Protecting Your Financial Accounts in Tumultuous Times

 

            With all of the current turmoil in the financial markets, many people are wondering about the safety of their savings and investment accounts.  The federal government, through a system of insurance programs, offers some security, and in the last 30 days that security has been expanded and increased on a temporary basis.  Here is a brief overview of the dollar amount and other limitations of these programs.

 

Deposits

 

            Federally-insured financial institutions (those that are insured by the Federal Deposit Insurance Corporation [FDIC] or by the National Credit Union Administration [NCUA]) remain safe places for deposited money, at least for amounts that are within the insured limits, especially now that the basic federal insurance limits have been temporarily increased by the Emergency Economic Stabilization Act of 2008.  On October 4, 2008, the FDIC issued an advisory summarizing the new, higher deposit insurance limits for FDIC-insured banks as follows:

 

Basic FDIC Deposit Insurance Coverage Limits*

Single Accounts (owned by one person)

$250,000 per owner**

Joint Accounts (two or more persons)

$250,000 per co-owner**

IRAs and certain other retirement accounts

$250,000 per owner

Trust Accounts

$250,000 per owner per beneficiary subject to specific limitations and requirements**

* These deposit insurance coverage limits refer to the total of all deposits that an accountholder (or accountholders) has at each FDIC-insured bank. The listing above shows only the most common ownership categories that apply to individual and family deposits, and assumes that all FDIC requirements are met.

 

** The legislation authorizing the increase in deposit insurance coverage limits makes the change effective October 3, 2008, through December 31, 2009.

 

            The FDIC has also recently clarified the application of its deposit insurance coverage to informal (such as “payable upon death” [POD] accounts) and formal revocable trust accounts.

 

            On October 14, 2008, the Department of the Treasury announced that the FDIC is temporarily guaranteeing all deposits in non-interest-bearing deposit transaction accounts in FDIC-insured institutions, at least for the initial 30-day period of the guarantee program.  These types of accounts are mainly payment-processing accounts, such as payroll accounts used by businesses.  Each FDIC-insured institution will participate in this program without cost to it for the initial 30 days, but may opt out of the program to avoid being assessed for costs of participation by the FDIC after the initial 30 days.  If an institution opts out, then the temporary guarantee of course is no longer good after the 30 day period.  If an institution does not opt out, then the full guarantee of non-interest-bearing deposit transaction accounts held by that institution will continue, but not later than December 31, 2009.  Account holders seeking to confirm their continued coverage under this temporary guarantee program should therefore consult with their bank and their counsel.

 

            Federal deposit insurance does not insure non-deposit investment products such as money invested in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if they were purchased from or through an insured financial institution.

 

            You can use the FDIC's "EDIE the Estimator" to find out if your bank deposits are fully insured by federal deposit insurance.  Find additional information about FDIC coverage and NCUA coverage.

 

Money Market Funds

 

            Money market funds are not "banks" and money invested in money market accounts are not "deposits" and are therefore not insured by FDIC or other federal deposit insurance programs.  However, under the Temporary Guarantee Program (initial term of only three months) established as of September 29, 2008, by the U.S. Treasury, the U.S. “will guarantee to investors that they will receive $1 for each money market fund share held as of close of business on September 19, 2008.  Eligible funds must be regulated under Rule 2a-7 of the Investment Company Act of 1940, must maintain a stable share price of $1 and must be publicly offered and registered with the Securities and Exchange Commission.  Both taxable and non-taxable funds are eligible for this program.”  For further information, see the Treasury’s Frequently Asked Questions on this Temporary Guarantee Program.  Even for money market funds that are eligible to participate, guarantee protection is not automatic; to participate in the program, eligible funds must pay a fee and apply to enroll with the Treasury.  Individual investors cannot sign up for the program.

 

Brokerage Accounts

 

            Multiple layers of protection safeguard stocks, bonds and cash held by investors in brokerage accounts, including requirements that brokers segregate customer assets from broker assets.  If a brokerage firm fails and its customer account assets have been segregated (as required by SEC rules) on the broker’s books from those that the broker owns, the bankruptcy trustee must respect the customer's ownership of the assets and not appropriate them in order to pay the broker’s own debts.  In these cases, the customer accounts will typically be transferred in an orderly fashion to another brokerage firm, and customers whose accounts have been transferred will have the option of staying at the new firm or moving to another brokerage of their choosing.  For instance, customer accounts were transferred intact in an orderly fashion when Bear Stearns was acquired by JPMorgan Chase in March, 2008.

 

            Only if a broker has failed and has not correctly segregated customer account assets, or if a broker has misappropriated customer assets, is governmental protection triggered.  In those cases protection is afforded to public account holders with respect to stocks, bonds and certain other assets held in insured broker customer accounts by the Securities Investor Protection Corp (SIPC).  SIPC does not protect account holders against market losses, but does protect account holders (by making supplemental payments of up to $500,000 per account, but not more than $100,000 with respect to any lost cash in the account) for the difference between what their account should have had in it (in the form of eligible investments and cash) when the broker failed and the amounts of eligible investments and cash that are recovered by the account holder pursuant to the bankruptcy.  Not all investments in a customer account are eligible for SIPC protection;  for instance, while SEC-registered mutual funds are eligible, unregistered investment contracts, unregistered limited partnerships, fixed annuity contracts, currency, and interests in commodity futures contracts or commodity options are not protected by SIPC.

 

            A brokerage bankruptcy in which there is not a merger or other orderly takeover of customer accounts by another brokerage can result in delays in investors gaining control over their accounts, particularly if the records are inaccurate due to negligence or broker fraud.  SIPC does not cover market losses incurred during the period after a bankruptcy filing date when the account is inaccessible.

 

            Read the SIPC’s explanatory brochure and the Financial Industry Regulatory Authority's (FINRA) recent investor alert.

 

            For further information, contact Ice Miller’s Corporate/Mergers and Acquisitions Practice Group.

 

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.