Words for the Week. #7
Securities Investor Protection Corporation (SIPC)
With all the headlines about Bank collapses and FDIC insurance I thought it would be beneficial to also address another of the acronyms of the the type of protections in the Broker-Dealer and Securities Industry.
The Securities Investor Protection Corporation (SIPC) is a Federally mandated, non-profit, member-funded, United States corporation created under the Securities Investor Protection Act (SIPA) of 1970 that mandates membership of most US-registered Broker-Dealers. Although created by federal legislation and overseen by the Securities and Exchange Commission the SIPC is neither a government agency, nor a regulator of broker-dealers. The purpose of the SIPC is to expedite the recovery and return of missing customer cash and assets during the liquidation of a failed investment firm.
The SIPC serves two primary roles in the event that a broker-dealer fails. First, the SIPC acts to organize the distribution of customer cash and securities to investors. Second, to the extent a customer's cash and/or securities are unavailable, the SIPC can pay the customer (via its trustee) up to $500,000 for missing equity, including up to $250,000 for missing cash. In most cases where a brokerage firm has failed or is on the brink of failure, SIPC first seeks to transfer customer accounts to another brokerage firm. Should that process fail, the insolvent firm will be liquidated. In order to state a claim, the investor is required to show that their economic loss arose because of the insolvency of their broker-dealer and not because of fraud, misrepresentation, or bad investment decisions. In certain circumstances, securities or cash may not exist in full based upon a customer's statement. In this case, protection is also extended to investors whose "securities may have been lost, improperly hypothecated, misappropriated, never purchased, or even stolen".
While customers' cash and most types of securities - such as notes, stocks, bonds and Certificates of Deposit - are protected, other items such as Commodity, or Futures Contracts are not covered. Investment contracts, certificates of interest, participations in profit-sharing agreements, and oil, gas, or mineral royalties, or leases are not covered unless registered with the Securities and Exchange Commission (SEC).
Caveats and Clarifications:
SIPC was modeled loosely on the Federal Deposit Insurance Corporation (FDIC) which protects bank customers, the SIPC has wider discretion in satisfying customer claims. When securities are missing, it can arrange to provide either replacement securities of the same kind, or their cash value on the date that its trustee was appointed to the case. The SIPC does not protect investors against any loss in the value of their securities, and it does not assume responsibility for any promises about investment performance. Unregistered securities and commodity contracts are not covered by the SIPC, even when brokered by a member firm. Account disputes with a brokerage that remains in business are not handled by the SIPC, but typically by the Financial Industry Regulatory Authority. (FINRA) and the Commodity Futures Trading Commission. (CFTC).
The limitations of SIPC protection caused significant confusion among a number of investors following the collapse of Lehman Brothers and perhaps, most prominently, following the exposure of Bernard Madoff's Ponzi Scheme frauds.
In the Madoff fraud, where securities had allegedly not actually been purchased, SIPC and the SIPC Trustee challenged and disposed of the claims of approximately one-half of customers of the Madoff firm, arguing that over the course of time those investors had withdrawn more funds than had been invested, resulting in a negative "net Equity", and, therefore, not eligible for SIPC protection.
Since SIPC does not insure the underlying value of the financial asset it protects, investors bear the risk of the market. In addition, investors also bear any losses of account value that exceed the current amount of SIPC protection, namely $500,000 for securities. For example, if an investor buys 100 shares of XYZ company from a brokerage firm and the firm declares bankruptcy or merges with another, the 100 shares of XYZ still belong to the investor and should be recoverable. However, if the value of XYZ declines, SIPC does not insure the difference. In other words, the $500,000 limit is to protect against broker malfeasance, not poor investment decisions and changes in the market value of securities. In addition, SIPC may protect investors against unauthorized trades in their account, while the failure to execute a trade is not covered. Again, this only pertains to an insolvent broker or dealer.
Under rules of the regulatory SRO governing brokers and dealers—the Financial Industry Regulatory Authority (FINRA), the investors' and the brokerage firms' assets must be segregated; they may not be commingled. It could be a civil or criminal violation if an investor's assets were inappropriately commingled. If the firm files for bankruptcy, provided the assets have been appropriately segregated, the investor's assets should be recoverable, beyond SIPC's current protection limit of $500,000, of the net equity, per account and $250,000 for cash claims. However, as noted above, not all asset types are covered by SIPC, such as annuities.
Please see the following Link for Gemini Wealth Group/ LPL Financial Coverage. Please contact us or refer to www.lpl.com for further information
The information above is not all inclusive but a summary of information and the opinions of the blogger (me). It is not meant to solicit any specific investment or program but to provide a brief resource for your reference.
We welcome any questions or comments and appreciate the opportunity to assist you.