Are Your Investment And Deposit Assets Safe?

With the recent difficulties surrounding Bear Stearns (BSC) and anticipated acquisition by JP Morgan Chase (JPM), investors have inquired about the safety of their investment assets. There is a notable difference between assets held by banks, bank trust departments and security firms.

BusinessWeek recently ran an article, What if your Broker Goes Belly Up?, describing the nuances of security firm deposits and the interaction of the Securities Investor Protection Corp. (SIPC). The article answers the question about asset safety if a brokerage firm fails:

Unless a broker has run off with your assets, the securities you own will be available, even if the firm files for bankruptcy. Your biggest worry becomes how long it will take to get your money, but that's only a cause for concern if the back-office operations of the firm are in disarray. In the event of a financial crisis, an organization known as the Securities Investor Protection Corp. (SIPC) will step in to make sure that customer accounts are transferred to a financially sound institution. That's what happened when Cincinnati-based Donahue Securities collapsed in 2001.

Additionally, the article notes there has been some confusion about SIPC's specific role:

SIPC steps in to cover losses only when assets disappear due to wrongful conduct, such as misappropriation, by the broker. In that case, SIPC covers losses up to $500,000 per account. (Only $100,000 may be in cash.) Most brokerage firms carry excess coverage for losses above this amount. You won't be covered for losses due to a drop in security prices.

The American Bankers Association recently released an article about the difference between deposit, trust, fiduciary and custodial accounts. The article, Are My Trust, Fiduciary and Custody Assets Safe?, explains the difference between deposit accounts, trust and fiduciary accounts, and custodial accounts if a bank does fail.

Since deposit accounts become liabilities of the bank, it follows that the depositor would become a creditor in the event a bank failed. However, the FDIC insures depositors for up to $100,000 per individual per bank.

Since assets held in trust, fiduciary and custodial accounts do not become liabilities of the bank (title is held by the account's owner(s)), it follows that none of this property is subject to the claims of the bank's creditors. As a result, a failure of a bank will have no adverse effect on trust, fiduciary or custodial accounts: they remain the property of the account's owner(s).

Source:
What If Your Broker Goes Belly Up?
BusinessWeek
By: Lauren Young
March 20, 2008
http://www.businessweek.com/magazine/content/08_13/b4077086438962.htm?

Are My Trust, Fiduciary and Custody Assets Safe?
American Bankers Association
By: Carol Kaplan
March 20, 2008
http://www.aba.com/Press+Room/032008AssetSafety.htm