SIPC, FDIC and NCUA -- the same?

[always_learning]

I feel like an idiot for asking, but does the SIPC do the same for brokerage firms as the FDIC/NCUA do for banks? All these years, I thought it only covered malicious behavior by execs but the doc I just read sounds like that is wrong and it's really more along the lines of FDIC/NCUA. Is this correct?

This is the doc I read in case it's relevant ( https://www.sipc.org/for-investors/what-sipc-protects )

 

[pb4uski]

No, SIPC coverage is very different from FDIC/NCUA protection.

... SIPC protection is limited. SIPC only protects the custody function of the broker dealer, which means that SIPC works to restore to customers their securities and cash that are in their accounts when the brokerage firm liquidation begins.

SIPC does not protect against the decline in value of your securities. SIPC does not protect individuals who are sold worthless stocks and other securities. SIPC does not protect against losses due to a broker's bad investment advice, or for recommending inappropriate investments.

 

[always_learning]

No, SIPC coverage is very different from FDIC/NCUA protection.

I'm sorry. That still doesn't help me. I totally get the part about loss of investment and always knew that.

What I can't seem to wrap my head around is what situation the SIPC would kick in?

Just using Vanguard in my example, would a 'run' on them prompt a halt to moving money (halted by whatever agency) and what is left at that time is protected under the SIPC? Or does the SIPC literally just cover 'theft' from fund managers or something like that?

 

[rodi]

My understanding is SIPC stepped in when Lehman collapsed. The accounts at Lehman were transferred to other brokerages (like a bank takeover Chase got WAMU in the last bank collapse). The value of the holdings was not protected but the number of shares and cash were protected and transferred.

 

[audreyh1]

A brokerage is quite different from a credit union or bank. They are holding securities for you in your account. They aren’t responsible for the value of your securities. There is no “run” in the bank sense. If you want to move your securities, you have them transferred in kind to another broker or sold and put in a money market fund from which to withdraw the proceeds. The broker doesn’t have to cover anything, they just hand your securities back or sell them on your behalf and hand you the proceeds. The securities themselves exist separately from the brokerage.

The SIPC steps in when a brokerage fails and has to be liquidated, or when assets go missing from your accounts. So you do want to keep a recent statement handy. https://www.sipc.org/for-investors/when-sipc-gets-involved

 

[always_learning]

My understanding is SIPC stepped in when Lehman collapsed. The accounts at Lehman were transferred to other brokerages (like a bank takeover Chase got WAMU in the last bank collapse). The value of the holdings was not protected but the number of shares and cash were protected and transferred.

This is what I needed. I had no idea SIPC covered that/worked that way. For over 30 years I thought it was just there for willful mishandling.

A broker is quite different than a credit union or bank. They are holding securities for you in your account. They aren’t responsible for the value of your securities. There is no “run” in the bank sense. If you want to move your securities, you have the, transferred in kind to another broker or sold and put in a money market fund from which to withdraw cash. The broker doesn’t have to cover anything, they just had your securities back or sell them on your behalf.

And this was why I was confused today when I followed a rabbit trail and read something about the SIPC. I thought all these years that we had just better hope nothing happened to the brokerage and that everything was just gone if they failed.


Thanks everyone. I'm good now. I learned something today!

 

[Koolau]

Thanks to all for the clarification. I was hazy at best on this.

 

[Ivy1]

So a couple of ??...
1)is there a list of FDIC insured Money Mkt Funds?
2)What organization if any backs up SIPC?

 

[VanWinkle]

This article may help explain:


https://thefinancebuff.com/brokerage-account-safe-no-fdic.html



VW

 

[audreyh1]

So a couple of ??...
1)is there a list of FDIC insured Money Mkt Funds?
2)What organization if any backs up SIPC?

Money market funds which are available through brokerages are not FDIC insured. They hold very short-term fixed income securities that are constantly maturing. Some brokerages offer bank sweep accounts which are FDIC insured because these are held by banks.

Money market accounts which are available through banks are FDIC insured (provided the bank is).

