Banking Law

Hot Topic Post-Bear Stearns: Investment Safety Rules

After seeing the value of one of the nation’s investment banking giants plummet disastrously virtually overnight this week, investors are now wondering about the safety of assets held in brokerage accounts.

But there is little likelihood that their assets are at risk, at least as far as accounts that don’t exceed $500,000 are concerned, reports the Wall Street Journal (reg. req.). That applies both to customers of Bear Stearns (although it doesn’t have a retail brokerage operation) and of other financial institutions.

Although they are not insured, like banks, by the Federal Deposit Insurance Corp., brokerages are required to have enough cash on hand to liquidate accounts even in the event of a bankruptcy, and must segregate customer funds from their own funds, the newspaper notes. If, because of negligence or malfeasance, they don’t do so, the Securities Investor Protection Corp. will cover customer losses of up to $500,000, including $100,000 in cash.

Hence, concerned investors should verify SIPC coverage and, if their accounts are large, determine whether the brokerage has excess insurance coverage beyond what the SIPC offers, according to lawyer Steven Caruso of Maddox Hargett & Caruso in New York.

Only investors whose accounts exceed SIPC limits or are caught in a squeeze, such as an immediate margin call because of a brokerage bankruptcy that forces them to sell stock at a loss, are at risk of losing their money because of a investment bank downfall, the WSJ reports.

“Before anyone panics and starts another run on a big bank, let me say unequivocally that client assets in the big brokerage firms are safe from the danger of any Bear Stearns-type collapse,” writes James Stewart in a Smart Money article that covers the same ground. “Client accounts are subject to multiple safety nets. And by offering what is essentially unlimited liquidity to the nation’s primary dealers (which include Merrill, Citigroup, Morgan Stanley and Goldman), the Federal Reserve just added another important one.”

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