Brokerage Insurance

msf

I'm wondering what people think about diversifying brokerages because of SIPC insurance limits. I just wrote a post elsewhere where I said that this is way down on my list of things to worry about.

In part because, like FDIC insurance, each type of account (IRA, individual, etc.) gets its own insurance limit. In part, because the securities are kept in segregated accounts (so even in bankruptcy they're not touched). In part, because all the major brokerages have excess SIPC insurance in the tens or hundreds of million dollars.

On the other hand, the industry used to get excess insurance through an industry-backed company called CAPCO, that couldn't handle the Lehman collapse.

So ... what are your thoughts on SIPC and excess SIPC insurance? Is this something that worries you? (More likely, it's not something people have given much thought to, but if you have, inquiring minds want to know.)

Investor

Are you wondering about SIPC insurance for your brokerage account that holds mutual funds or are you concerned about non-mutual fund holdings in a brokerage account?

msf

Does it make a difference? Mutual funds (including MMFs) are securities covered by SIPC. Most other securities are covered by SIPC as well (though investments like futures contracts are not).

Since the SIPC limit is for all (covered) securities combined, I guess the answer to your question is both.

What may be bothering me is how difficult I found it to come up with the name CAPCO, after the industry had been touting it for years as a great risk eliminator. Yet they formed this company because the insurance industry was too leery of the risk (which I still don't see); CAPCO failed, and the brokerage industry seems to have swept it under the covers - they just switched insurers and act like nothing happened.

Investor

Reply to @msf: there may be a difference as you buy a mutual fund I think your shares are kept by the custodian under your name instead of street name (brokerage). It is different for ETFs, individual stocks etc. Than again it might be different between mutual funds held directly vs held at brokerage. At a brokerage, it might be held under street name so SIPC is needed. If you have more than $500K at a brokerage (the official SIPC limit), I would consider adding additional brokers and not rely on the excess SIPC which is not SIPC.

My the way here is the link to CAPCO. http://www.capcoexcess.com

msf

I think you're right about the difference between holding shares directly with the fund and through a brokerage. For example, from Scottrade's Account Transfer Form reads: "I acknowledge that while my fund position(s) are being held in street name with Scottrade, I will not be able to have direct communication with the fund company concerning my account."

My difficulty in finding CAPCO wasn't the site, it was the name - I knew brokerages had banded together to make this insurance company (they crowed so loudly about it in the previous decade) - but mention of it has all but vanished and I couldn't remember the name. And as the NYTimes article within the link I provided pointed out, CAPCO discloses almost nothing about who they are, what they do.

Since one can get multiples of $500K coverage by having different types of accounts (IRA, taxable, etc.), the real limit of SIPC coverage may be much higher than $500K. And money that's kept in a bank via the brokerage (whether in a bank sweep, adjunct bank, or CD) is FDIC insured, so it doesn't get counted against the $500K limit. Nevertheless, I take your point - don't count on anything above SIPC coverage. Thanks.