Financial Asset Protection
With the Federal Deposit Insurance Corporation’s (FDIC) recent seizure of mortgage lender IndyMac Bancorp and industry experts predicting further bank failures it appears as though consumer confidence in our nation’s financial institutions has become the most recent victim of the U.S. credit crisis. Thousands of customers descended upon IndyMac branches hoping to recover their portion of the bank’s $19 billion in total deposits, $1 billion of which was not covered by FDIC guarantees. This triggered memories of the Savings and Loan crisis of the late 1980s/early 1990s and left many Americans questioning the security of their financial wealth.
Given this environment, FDIC member institutions stress that up to $100,000 of deposits per account owner in individual, joint, business, or trust accounts is fully-insured with an increased cap of $250,000 on self-directed retirement accounts (click here for example).However, when investment products are involved the following disclosure often appears:
Investment Products: Not FDIC Insured, No Bank Guarantee, May Lose Value
For prudent investors, this raises some crucial questions; specifically, what constitutes an investment product and what protects my ownership in these products if the financial institutions that serve me fail? Furthermore, what distinguishes custodians such as Fidelity Investments from the likes of Bear Stearns and other failed financial institutions?
Enter the Securities Investor Protection Corporation (SIPC), a collection of member broker-dealer firms established by Congress in 1970 and tasked with safeguarding investment assets from the threat of brokerage firm insolvency. As the preserver of all Securities Exchange Commission-registered holdings (i.e. all mutual funds, money market funds, stocks, and bonds), the SIPC provides coverage for all securities per account owner up to $500,000 with a $100,000 maximum placed on cash claims. However, it is important to note that the SIPC is not responsible for protecting risk-oriented investors against the loss in market value of any individual security.
As a custodian and SIPC member firm, Fidelity Investments is legally responsible for the operational safekeeping of securities. With $3.4 trillion in custodied assets while offering investment management, retirement planning, brokerage, and human resources and benefits outsourcing services, it is one of the world’s largest providers of financial services. Its brokerage clearing and custody services operate as National Financial Services LLC, a wholly-owned subsidiary of Fidelity Investments. As a clearing firm, NFS is an organization that works with financial exchanges to handle the confirmation, delivery, and settlement of transactions. NFS protects securities by segregating investor asset accounts from Fidelity Investments general accounts, ensuring client access to securities at all times. In addition, NFS provides coverage in excess of the SIPC limit, offering unlimited protection of net equity value through the Customer Asset Protection Company, a third-party insurer with an A+ financial strength rating from Standard & Poors. According to the S&P ratings system an insurer rated BBB or higher is regarded as having financial security characteristics that outweigh any vulnerabilities, and is highly likely to have the ability to meet financial commitments. Finally, it is important to highlight that Fidelity and its subsidiaries are neither a bank nor an investment banker, thus avoiding the lending, underwriting and/or origination of securities that has been indicative of the recently troubled financial institutions.
In the unlikely event of a liquidation of Fidelity Investments, cash and/(or) securities would be transferred to another SIPC member firm while the client receives preferential treatment over any general creditors of the failed custodian. Where the firm cannot make cash and securities available to honor a full distribution, the client would receive a pro rata distribution while SIPC and CAPCO protection works to cover the remaining shortfall of net equity value.
These are complex issues and it may not be possible to address all of the questions or concerns that may arise in a general forum such as this one. Please rest assured that as fiduciaries the prudent management of our clients’ assets (from the recommendation of a custodian to the investment selection process) is always our foremost concern.