http:\/\/www.sipc.org\/who\/notfdic.cfm<\/p>\n
The SIPC is not a government agency. It has no access to the US Treasury.\u00a0 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.<\/p>\n
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”.\u00a0\u00a0 It’s plausible that other firm might also fail, meaning there is no stock until the other firm clears its own bankruptcy.<\/p>\n
So when a broker-dealer fails, they may not even have the stocks you think you own in their firm’s accounts.\u00a0 When a firm fails, the SIPC appoints a trustee to unwind the firm and figure out who gets burned.<\/p>\n
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.<\/p>\n
SIPC gets its operating funds from a small annual fee paid by registered brokers.<\/p>\n
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.<\/p>\n
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.\u00a0 That’s the only similarity between the FDIC and the SIPC.<\/p>\n
Within a few days, your GE shares are transferred to another broker dealer company and you ducked the bullet and no harm, no foul.<\/p>\n
But what if there are no reliable records? Or the company “borrowed” the assetst from thei5r customer accounts?\u00a0 Or the SIPC is unable to find another broker dealer who wants to assume responsibilty for clearing up the mess?<\/p>\n
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<\/em><\/strong> 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.\u00a0 If you used those shares as collateral for a loan, you may have a problem with your lender.<\/p>\n 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.\u00a0\u00a0 It’s already swamped trying to clean up the Madoff mess.<\/p>\n 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\u00a0 the broker?”<\/strong><\/em><\/p>\n 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\u00a0 “who insures my life insurance policy\/annuity if the insurance company fails?<\/strong>“. 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.<\/p>\n 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<\/strong>, and can be lent out by the broker. If you have a margin account<\/strong><\/em> 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.<\/p>\n 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.<\/p>\n The third option created because of the need to stop issuing paper certificates is the Direct Registration System.<\/strong><\/span><\/p>\n http:\/\/www.sec.gov\/investor\/pubs\/holdsec.htm<\/a><\/p>\n 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.<\/p>\n “If you don’t trust our firm, then maybe you should take your business somewhere else”<\/em><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" http:\/\/www.sipc.org\/who\/notfdic.cfm The SIPC is not a government agency. It has no access to the US Treasury.\u00a0 The “I” in SIPC is not “insurance” – SIPC is not “insuring” your brokerage account, it is “P”rotecting it so you can sleep at … Continue reading