Little-Known Federal Agency Covers Investors : Insurance: The Securities Investor Protection Corp. was set up after a rash of brokerage failures in the ‘60s. However, it is used as a last resort.
Marilyn Helding, 65, the widow of a Wisconsin vegetable farmer, was afraid the money from her husband’s estate vanished like crops in the Dust Bowl when Windsor Capital Corp. went out of business.
“I nearly went crazy when they went under,” Helding said from her home in Franksville, Wis. “I didn’t know what to do.”
But a few months after the small Milwaukee brokerage collapsed in March, 1988, Helding regained her entire stock portfolio and $45,000 in cash owed her by the firm.
The message: If your broker goes bust, your investment doesn’t have to.
The safety of customer accounts has become the focus of much attention with the recent collapse of Drexel Burnham Lambert Inc., with the bankruptcy court filings by two other brokerages in the past year and the widely publicized problems at several Wall Street firms.
After a rash of brokerage house failures in the late 1960s, Congress established an agency, the Securities Investor Protection Corp., to protect investors. The corporation has a $485-million fund that insures individual accounts for up to $500,000, including up to $100,000 in cash. Large brokerages have insurance for larger amounts.
Turning to the protection fund, however, is a last-resort action. Should a brokerage go belly up, the SIPC first tries to arrange for customer accounts to be transferred to another firm.
“The basic intention is that a customer should not lose assets or property because the broker with whom (he or she is) doing business has encountered financial difficulty,” said Theodore H. Focht, SIPC president and general counsel.
SIPC covers all forms of stock and bond holdings, but not commodities. It also does not guarantee the underlying value of a customer account. For example, if XYZ Co. is trading at $50 a share when a brokerage folds but falls to $5 at reimbursement time, the customer loses the difference.
“It does not insure you for market losses,” said Irving Picard, a New York bankruptcy lawyer who has served as a court-appointed SIPC trustee in three liquidation cases. “If you think the broker defrauded you . . . that’s not protected by the SIPC fund.”
In the 19 years since its creation, SIPC has handled 212 cases and paid $185 million to satisfy customer claims. If a firm cannot pay immediately, SIPC will advance the money to customers and try to collect later.
SIPC officials estimate that cash and securities worth $1.4 billion have been returned to about 240,000 investors, most through account transfers. A total of 305 claims worth $31 million have not been satisfied, primarily because of legal challenges.
The SIPC fund is comparable to the Federal Deposit Insurance Corp. for commercial banks. It is fed by required contributions from the nation’s 12,000 or so registered broker-dealers. It also has $500 million in bank credit and a $1-billion line with the U.S. Treasury. So far, however, neither of those resources has been tapped.
About 25 brokerages also have private coverage of as much as $5 million per account.
Before SIPC was signed into law by President Richard M. Nixon on Dec. 30, 1970, self-regulatory organizations --the National Assn. of Securities Dealers and the stock exchanges--set aside funds to protect the customers of brokerages that failed. However, Wall Street was hit with a rash of failures in the ‘60s, when the market slumped as firms spent large sums to computerize. When its customer-protection kitty dried up, the New York Stock Exchange was forced to dip into a building fund to protect investors. Fearing the worst, the exchanges lobbied Congress for help.
There were six SIPC cases last year, five of which involved a total of fewer than 50 claims.
SIPC’s largest payout, $32.5 million, was related to the 1983 fraud-related collapse of Bell & Beckwith of Toledo, Ohio. The demise of Fitzgerald, DeArman & Roberts Inc. of Tulsa, Okla., involved the greatest number of customer accounts--50,000. SIPC has doled out $5.5 million since that case opened in June, 1988.
The SIPC can become involved when a broker-dealer enters bankruptcy court proceedings, when a trustee or receiver is appointed to run a firm, when a firm fails to meet federal requirements or when it cannot demonstrate compliance.