SIPC is member funded, brokerage membership is required, but is not a government agency, although it is overseen by the SEC and board members are appointed by the government. https://en.m.wikipedia.org/wiki/Securities_Investor_Protection_Corporation

 

[dunkelblau]

1) according to this money market mutual funds are not FDIC insured, but money market accounts at banks are FDIC insured:
https://www.ally.com/do-it-right/banking/are-money-market-accounts-fdic-insured/
A critical difference between these two types of savings instruments is that deposits in money market accounts are insured by the FDIC (Federal Deposit Insurance Corporation) up to the maximum allowed by law at FDIC-insured banks. By contrast, money market funds are not FDIC-insured. So with these it is possible to lose some, or even all, of your principal.

2) according to this SIPC is a non-profit membership corporation and is not a federal government agency. Maybe analogous to a State Farm for brokers?
https://en.wikipedia.org/wiki/Securities_Investor_Protection_Corporation
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[3] 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 insurance limit is $500k per customer account-type of which up to $250k may be cash. Based on recent discussions about consolidating accounts into one or two brokerages, I assume it's common for us to exceed the $500k limit when the securities are held in our name, but we need to be careful to stay below the $250k cash limit just as we would the $250k FDIC limit.

I read somewhere that the large excess SIPC coverage that large brokers buy from Lloyds (typically ~$100M) should be taken with a grain of salt because the aggregate coverage limit (typically $500M to $1B) caps the total recovery per failure. IOW if only a small fraction of accounts lose securities and/or cash exceeding the SIPC limit in a collapse, these will be fully covered, but if this loss is widespread, then the haircut could be substantial. That's my understanding anyways, and I'm more than happy to stand corrected.

 

[gayl]

So is that 500k per person or per account type ie: brokerage, IRA, Roth?? I only keep 5-10 k in the brokerage bank account but have the limit in 2 of the other account types. Is that up to 500k in stocks / bonds / ETFs excluding CDs & treasuries

 

[pb4uski]

SIPC coverage rarely comes into play... it covers the brokerage custody screwups, which almost never happens in this day and age. If an investment loses value... say that in your brokerage account you had SVB stock or SVB preferred stock or SVB bonds or e SVB brokered CDs in excess of the $250k FDIC coverage (before the FDIC temporarily extended coverage yesterday).. all the broker is responsible for is keeing custody of the investment and the investment is still there... the value loss is the investor's problem... that's how capitalism works.

 

[gayl]

Thanks. Not at all concerned about investment losing value. That's on me. Concerned about going thru a Lehmann or Bear Stearns event.

FWIW I sold out of the individual banks on Tuesday (IRA) & Thursday (brokerage) mornings as part of my simplification and putting more into CDs. I'm not that smart

 

[Gotadimple]

Thanks. Not at all concerned about investment losing value. That's on me. Concerned about going thru a Lehmann or Bear Stearns event.

FWIW I sold out of the individual banks on Tuesday (IRA) & Thursday (brokerage) mornings as part of my simplification and putting more into CDs. I'm not that smart

If you have a normal retail relationship with your broker you should not ever be affected the way clients at Lehmann and Bear Stearns were affected. All their retail clients got all of their money back, because there was a segregation between client accounts and other 'unsecured' bank deposits from other brokers and hedge funds, for example.

Retail clients accounts were sold to other large broker firms who took over the accounting for what each client owned and any other deposits in their accounts. That happened really quickly.

The article from the Finance Buff should help to clarify: https://thefinancebuff.com/brokerage-account-safe-no-fdic.html
"...When you have money at a bank, you have a lender-borrower relationship with the bank..."
"...When you have money at a broker, the broker is only buying and keeping things for you. There is an exact mapping between what the broker says you have in your account and what the broker keeps for you..."
"...Brokerage accounts are insured by SIPC up to $500,000 but the insurance doesn’t cover the payback from your investments. It only covers missing assets if the broker goes down."

Lehman Brothers falsified records of unsecured investments. There was no mapping of what had been deposited to the bank (not the brokerage).