In the wake of the recent news about Silicon Valley Bank and Signature Bank, questions about SIPC coverage have come up more frequently. At RMR, we pride ourselves on ensuring that our client’s assets are protected to the fullest extent possible.
We work with some of the largest custodians (Fidelity, Charles Schwab, & TD Ameritrade) in the financial services industry, each of which offer “Excess SIPC” coverage for client assets. Fidelity serves over 40 million individual investors and has $10.3 trillion in assets under administration (https://www.fidelity.com/about-fidelity/our-company), Charles Schwab has over $7 trillion in client assets on their platform (https://www.aboutschwab.com/charles-schwab), and TD Ameritrade provides services for 11 million client accounts that total more than $1 trillion in assets (https://www.tdameritrade.com/about-us.html).
The Securities Investor Protection Corporation (SIPC)
What is SIPC?
The Securities Investor Protection Corporation (SIPC) protects customers if their brokerage firm fails. Brokerage firm failures are rare.
How does SIPC protection work?
SIPC protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash. Most customers of failed brokerage firms are protected when assets are missing from customer accounts. There is no requirement that a customer reside in or be a citizen of the United States. A non-U.S. citizen with an account at a brokerage firm that is a member of SIPC is treated the same as a resident or citizen of the United States with an account at a SIPC member brokerage firm.
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.
It is important to recognize that SIPC protection is not the same as protection for your cash at a Federal Deposit Insurance Corporation (FDIC) insured banking institution because SIPC does not protect the value of any security.
Investments in the stock market are subject to fluctuations in market value. SIPC was not created to protect these risks. That is why SIPC does not bail out investors when the value of their stocks, bonds and other investment falls for any reason. Instead, in a liquidation, SIPC replaces the missing stocks and other securities when it is possible to do so.
What does SIPC protect?
SIPC protects your investments if:
- Your brokerage firm is a SIPC member.
- You have securities at your brokerage firm.
- You have cash at your brokerage firm to buy securities.
SIPC does NOT protect:
- Your investments if the firm is not a SIPC member.
- Market loss.
- Promises of investment performance.
- Commodities or futures contracts.
How is my cash protected?
SIPC protects cash in a brokerage firm account from the sale of or for the purchase of securities. Cash held in connection with a commodities trade is not protected by SIPC. Money market mutual funds, often thought of as cash, are protected as securities by SIPC. SIPC protects cash held by the broker for customers in connection with the customers’ purchase or sale of securities whether the cash is in U.S. dollars or denominated in non-U.S. dollar currency.
What are securities?
SIPC protects stocks, bonds, Treasury securities, certificates of deposit, mutual funds, money market mutual funds and certain other investments as "securities." SIPC does not protect commodity futures contracts (unless held in a special portfolio margining account), or foreign exchange trades, or investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.
For a more detailed explanation, consult the definition of “security” in the Securities Investor Protection Act, section 78lll(14):
The term “Security” means any:
- treasury stock,
- evidence of indebtedness,
- any collateral trust certificate, preorganization certificate or subscription,
- transferable share,
- voting trust certificate,
- certificate of deposit
- certificate of deposit for a security, or
- any security future as that term is defined in section 78c(a)(55)(A) of this title,
- any investment contract or certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or mineral royalty or lease (if such investment contract or interest is the subject of a registration statement with the Commission pursuant to the provisions of the Securities Act of 1933 [15 U.S.C. 77a et seq.]),
- any put, call, straddle, option, or privilege on any security, or group or index of securities (including any interest therein or based on the value thereof), or
- any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency,
- any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase or sell any of the foregoing, and
- any other instrument commonly known as a security.
Except as specifically provided above, the term “security” does not include any:
- currency, or
- any commodity or related contract or futures contract, or
- any warrant or right to subscribe to or purchase or sell any of the foregoing.
Are my investments with a SIPC member?
Yes. As of March 2023, brokerage assets managed by RMR are custodied through Fidelity, TD Ameritrade, and Charles Schwab.
Does Fidelity, TD Amerirade, or Charles Schwab offer additional coverage?
Yes. Fidelity, Charles Schwab, and TD Ameritrade offer “excess SIPC” coverage.
Fidelity “Excess SIPC” Coverage (https://www.fidelity.com/why-fidelity/safeguarding-your-accounts): In addition to SIPC protection, Fidelity provides its brokerage customers with additional "excess of SIPC" coverage through Lloyd's of London. The excess coverage would only be used when SIPC coverage is exhausted. Like SIPC, excess protection does not cover investment losses in customer accounts, including losses due to market fluctuation. For example, fraud claims would not be covered if the brokerage firm was still in operation. Total aggregate excess of SIPC coverage available through Fidelity's excess of SIPC policy is $1 billion. Within Fidelity's excess of SIPC coverage, there is no per customer dollar limit on coverage of securities, but there is a per customer limit of $1.9 million on coverage of cash awaiting investment. This is the maximum excess of SIPC protection currently available in the brokerage industry.
Both SIPC and excess of SIPC coverage are limited to securities held in brokerage positions, including mutual funds if held in your brokerage account and securities held in book entry form.
Charles Schwab “Excess SIPC” Coverage (https://www.schwab.com/legal/sipc-account-protection):
Additional brokerage insurance—in addition to SIPC protection—is provided to Charles Schwab & Co., Inc. accounts through underwriters in London. Schwab’s coverage with Lloyd's of London and other London insurers, combined with SIPC coverage, provides protection of securities and cash up to an aggregate of $600 million, and is limited to a combined return to any customer from a Trustee, SIPC, and London insurers of $150 million, including cash of up to $1,150,000. This additional protection becomes available in the event that SIPC limits are exhausted.
TD Ameritrade “Excess SIPC” Coverage (https://www.tdameritrade.com/account-protection.html): In addition to SIPC, TD Ameritrade clients receive an extra level of coverage through "excess SIPC" insurance protection for securities and cash. This provides additional coverage in the event of a brokerage firm failure and funds covered by SIPC protections are exhausted. The combined total of our SIPC coverage and our "excess SIPC" coverage means TD Ameritrade provides protection up to a combined return of $152 million per customer, up to $2 million of which may be in cash. The Excess SIPC program has a $500M aggregate limit (meaning the most the program will pay for the Excess SIPC portion of the losses). Commodity interests and cash in futures accounts are not protected by SIPC.
Does RMR offer a solution that protects a cash position in excess of the amounts covered by "Excess SIPC" Coverage?
Yes. RMR has partnered with Stone Castle’s FICA program, through which you can obtain FDIC insurance for up to $25 million in cash. This is accomplished by dividing funds across multiple banks, never exceeding the FDIC insurance amount. Another benefit to this program is that customers can restrict the use of banks available through this program. To learn more about this offering, please contact your advisor.
Do you want to learn more about FDIC Insuarnce?