Insurance for Brokerage Accounts
QUESTION: I have securities totaling about $200,000 held for my account by a major stock brokerage. In the event of a failure of that brokerage, would those securities be passed directly to me? Or would I have to rely on private insurance protection?--W.C.W.
ANSWER: The Securities Investor Protection Corp. insures brokerage accounts up to $500,000. But that assumes that the account consists entirely of securities. Different rules apply when the account contains cash, which is insured only up to $100,000.
So, an investor with a brokerage account containing $300,000 in securities and $200,000 cash would be guaranteed $400,000 in the event of a failure. Your $300,000 worth of securities would be fully insured.
The SIPC does not distinguish between securities for insurance purposes. U.S. Treasury securities, corporate debt and equity securities and stock options are all subject to the $500,000 limitation. No SIPC protection is offered, however, for securities that fall under the regulation of the Commodity Futures Trading Commission--such things as precious metals, commodity accounts and unregistered investment contracts.
Nor does the insurance cover any decline in the market value of securities held while the SIPC is overseeing a liquidation or merger, a process that can take many months.
Beyond the $500,000 maximum protection, investors are entitled to a pro-rata share of assets recovered from the failed brokerage.
The SIPC, created by Congress to protect investors with accounts at brokerages, gets the money for its insurance fund by assessing member brokers. The fund currently stands at about $270 million. In the event of a large failure or several failures, which could wipe out the fund, the Securities and Exchange Commission has authority to approve a loan of up to $1 billion to the SIPC from the U.S. general fund.
Some brokerages have opted to buy additional private insurance to protect investments exceeding $500,000. Security Pacific Brokerage in Los Angeles, for example, insures accounts up to $2.5 million. Unfortunately, there is no master list of these brokerages. If you’re interested, you will have to do some shopping around.
Q: My business is in Los Angeles. If I want to take a business client in San Francisco to small claims court, may I file with the Los Angeles small claims court or do I have to file in the other party’s jurisdiction?--J.C.
A: In such matters, the plaintiff has a choice. He or she may file in the district where the defendant resides or does business, or where the obligation occurred.
To file, either go to the small claims office or request the forms by mail by sending a letter to the court, along with a self-addressed, stamped envelope. In Los Angeles, the filing fee is $6, assuming you have filed fewer than 12 claims in a year ($12 if you have filed 12 or more). You may sue for amounts up to $1,500.
Q: Recent bank and S&L; failures have raised two questions that I have not seen answered. In the event of a failure, how does the FDIC handle Social Security payments that are directly deposited in recipients’ bank accounts? Also, are renters of lock boxes allowed access to their boxes while a bank is closed, in receivership or awaiting a buyer?--P.I.
A: The direct deposits of Social Security payments are handled just like any other deposit. That is, accounts are protected up to $100,000, regardless of whether the money on deposit comes from wages or Social Security payments or investments.
Lock-box holders generally have immediate access to their box’s contents because government regulators generally close failing institutions after business hours Friday and reopen them as a branch of the buyer the following Monday morning.
But, when a buyer can’t be found, the bank is shut down for a few days while regulators prepare to pay off insured depositors. That means lock-box holders do lose access temporarily. However, if the box owner has a legitimate crisis or emergency, he or she should call the FDIC manager handling the closing at the bank and explain the situation. Usually, accommodations will be made.
Q: In a recent column you discussed the procedure for deducting sales taxes for federal income tax purposes. Are taxpayers entitled to include hotel room taxes in that sales-tax calculation? For those of us who travel a lot, it could make a big difference.--F.E.P.
A: If the hotel stay is a business expense, you are, of course, entitled to deduct the full cost of the room, including the room tax, as a business expense. That’s the easy part.
If your stay at the hotel isn’t business related, you still may be able to include the room tax in figuring your sales-tax deduction. But the IRS makes it a little more difficult for you to do so.
You have to know the general sales tax rate charged by the locality where the hotel is located and the room tax rate charged by the hotel. If the two are identical, you may add the amount to your other sales-tax receipts in calculating actual sales taxes paid. (It is important to note that the room taxes cannot be deducted if you use the sales tax tables provided by the IRS.) If the room-tax rate is either smaller or larger than the general sales tax of the locale, it isn’t deductible because it then is considered a selective sales tax rather than a general sales tax.
Say you live in Los Angeles and take a vacation at a resort outside the state that charges a room tax. You have to know the room-tax rate and the general sales tax rate of the municipality where the resort is located. Compare the two. If they are identical, you may deduct the tax as a sales tax if you calculate your actual sales-tax expenditures. Note that the general sales tax of the state in which you reside is not a factor in this determination.
Does anyone actually go to the trouble of finding out this information? Frequent travelers do. But tax advisers say it’s a rare IRS auditor who presses a taxpayer on this point if that taxpayer faithfully saves his hotel receipts and keeps a tally of the room taxes paid.
Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Business Section, The Times, Times Mirror Square, Los Angeles 90053.
