http://www.sipc.org/who/notfdic.cfm
The SIPC is not a government agency. It has no access to the US Treasury. The “I” in SIPC is not “insurance” – SIPC is not “insuring” your brokerage account, it is “P”rotecting it so you can sleep at night.
SIPC’s primary function is to resolve failed broker dealers in an orderly way. If you own stocks and they are kept in “street name” (they probably are), the stock is actually in the name of the broker – and among other things your shares may have been loaned out to another firm, often to enable a trader to “sell short”. It’s plausible that other firm might also fail, meaning there is no stock until the other firm clears its own bankruptcy.
So when a broker-dealer fails, they may not even have the stocks you think you own in their firm’s accounts. When a firm fails, the SIPC appoints a trustee to unwind the firm and figure out who gets burned.
The SIPC has a pool of money of less than a Billion dollars standing behind something like $10 trillion in protected (NOT insured!) assets. If you think the SIPC could protect against a collapse of a large Broker Dealer (or more than one), think again.
SIPC gets its operating funds from a small annual fee paid by registered brokers.
Let’s say you think you own 1,000 shares of General Electric Stock in street name at your broker, and the firm fails. GE stock is $16.25 a share today.
In the best case, all the records are intact, and the firm actually owns the stock (unlike Madoff where there was no stock at all). Similar to how the FDIC disposes of a failed bank, the SIPC will try to get a bigger broker to agree to take over all the firm’s accounts and handle the entire mess. That’s the only similarity between the FDIC and the SIPC.
Within a few days, your GE shares are transferred to another broker dealer company and you ducked the bullet and no harm, no foul.
But what if there are no reliable records? Or the company “borrowed” the assetst from thei5r customer accounts? Or the SIPC is unable to find another broker dealer who wants to assume responsibilty for clearing up the mess?
You will have to file a claim form to the SIPC with copies of your last statement and confirmations of trades you made since that statement (you do have them, right?)… In one to three months, after all the claims are sorted out, you might get your shares of GE stock back. During that time, you have no access to the stock – if GE falls to $5 a share, you’re screwed. You can’t sell the shares to meet a margin call. If you used those shares as collateral for a loan, you may have a problem with your lender.
If it turns out there is no stock and the books are bogus and the money was lost gambling on European Bond Repurchase agreements, you may wind up just being a general creditor in the bankruptcy – the SIPC is your advocate… but doesn’t have unlimited funds if multiple firms fail at the same time. It’s already swamped trying to clean up the Madoff mess.
Understanding how street name stocks work and the limits of the SIPC, you might ask “So can I have the broker hold my stocks in my name with the transfer agent instead of being in the “street name of the broker?”
The answer is “yes”, but your broker will be about as happy to discuss this with you as your life insurance agent is when you walk in and ask them “who insures my life insurance policy/annuity if the insurance company fails?“. You’ll get the initial pratronizing “don’t worry – that can’t happen…”, probably followed by either the agent saying he doesn’t really know or just making up a lie.
When you signed all that paperwork to open a brokerage account, it’s extremely likely you agreed that your stocks would all be held in street name, and can be lent out by the broker. If you have a margin account at the broker, then you absolutely agreed to have the stocks in street name so the firm can liquidate them quickly without your permission to meet margin calls.
Back in the old days, there were only two options – you held physical stock certificates issued in your name, or the stock was held in street name at a broker.
The third option created because of the need to stop issuing paper certificates is the Direct Registration System.
http://www.sec.gov/investor/pubs/holdsec.htm
With direct registration, your broker is only acting as your agent to buy and sell the stocks and isn’t the legal owner of the shares – you are. Since you are cutting out their flexibility to use your stocks and creating “busy work” to transfer shares to and from the DRS, expect to pay extra fees or be told the firm doesn’t want your account.
“If you don’t trust our firm, then maybe you should take your business somewhere else”
This is one scary thing to know. I must now double my Lunesta.
“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-based investment marketplace that is so different from the world of banking.”
Oh really? Such as the bankers’ CDS racketeering and sub-prime lending implosion?
It’s interesting to read the SEC ‘explanation’ of the three methods of holding a stock… they subtly imply physical or direct registration are less convenient than street name.
Thus, we come full circle as to why the entire bogus derivatives market needs to be investigated, overhauled, and regulated. It has reached the point where there is almost NOTHING left of the ‘old’ stock equity market… it’s all been converted into monetized debt, ‘exotic’ derivative instruments, and gambling on FOREX rates.
In this regard, the ‘occupy Wall Street crowd’ is correct… too bad they’ve been duped into anarchism by the very people they purport to be protesting (e.g. Soros, et-al). When they turn against Obama, Soros, and the others then I’ll believe they’re serious.
Prepare for crazy talk – for the past few days, I’ve been entertaining the idea that Rupert Murdoch and George Soros are playing on the same team. Perhaps this is due to the London tabloid thing, or maybe they’ve been on the same team all along. I’ve been pretty consistent in my statements that I don’t trust Fox News.
Fox News slogans (as I interpreted them several years ago):
“Fairly unbalanced.”
“We decide what you report.”
😉
What they’re kind of saying there without saying it – if the SIPC was actually backed by the US Government, it would be yet another “moral hazard”. People would deliberately price that guarantee in their risk calculations and create a crash knowing the US Treasury would pick up the pieces (and still might).
Raising the FDIC limit from 100k to 250k in 2008 just shows how irresponsible Congress is. People with > 100k in the bank were not paying the premiums for years to back up the accounts and were able to rush in and push themselves in front of those that who were within the limits… just like FEMA rushes in and hands out money to people who made the choice not to buy private insurance. If the FDIC were to announce that in 90 days, the limits on coverage were going down to $40k (enough to survive for a year or so in a total collapse, maybe), and you only get it on one bank account, not 40k per bank…. the real estate problem would show sudden improvement. People would also suddenly care if their bank is issuing 10s of billions in CDSs on Greek Debt and start demanding accountability.
The alternatives would be NBC, CBS, ABC, MSNBC, NYT, LAT, AP, UPI, et alia. I kind of don’t trust THEM, myself. The Fourth Estate long ago became the Fifth Column. Give FOX at least a little credit for not being the bunch mentioned above … at least not yet.
I understand what you’re saying, but the problem is the ‘center’ has been moved so far left that anything even remotely conservative is now labeled as ‘extremist’.
Thus, Rino Romney is lauded by the liberal media while Cain is lynched.