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I first remember hearing about FDIC insurance over 16 years ago, back when I entered the investment profession as an intern with Merrill Lynch in Chambersburg, Pennsylvania. Back in the early to mid 1990’s most of the financial institutions had a niche market- meaning that most of the banks did banking and lending, insurance companies did insurance and annuities, and the brokerage firms did the investing for consumers and institutions. That was each of their bread and butter and made up their primary business model- basically, that’s what each financial institution depended on to turn their profit. While at a brokerage firm back then, it wasn’t uncommon to question the reason for this FDIC and SIPC insurance… many would even suggest “who would ever need to use such an organization”?
What Happened to the Financial Picture?
As times changed and financial firms got greedier and greedier, we started to see a change in the way that many financial institutions ran their business models. With big money being made in all directions, the majority of financial institutions wanted to become a “jack of all trades” or a “one-stop shop” as many have phrased it, where in reality they suddenly became a “master of none”. Banks decided to infiltrate the annuity and brokerage business to offer the potential for higher returns to their clients, while brokerage firms and insurance companies retaliated by offering higher paying conservative investments such as money markets and CD’s and stepped into the lending markets as well. The result is… one big mess, a chaos that you, I, and other taxpayer/investors will end up paying for.
Getting Back on Track…
Even with all the credit default swaps, bad mortgages, and credit card debt that’s out there… we will eventually see economic recovery. I also think that you’ll see several of the financial institutions reverting their main focus back to their bread and butter business. Right now, investors are concerned about the safety of their principal in today’s uncertain and turbulent environment. Several banks, brokerage firms, and financial professionals have either gone out of business, folded, merged with another company, or been a part of white-collar crime in the industry which has caused many investors to lose money. The FDIC and SIPC has undertaken a huge role over the past 18 months to investigate and help return money to investors in these unfortunate circumstances. This article is designed to help the investor understand two of the investor protection organizations that are available… the FDIC (Federal Deposit Insurance Corporation) and the SIPC (Securities Investor Protection Corporation).
What’s New with FDIC?
The FDIC insures deposits in most banks and savings associations located in the United States. It covers checking accounts, savings accounts, money market accounts, CD’s, and NOW accounts. It does NOT insure funds that are invested in mutual funds, municipals, exchanged-traded funds, stocks, bonds, annuities, or life insurance policies even if these products were purchased from an insured financial institution. Since US Treasury bonds, notes, and bills are backed by the full faith and credit of the US Government, they are also not covered under FDIC insurance. To confirm that your financial institution is insured by FDIC, you can call the toll-free number at 1-877-275-3342 to confirm their status.
One of the major recent changes has been the increase in the coverage amount per depositor from $100,000 to $250,000 per insured bank. Depositors can increase their FDIC coverage by placing deposits with different member banks and staying under the $250,000 limit within each FDIC member bank or they can also increase their insurance coverage by dividing their deposits into several different accounts at the same insured bank. This can be done by utilizing different categories of ownership such as joint accounts, revocable trust accounts, and retirement accounts. The FDIC does not insure the contents in safe deposit boxes or deposits on file with non-member banks.
How is SIPC coverage different?
The SIPC organization was established to protect brokerage investors whose cash, stocks, bonds, and other securities are stolen by a broker or put at risk when a brokerage fails for other reasons. SIPC does not bail out investors when the value of their mutual funds, stocks, or any other investment declines in value due to market fluctuation or any other reason. Among the investments that are ineligible for SIPC protection are commodity futures contracts and currency, as well as investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933. If you have a question as to whether your particular firm is a member of SIPC, you should call the SIPC Membership Department at 202-371-8300 to confirm their status.
If the SIPC- member firm should happen to fail, the customers get back all securities that are in the process of registration or are already registered in their name. After this is done, the firm’s remaining customer assets are then divided on a pro rata basis with funds shared in proportion to the size of claims. Should these assets not cover all the amount of claims, then SIPC reserve funds are used to fill the claims. Limits of $500,000 per customer with a maximum of $100,000 for cash claims is covered under SIPC. Whenever possible, the SIPC uses reserve funds to repurchase the securities owned by the investor and returns them to a new account in the investor’s name.
These are scary times and investors need to take it upon themselves to make sure that their banking and brokerage institutions are members of FDIC and SIPC. If your funds on hand exceed the coverage limits specified above, then you may want to consider using multiple banks for those funds and inquiring with your brokerage firm if they have purchased additional separate insurance coverage above the SIPC limits. Large brokerage firms such as Vanguard, Fidelity, and Charles Schwab have purchased insurance coverage that insures investor accounts that exceed the $500,000 limit covered under SIPC.
www.sipc.org, “What SIPC Covers… What it Does Not”, Copyright 2009 Securities Investor Protection Corporation
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