Customer Assets Are Separate From Firms’ Assets Securities regulations protect your funds and your securities when you keep them at a broker-dealer.
The Securities and Exchange Commission requires broker-dealers to deposit customer funds in a separate account, distinct from the firm’s own money. Securities held by clients in “street name” are kept securely with the Depository Trust Company, separate and distinct from the assets of securities firms.
Regulated by the SEC and the Federal Reserve, the depository is a national clearinghouse for settling trades and a custodian of securities. Regulators and independent auditors periodically review firms’ financial records to ensure that clients’ assets are accurately tracked and held separately from the firm’s own holdings.
In addition, Congress created the Securities Investor Protection Corporation (SIPC) in 1970 to protect customers of member broker-dealers that may fail or be liquidated. If any securities or cash are missing from eligible customer accounts, the corporation steps in to replace those securities and cash. This protection is limited to $500,000 per customer, including up to $100,000 in cash. SIPC does not protect customers against market risk. (Losses resulting from a fall in a security’s value are not covered.) See www.sipc.orgfor more information about SIPC.
Most securities firms offer additional account protection beyond SIPC’s limits (commonly referred to as “excess SIPC”). This coverage is provided through private arrangements between securities firms and insurance companies. Since the protections vary from firm to firm, clients should talk with their broker-dealer to learn about what is provided.
Customers can have confidence that, given the very high percentage of client assets that are recovered during liquidation, SIPC coverage is adequate for nearly all customer accounts. Consider:
First, federal securities laws require that customer assets be segregated from a firm’s own assets. The law is backed by internal and external audits, regulatory examinations, and by weekly and monthly reporting requirements.
Second, most customer assets are held in book-entry form at industry depositories and not in physical possession by the firms themselves.
Third, SIPC reports that 99.7 percent of eligible investors have been made whole in the 306 failedbrokerage firm cases that it has handled over the past 32 years. None of these cases required a payment under excess SIPC coverage. The remaining 0.3 percent of investors had claims in excess of the SIPC limits, but LPL understands that these claims were filed by clients of broker-dealers that did not carry excess coverage.
Fourth, SIPC funds are used to make investors whole after all customer assets held at the brokerage firm have been recovered. The SIPC limit of $500,000 ($100,000 cash) per account does not mean that the account will receive only up to $500,000. Rather, in a SIPC customer proceeding, the account will receive a pro-rata share of all client assets recovered in liquidation and then will receive up to $500,000 from SIPC to make up any difference that may still exist.
The Federal Deposit Insurance Corporation (FDIC) protects deposits up to $100,000 in most, but not all, U.S. banks and savings associations in the event that the institution becomes insolvent. FDIC does not cover securities, mutual funds, or similar types of investments. For more information about FDIC insurance, see www.fdic.gov.
The first, called “net equity,” covers each eligible customer account up to the account’s total value (or net equity).
The second is called “aggregate limit” insurance. This is similar to “net equity” insurance, but there is a limit per customer account and an aggregate firm limit on the total amount payable for all accounts. For example, a firm with a $10 million customer account limit subject to a total aggregate of $100 million would pay no more than $10 million to any one customer account and no more than $100 million in all. Using the same example, amounts less than $10 million could be paid to settle multiple customer account claims, but in no event exceed $100 million.
The third type provides an aggregate limit for any one customer, but does not impose a cap on the total amount that will be paid when a securities firm is liquidated.
Some insurance carriers that have provided excess SIPC in the past recently advised their customers (securities firms) that they are making changes. Some will no longer offer excess SIPC, while others will provide coverage only on an aggregate-limit basis.
As a result, some securities firms may change existing coverage or negotiate new coverage. Each firm will be responsible for notifying its customers of any changes. The underlying SIPC protection is not affected by these changes.
Ask your brokerage firm representative to explain the protection that is available for your account above the SIPC limits and to discuss the firm’s internal controls and financial strength. Knowing that you are with a well run, financially stable firm is your best assurance that your assets are safe and protected.
LPL has Excess SIPC protection from Lloyd’s of London. The firm coverage limits are $500 million in the aggregate and $99.5 million per customer. This coverage, referred to as “aggregate limit” insurance, is currently the only type of coverage available in the regular insurance marketplace. LPL Financial• Member FINRA/SIPC.