Author Topic: SIPC (like FDIC for brokerages) not all it's cracked up to be  (Read 1909 times)

dragoncar

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Stealing this from the Permanent Portfolio forum.  I was under the impression SIPC offered better protection for brokerage failures:

Quote
The Restoring Main Street Investor Confidence and Protection Act would define the value of a person’s brokerage account—their “net equity”— as the value of the account based on the last statement from the brokerage house. That amount, up to $500,000, is what you could recover from the Securities Investor Protection Corporation, the SIPC, in the event of failure or fraud at the brokerage firm that has your money. 

... it turns out the SIPC has a different definition of “net equity.” It isn’t the value of your account on the last statement from your brokerage firm. It is the amount of money you deposited with the firm, less any amounts withdrawn.

You don’t have to think about that very long to realize that your insurance coverage could actually be, um, nada. How? Easy. All you need is a long-term account from which you have withdrawn a regular income— like a retirement account. A more dramatic example: Say you are the proud owner of Apple Computer shares purchased 5 years ago at $20. Withdrawing the proceeds from selling some shares at the current price of $90 would eliminate your “net equity.” By the SIPC definition, there would be no “net equity”— and no loss.

But wait, it gets worse. In the event of fraud, the appointed trustee can sue the victims to recover money that was distributed from their account. Visit the Madoff trustees website and you will learn that 16,519 claims were received. Only 2,518 were allowed. Check the “recoveries” page and you’ll find that the primary source of the $9.8 billion recovered to date was, yes, Bernard Madoff’s victims. The victims faced a hard choice: take an “avoidance action” and repay money withdrawn to avoid litigation— or be sued to repay up to six years of money withdrawn prior to the bankruptcy.


http://assetbuilder.com/SCOTT_BURNS/WILL_CONGRESS_KEEP_YOUR_INVESTMENTS_SAFE_MAYBE_MAYBE_NOT

BFGirl

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Re: SIPC (like FDIC for brokerages) not all it's cracked up to be
« Reply #1 on: July 07, 2014, 02:07:03 PM »
Well crap!!

stuckinmn

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Re: SIPC (like FDIC for brokerages) not all it's cracked up to be
« Reply #2 on: July 08, 2014, 02:13:15 PM »
that article is just wrong- see definition of "net equity" from the SIPC statute.  It is the value of the cash and shares in the account as of the filing date (ie the date the broker holding your shares is liquidated) less any amounts you owe to the broker (for margin or other fees).  As a practical matter, if you are missing shares or cash from your account, SIPC will go buy some shares and replace them and credit you with any missing cash, subject to the limits.   

(11) Net Equity
The term "net equity" means the dollar amount of the account or accounts of a customer, to be determined by-

(A) calculating the sum which would have been owed by the debtor to such customer if the debtor had liquidated, by sale or purchase on the filing date-

(i) all securities positions of such customer (other than customer name securities reclaimed by such customer; and

(ii) all positions in futures contracts and options on futures contracts held in a portfolio margining account carried as a securities account pursuant to a portfolio margining program approved by the Commission, including all property collateralizing such positions, to the extent that such property is not otherwise included herein; minus

(B) any indebtedness of such customer to the debtor on the filing date; plus

(C) any payment by such customer of such indebtedness to the debtor which is made with the approval of the trustee and within such period as the trustee may determine (but in no event more than sixty days after the publication of notice under section 78fff-2(a) of this title).