverage, the Total Investor Protection is $25,000,000, inclusive of up to $1,000,000 in cash. This coverage does not protect against loss of the market value of securities. SIPC coverage is not the same as the insurance on bank accounts provided by the Federal Deposit Insurance Corporation (FDIC).
*In order for cash to be covered by SIPC or excess SIPC, cash held in an account must be for the purpose of, or as a result of, securities transactions. Cash held in a securities account for the purpose of earning interest, which was not the result of a securities transaction, may not be covered by SIPC or excess SIPC.
Next, then I went to the SIPC site. From the information I was able to ascertain, most brokerage firms look at the SIPC as the major investor protection that is available. The Securities Investor Protection Corporation’s purpose to help investors like yourself only in cases when a brokerage firm becomes insolvent and assets are missing.
It says about its mission
When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers’ cash, stock and other securities. Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever or wait for years while their assets are tied up in court.
Although not every investor is protected by SIPC, no fewer than 99 percent of persons who are eligible get their investments back from SIPC. From its creation by Congress in 1970 through December 2007, SIPC advanced $508 million in order to make possible the recovery of $15.7 billion in assets for an estimated 625,000 investors.
This is their main website:
When discussing their mission, their website says:
SIPC is an important part of the overall system of investor protection in the United States. While a number of federal, self-regulatory and state securities agencies deal with cases of investment fraud, SIPC’s focus is both different and narrow: Restoring funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms. The Securities Investor Protection Corporation was not chartered by Congress to combat fraud.
The organization goes to great lengths to dispel the notion that there is some sort of securities account insurance because there is not.
“Insurance” for investment fraud does not exist in the U.S. The Federal Trade Commission, Federal Bureau of Investigation, state securities regulators and other experts have estimated that investment fraud in the U.S. ranges from $10-$40 billion a year. In the case of microcap stock fraud, the toll on investors has been estimated as $1-3 billion annually.
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.
It is important to understand that SIPC is not the securities world equivalent of FDIC–the Federal Deposit Insurance Corporation. Congress specifically considered creating a Federal Broker-Dealer Insurance Corporation, but lawmakers wisely concluded that such a designation would be both misleading and out of step in the risk-bas
ed investment marketplace that is so different from the world of banking.
–Why We Are Not the FDIC
My overall take here is that SIPC helps one get money out of your account more quickly but does not protect against fraud and it is not FDIC insurance for brokerage accounts. These accounts are generally not insured.
Now, looking specifically at AIG as an example, it has several parts that are SIPC members. I looked them up at the web address below and here are their listings:
|Company Name||Trade Name||Address||City||State||Zip|
|AIG EQUITY SALES CORP||AIG EQUITY SALES CORP||ATTN WALTER JOSIAH
70 PINE ST 11TH FLOOR
|AIG SUNAMERICA CAPITAL SERVICES INC||AIG SUNAMERICA CAPITAL SERVICES INC||ATTN: KATY BLICHARZ
HARBORSIDE FINANCIAL CENTER
|AIG FINANCIAL SECURITIES CORP||AIG FINANCIAL SECURITIES CORP||50 DANBURY ROAD||WILTON||CT||06897-4444|
|AIG RETIREMENT ADVISORS INC||AIG RETIREMENT ADVISORS INC||2929 ALLEN PARKWAY
ATTN DARLA KEW L7-50
|CHAMPAIGN INVESTMENT COMPANY||CHAMPAIGN INVESTMENT COMPANY||6400 PERIMETER DRIVE||DUBLIN||OH||43016|
|CRAIG-HALLUM CAPITAL GROUP LLC||CRAIG-HALLUM CAPITAL GROUP LLC||222 SOUTH NINTH ST STE 350||MINNEAPOLIS||MN||55402|
|AIG FINANCIAL ADVISORS INC||AIG FINANCIAL ADVISORS INC||2800 N CENTRAL AVE STE 2100||PHOENIX||AZ||85004-1072|
|AIG SECURITIES LENDING CORP||AIG SECURITIES LENDING CORP||ATTN PETER ADAMCZYK
70 PINE ST 13TH FLOOR
In thinking about bankruptcy, you can use Lehman Brothers as an example. This is what the SIPC had to say about Lehman Brothers.
