Time to Clarify FDIC and SIPC Member Insurance Coverages

Given the media frenzy of late relating to the failure of Silicon Valley Bank and the mention of investment companies such as Schwab that also has a bank charter, it is important to understand the differences as they relate to client asset protection.

FDIC is For Banks

The Federal Deposit Insurance Corporation (FDIC) is a government agency, which was founded in 1933 to protect bank depositors from bank insolvency (i.e., not enough money to make depositors whole).  It is funded by its “member” banks in the form of mandatory premiums paid to the FDIC. The insurance covers cash on deposit in checking, savings, CDs, IRA, etc.  The current coverage is $250,000 per depositor, for each “account ownership category”, per insured bank.  For example, if you have an individual account, a joint account, and a retirement account (this represents 3 of the most common ownership categories-there are more) at a single bank, you are covered individually up to $750,000 and your joint account owner is covered up to $250,000 separately. That means that if your accounts are spread among different categories, your coverage can expand well beyond $250,000 at a single insured bank. Note that if you have 3 individual accounts, 3 joint accounts, and 3 retirement accounts (IRA/Roth not distinct categories-all represented under retirement account category), each account holder is only covered up to $250,000 for all accounts in a “category” combined. The rules get a bit more complicated for trust accounts with beneficiaries, employee benefit accounts, and government accounts, but again, these represent different “ownership categories” and can expand a depositor’s coverage even further.

SIPC is For Investment Companies

SIPC stands for Securities Investor Protection Corporation. This is not a government agency; it is a non-profit membership corporation funded by “member” broker-dealers created by Congress in 1970 in the Securities Investor Protection Act (SIPA). The insurance covers stocks, bonds, mutual funds, CDs, treasuries, ETFs, money market mutual funds, and certain options. The current coverage is $500,000 including up to $250,000 in cash per “account type”, per brokerage firm. You can use the example above and the limits for SIPC to arrive at a potential coverage for account types in aggregate. Once again you can see that your protection per brokerage firm can far exceed the stated $500,000 limit. Keep in mind that SIPC is account level coverage per category as opposed to FDIC account owner coverage per category. This means that a joint account under SIPC is only covered up to $500,000 per account and not per owner. Also worth noting is that IRA’s and ROTH accounts are treated as two separate “account types” under SIPC and eligible for separate $500,000 coverages. Multiple accounts with the same “account type” are treated in the collective as they are with FDIC coverage. It is very important to note that the triggering circumstance for recovering a claim through SIPC is that your assets must “go missing”. Because, brokerage firms are required to keep client assets separate from their own and their own assets are regulated by the SEC, missing assets is not a common occurrence outside of fraud, which is rare. Most commonly, brokerage firm failures result in client assets transferring to another firm.