Sleeping well at night and knowing that investment capital is safe has become a fundamental concept for baby boom investors as they redefine risk tolerance. Given sharp drops across many asset classes during the financial crisis, even the most risk-tolerant of investors have revisited their pain thresholds. Due to the unforgettable events of fall 2008, when a money market mutual fund famously “broke the buck” — or recorded a Net Asset Value below $1 due to mark-to-market losses in its portfolio — clients are double-checking fund prospectuses and reading the fine print on their monthly investment statements more frequently. This recent curiosity has sparked a number of frequently asked questions about insurance coverage provided by the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC).
What does the FDIC cover?
Created by Congress in the Banking Act of 1933, the FDIC is an independent agency established in response to the widespread bank failures during theGreat Depression.1 Currently, the FDIC serves to maintain stability and consumer confidence in the banking system by monitoring financial institution safety standards and providing insurance to depositors in case of bank failures.
The FDIC uses the term “ownership category” to describe differing registration types for which they assign specific insurance coverage limits. For example, an individual account and an account held in joint name are considered two unique ownership categories. Trusts, corporations, partnerships, and certain retirement accounts are also considered unique ownership categories.2
The FDIC insures cash investments at banking institutions for up to $250,000 per ownership category, per institution. An individual can have multiple like-registered accounts at several different banking institutions to obtain coverage above this $250,000 mark. With an account held in joint name, each account owner will carry his or her own $250,000 of coverage, thus allowing up to $500,000 of insured coverage for a joint deposit account. Trust accounts carry their own specific ownership category rules based upon the number of trustees and benefi ciaries. Meanwhile, corporation and partnership accounts are covered at the $250,000 level, regardless of the number of shareholders or partners. The FDIC has also extended coverage to certain retirement accounts, covering $250,000 of cash investments in traditional, Roth, and SEP individual retirement accounts. All retirement accounts held at one institution by one owner are aggregated and insured up to $250,000.3
CAPTRUST’s primary custodian — Pershing, LLC — provides our private wealth clients access to FDIC-insured money market sweep funds inside their brokerage accounts. Our default sweep option for taxable accounts uses a multi-bank money market fund, which has the effect of raising the coverage on cash balances from $250,000 per depositor to $2.5 million — or $5 million for joint accounts. Cash balances invested in this program sweep overnight into as many as 10 member banks, each of which provides $250,000 of coverage.4 This affords our clients increased coverage without the complexity of maintaining banking or investment accounts at multiple institutions and, most importantly, peace of mind knowing their cash balances are insured.
What does the SIPC cover?
The Securities Investor Protection Corporation is a nonprofit corporation created by the Securities Investor Protection Act of 1970 in response to a high number of trade failures caused by an overwhelming increase in trading volume in the late 1960s.5 Its primary purpose is to restore “missing” assets to clients of failed, bankrupt, or financially distressed brokerage firms. The SIPC is unrelated to the FDIC and does not afford investors the same protections. The SIPC does not insure against a decrease in the value of securities due to market decline. The FDIC’s scope is limited to bank deposits and does not extend to investments held in brokerage accounts. Fortunately, that’s where the SIPC picks up.
The SIPC uses the nomenclature “separate customer,” referring to the types of investors for which it provides insurance. For example, an individual account is considered a type of separate customer, as is an account held in joint name. Each owner of a joint account does not carry his or her own separate unique coverage, as they do with the FDIC. The same is true for corporations and trusts, both of which carry their own unique singular separate customer identity regardless of the number of trustees, benefi ciaries, or shareholders respectively.6
The SIPC provides insurance for replacement of securities up to $500,000 per separate customer account, of which $250,000 can be cash awaiting investment, defined as uninvested cash in a brokerage account, as demonstrated in Figure 1. Pershing, LLC has obtained coverage above and beyond basic SIPC through Lloyd’s of London, the well-known syndicate of insurance underwriters. This coverage — called “excess SIPC” — provides $1 billion of coverage in aggregate for missing cash and securities (including up to $1.9 million of cash per customer account). In other words, Pershing’s excess SIPC coverage is applied after the last dollar of SIPC coverage at a per-client loss limit of $1.9 million for cash awaiting investment, and has an aggregate firm loss-limit of $1 billion for cash and securities.
While FDIC and SIPC coverage details do not make for the most exhilarating pillow talk, knowing the protections the two afford can help investors mitigate restless nights. Due to fallout from the recent financial crisis and ensuing recession, risk sensitivity has become deeply entrenched in the psyche of investors. Despite this fallout, the FDIC and SIPC provide security in an otherwise unsure investment universe. It is imperative that our clients know why they own what they own and are informed about the protections provided to them when investing with CAPTRUST. If you would like more information on FDIC and SIPC coverage and how they apply to your specific situation, please contact your CAPTRUST Financial Advisor.
1 History of the FDIC. Federal Deposit Insurance Corporation. http://www.fdic.gov/about/history/index.html.
2 FDIC. Your Insured Deposits (brochure). Federal Deposit Insurance Corporation. July 2011.
4 BNY Mellon Asset Management. Dreyfus Insured Deposit Program (brochure). MBSC Securities Corporation. 2011.
5 SOUTHERN CALIFORNIA LAW REVIEW. Who Watches the Watchers? The Securities Investors Protection Act, Investor Confidence, and the Subsidization of Failure. Joo, T. Vol. 72 (1071), 1076.
6 SECURITIES INVESTOR PROTECTION CORPORATION. Rules Identifying Accounts of “Separate Customers” of SIPC Members (brochure). June 1981.
8 Pershing LLC. Understanding the Protection of Assets (brochure). 2012.