SIPC ISSUES STATEMENT ON LEHMAN BROTHERS INC.:
NO LIQUIDATION PROCEEDING ANTICIPATED
WASHINGTON, D.C. – September 15, 2008 – The Securities Investor Protection Corporation (SIPC), which maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms, issued the following statement this morning in relation to reports about the bankruptcy filing of Lehman Brothers Holdings, Inc.
SIPC President Stephen Harbeck said: “SIPC has not initiated a liquidation proceeding against the broker-dealer Lehman Brothers Inc. and we do not currently anticipate doing so. As of this morning, it appears that all customer cash, stocks and other securities are accounted for.
It is important to understand that the holdings of broker-dealer Lehman Brothers Inc., would not be directly impacted by a bankruptcy filing at the separate entity Lehman Brothers Holdings, Inc.
Should the situation at Lehman Brothers Inc. change in some material way not now anticipated by SIPC and regulators, we will, of course, intervene as necessary to protect the cash and securities of customers. However, I want to underscore that such an action is considered unlikely at this time.
SIPC is working closely with the U.S. Securities and Exchange Commission (SEC) to monitor the situation at Lehman Brothers Inc.
The Securities Investor Protection Corporation remains vigilant and committed to our core mission: When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers’ cash, stock and other securities. Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever or wait for years while their assets are tied up in court.”
-SIPC statement on Lehman’s bankruptcy filing
The SIPC points out that it is not in the business of insuring against fraud, which is not the case you are thinking about. But, it does go on to say that it has only $1 billion in reserve. So, I cannot see this organization as a good lifeline. Again, I a not a licensed financial advisor, though.
Forbes has this to say:
How Safe Is Your Brokerage Account?
Jim Stack, InvesTech Research 08.21.08, 4:00 PM ET
The demise of Bear Stearns, rumors about insolvency at Lehman Brothers and headlines about big losses at E*Trade Financial have prompted calls from subscribers about the safety of investment assets and what might happen if their brokers fail.
So as we patiently wait for our key indicators to signal a new buying opportunity, let’s address some concerns and questions about how to ensure your assets stay safe and sound at your custodial firm.
The first line of defense comes from a myriad of regulatory laws and standards that have been developed over the years in response to past financial problems. Broker-dealers come under strict requirements and constant scrutiny from a number of regulatory bodies, including the Securities & Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) at the national level, as well as state regulators.
These are some of the protections that are already in place for investors, under the current mandates:
–SEC-registered brokers are required to maintain adequate net capital (i.e., assets must exceed liabilities) to provide financial resources so that, if the firm fails, customers get their cash and securities back.
–Registered brokers must segregate customer funds and securities from the broker’s own proprietary holdings, thus protecting customers from trading losses of the firm. In the event a brokerage fails, customer claims for funds and securities are given preference over any other claims on the company.
–Broker-dealers registered with the SEC are required by law to be members of the Securities Investor Protection Corporation (SIPC), which, as we’ll see in a minute, provides insurance for customer accounts.
Usually, troubled firms have adequate assets to cover everything that is owed to their customers. To be honest, however, these tight regulatory standards do not prevent brokers from making poor business decisions or taking unwise credit risks. Nor do they fully eliminate the possibility of fraud or theft, which lead
s to the second line of defense.
Most investors are protected by the Securities Investor Protection Corporation. Some brokers also carry additional insurance coverage as added security. For instance, Charles Schwab & Co., which custodies accounts for Stack Financial Management, carries an additional $600 million in coverage with Lloyd’s of London that would only be tapped if required funds exceed the SIPC limit. Here’s some insight into SIPC insurance coverage.
What Is The SIPC?
