wealth management

FDIC, SPIC: Who’s Protecting Your Assets?

At a time when Americans’ savings are soaring, you need to know how your money is insured.

The Federal Deposit Insurance Corp. covers bank deposits. The Securities Investor Protection Corp. protects brokerage accounts. But in December 2018, Robinhood, the brokerage firm and mobile app, announced that it was offering a high-interest checking and savings account insured by SIPC, and SIPC promptly challenged the claim. A day later, Robinhood said it would re-brand and re-name the product.

Robinhood has since introduced a cash-management account that sweeps customers’ uninvested money into bank accounts insured by the FDIC. But the incident reflects the lingering confusion about the difference between the FDIC and SIPC.

Savings protection. Established during the Great Depression, the FDIC ensures that bank deposits are safe, even if the bank goes under. The FDIC, which is funded by premiums paid by banks and savings associations, protects up to $250,000 in individual deposit accounts and up to $250,000 for each person’s share of joint accounts. FDIC insurance covers money in checking, savings and money market deposit accounts, along with certificates of deposit and official items issued by a bank, such as cashier’s checks and money orders. The coverage extends to depositors’ accounts at each insured bank, including IRAs, living trust accounts and payable-on-death accounts. To determine whether a bank is FDIC insured, look for the FDIC sign at the bank, go to www.fdic.gov or call 877-275-3342. You can find out if your accounts are fully covered with the FDIC’s Electronic Deposit Insurance Estimator.

The FDIC doesn’t insure money invested in stocks, bonds, mutual funds, life insurance policies or annuities, even if these investments are purchased at an insured bank.

Investment protection. SIPC, meanwhile, protects brokerage accounts. Brokerages are required by law to keep customers’ investments separate from their own funds, but if the firm fails and customers’ assets go missing—due to theft, fraud or un­authorized trading, for example—SIPC can replace customers’ cash and securities. It doesn’t get involved until the firm has exhausted all other options, such as merging with another brokerage firm. (Look for the SIPC disclosure on a brokerage firm’s website, or check the membership directory.)

SIPC isn’t a government agency and doesn’t have the authority to investigate fraud at brokerage firms. That’s up to Finra, the industry’s self-regulatory organization, and the Securities and Exchange Commission, which refers brokerage failures to SIPC. After that, SIPC will file an application in federal district court, which will notify customers.  

SIPC first divides up the broker’s remaining assets among investors, then uses its own funds—up to $500,000 per account, with a limit of $250,000 in cash—to buy the same number of shares you originally owned and replace your cash. Depending on the amount of property the brokerage is able to recover, you may receive more than $500,000, says Josephine Wang, CEO of SIPC. SIPC has been successful in making most customers whole, Wang says.

If your bank fails, you don’t have to do anything—the FDIC will mail you a check. But if your brokerage fails, you must file a claim, and you should do it as soon as possible. If your securities decline in value after you file your claim, you won’t be reimbursed for losses that occur while your account is in limbo.

Know your limits

Federal Deposit Insurance Corp. (FDIC) Insures $250,000 per depositor, per bank, for each account ownership category. 

What it covers: checking, savings and money market deposit accounts, certificates of deposit, cashier’s checks, money orders.

Securities Investor Protection Corp. (SIPC) Guarantees up to $500,000 per brokerage account (with a limit of $250,000 in cash).

What it covers: stocks, bonds, mutual funds and cash that’s on deposit to purchase securities.

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