14 Aug

Are There Any Guarantees on My Investment Account?

August 14, 2008

This is an interesting question that tends to come up more often when the market is experiencing volatility such as we’ve seen this year and the fourth quarter of 2007.

We are all probably familiar with FDIC (Federal Deposit Insurance Corporation), which insures all depositors of a member bank against loss up to a certain dollar amount. The FDIC’s approach to making depositors entirely whole makes sense in the risk-averse bank account world, but what about the world of the stock market where volatility is part of the equation?

SIPC (Securities Investor Protection Corporation) was formed by Congress in 1970 as a way to help individuals whose money, stocks or 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 stock, bonds, or other investments fall or fail for any reason (ie. the volatility of the stock market).

SIPC usually gets involved when a brokerage fails and assets are missing from customer accounts. SIPC steps in by replacing these missing stocks and other securities by calculating the financial worth (e.g. the number of shares of a certain stock) of a customer’s account as of the “filing date”. SIPC first looks to see if the actual securities owned by the customers can be replaced in the right accounts. If they cannot, SIPC’s reserve funds will be used, if necessary, to purchase replacement securities up to a ceiling of $500,000 per customer held in separate capacity (e.g. joint tenant or sole owner), including a maximum of $100,000 for cash claims. Quite a few broker/dealers or custodians will purchase additional insurance. Savant actually uses a custodian that provides additional brokerage insurance (underwritten by Lloyd’s of London) in the event that SIPC limits are exhausted. This coverage provides protection of securities and cash up to an aggregate of $600 million, and is limited to a combined return to any customer from a trustee, SIPC, and Lloyd’s of $150 million, including cash of up to $1 million.

By the way, there are some assets that are ineligible for SIPC. These include commodity futures contracts, currency, and investment contracts like limited partnership that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.

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