The Securities Investor Protection Corporation was originally created in 1970 by Congress to protect investor interests. The SIPC is not a government agency or a regulator; it’s a nonprofit membership corporation that is funded by its member securities brokers.
What Does SIPC Insurance Cover?
SIPC is not an investor version of the FDIC, which automatically covers your bank account up to a certain dollar limit. If your broker fails, most (if not all) your securities (stocks, bonds, mutual funds, etc.) will be returned to you. After the broker’s customer assets have been distributed, SIPC steps in to replace only securities and cash that are missing from your account.
SIPC covers any missing assets up to a limit of $500,000 per account type, of which $100,000 may be claims for cash. In regard to money-market funds, if your statement lists these assets as shares with a value of $1, such as Schwab’s Value Advantage, they are viewed as mutual funds and qualify for the full $500,000 coverage limit. If the money-market assets are listed only in dollar figures or in a cash account, the limit of coverage is $100,000.
Each account that is a separate legal entity is treated on an individual basis. For instance, the following would qualify as separate accounts, each subject to the $500,000 limit: your individual account, your trust, your IRA, your spouse’s individual account, trust and IRA, your joint account, as well as a custodial account for a child.
Accounts with registrations that are substantially the same are combined for purposes of coverage. In other words, an IRA that is divided between two accounts would be viewed as a single account for insurance purposes.
There are, of course, some exceptions and caveats. Obviously, SIPC doesn’t compensate investors for declines in the value of their investments, and that rule also applies to money-market funds that “break the buck.” Nor does the company bail out investors who are sold worthless securities. If your broker fails, SIPC will return the shares of your missing securities whenever possible, regardless of the current market value.
Also, coverage excludes commodity futures contracts, foreign currency, precious metals, investment contracts (limited partnerships) and fixed annuity contracts that are not registered with the SEC. Certain persons associated with the brokerage–partners, officers, directors and some beneficial owners of the firm–are not covered.
What Happens If Your Broker Fails?
In the case of a failed brokerage firm with accurate records, a court-appointed trustee and the SIPC will attempt to have customer accounts transferred to another member firm. You would be notified of the transfer and then have the option of moving your accounts elsewhere.
If this isn’t possible, the trustee arranges for liquidation of the firm and distribution of assets. Customer assets are distributed based on the company’s record of your account positions. Any shortfall in assets is spread among affected accounts on a pro rata basis. After customer assets are allocated, SIPC steps in to cover any remaining, unsatisfied claims up to the specified limit for each account.
If your brokerage firm is put into liquidation, the trustee will notify you and send a claim form and instructions. You will need to act promptly, as this form must be returned by the filing deadline set by the bankruptcy court, which is usually 30 to 60 days from the date the notice of proceeding is published. Federal law allows up to six months for filings, but late claims are subject to delayed processing and possibly limited payment.
SIPC’s Track Record
This double level of protection–broker regulatory requirements and SIPC insurance–has served investors extremely well. In its 37-year history, SIPC has helped liquidate 317 firms, making possible the recovery of approximately $15.7 billion in assets for 625,000 investors.
SIPC estimates that 99% of eligible persons have fully recouped their losses in the failed broker cases it has handled to date. What’s truly remarkable is that the SIPC has only had to provide $508 million of its own funds to achieve this level of protection. Only 349 claims have exceeded SIPC limits over this time frame–that means less than 0.05% of claims were not fully satisfied.
Investments in brokerage accounts do not seem as safe as money in the bank. The FDIC has $54 billion to recover lost funds, while the SIPC only has $1 billion. I can imagine scenarios in which this money is quickly exhausted. That said, most major brokers have extra protection from AAA insurance companies. While this information may not be 100% reassuring, I hope it is helpful and reduces any sense of anxiety you might have about what to do in this time of crisis. It helped me. However, the anxiety that individual investors feel due to the recent banking sector volatility points to the need for a more comprehensive plan from our government.
Do see a CFP to help with for specific financial planning advice.