‘Street Name’ Holding Usually a Safe Bet
QUESTION: Please discuss the safety of having one’s stock portfolio in “street name” that is, the name of the brokerage house handling your account. They say accounts are insured. Does this give the person with a portfolio in street name any protection? I am 75 years old and can’t start over again.--L. R.
ANSWER: The recent wild swings in stock market trading and the closing of brokerage houses weakened by those gyrations has, naturally enough, heightened individual investors’ concerns about the safety of their accounts, particularly those held in the name of the brokerage house.
According to securities experts, the overwhelming majority of individual investors keep their holdings in “street name” because this allows faster execution of trades and greater convenience. Furthermore, some argue that the practice helps ensure that the stock certificate won’t get lost among the rest of your personal belongings.
Putting your stock holdings in street name doesn’t mean that you’ve either given up ownership or lost control of them. Here’s how the practice works: On a daily basis, your brokerage house keeps track in its computers of all its street name holdings--1,000 shares of XYZ Corp.; 2,000 shares of 123 Co., etc. It also keeps track of the shares according to the individual street name accounts that it manages: 200 shares of 123 Co. in John Doe’s account; 100 shares of XYZ Corp in Jane Doe’s, etc.
In most cases, explains Steve Harbeck, general counsel for the Securities Investor Protection Corp., a Washington securities insurance agency, stock certificates are never actually issued. “You don’t have a vast transfer of paper,” he says. “You have blips on a computer screen.” Printouts of those “blips” are issued, like bank statements, on a regular basis and sent to account holders so they can check for accuracy and the performance of their portfolio.
Although many consider a street name account preferable to keeping stock certificates at home or in a safety deposit box, the benefits do not carry over in the event a brokerage house fails. In such a case, if you hold the certificates yourself, you are basically unaffected by your brokerage’s problems and can conduct your business elsewhere whenever you want. Things aren’t as neat for street name account holders. But generally they can be as safe.
According to Harbeck, most brokerage houses are members of the SIPC, which insures each trading account held in street name up to $500,000. In addition, many brokerages, usually the larger houses, carry additional insurance on their own. The SIPC gets involved in a failed brokerage house by filing a “protective decree” in federal district court. The motion is basically the equivalent of a bankruptcy petition and allows the court to appoint a trustee to administer the financial affairs of the brokerage.
Usually, the trustee contacts every brokerage customer within the previous year to verify the account holdings and then, in conjunction with the SIPC, handles the reimbursements. If the brokerage’s records are incomplete or disorganized, individual customers must take the initiative to file a claim with the trustee.
Typically, Harbeck says, when a brokerage fails, its holdings are liquidated and the proceeds are disbursed among its customers. If there is a shortage of funds to cover all claims, insurance payments are used to make up the difference. The SIPC says the time required to complete the reimbursements varies according to the complexity of the case and the condition of the brokerage’s records. However, it says most customers can expect to receive their property in one to three months. Securities are generally valued according to their market value on the day the SIPC steps into a case. In the last 16 years, Harbeck says, the SIPC has handled 200,000 claims, and of that number only 323 had accounts in which the claims exceeded the total value of the brokerage’s assets, plus SIPC insurance.
The moral of the story, Harbeck insists, is to make sure your brokerage house carries SIPC insurance sufficient to cover the size of your account.
Q: I am suddenly making much more money than I anticipated, and there don’t seem to be many good tax shelters left. Recently, I met some wealthy people who told me they run all their money through Saipan corporations that they created. They say Saipan has a tax treaty with the United States and a flat 5% tax rate. Is it true? Is Saipan the ultimate tax shelter? Please do not use my name.--E. D.
A: We’ll tell you exactly what the Internal Revenue Service told us and let you decide for yourself how to proceed.
“We have no tax treaty with Saipan,” spokeswoman Shirley Nakagawa said. “In fact, the Mariana Islands, of which Saipan is a part, have just about the same tax code as the United States.”
However, there is more to the story, and possibly this is what your wealthy friends are referring to.
Until the Tax Reform Act of 1986, Saipan, which is part of the Mariana Islands east of the Philippine Islands, was a legal--and popular--tax haven. Under the old law, U.S. citizens could become legal residents of U.S. possessions, such as the Mariana Islands, and satisfy their U.S. tax obligations by satisfying their obligations in their legal residence. But this activity is outlawed under the reform act. “It’s simply illegal,” says Richard Heller, a partner in the Los Angeles office of Peat, Marwick Main & Co.
There is still another reason your friends have heard about Saipan tax shelters. According to the IRS, Saipan gives a 95% tax rebate on income generated by the sale of goods and services within the Mariana Islands. Some tax shelter promoters have interpreted Saipan’s policies to mean that the rebate applies to companies registered on the Mariana Islands and have suggested that Americans run their U.S. operations through a Saipan corporation.
Not surprisingly, the IRS has a different interpretation. The U.S. government contends that the 95% rebate applies only to income generated on the Mariana Islands and that U.S. tax laws and rates apply to income from U.S. operations. Further, the IRS wants you to believe that they are wise to Saipan tax shelter operations.
“Just remember there is no free ride,” says the IRS’ Robert Giannangeli.
