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What the FDIC and SIPC do and do not protect



Savings have been damaged after almost a decade of interest rates on most savings accounts get stuck below 1 percent. That was what made Free Stock Trading as attractive as Robinhood's offer in December. The Robinhood Checking & Savings account would give customers a place to earn 3% on their money without any fees or account claims. It is almost one percentage point more than even a high yield return account.

Unfortunately, the good news didn't last long. Robinhood paused the program within a few days as it was necessary to clear its plan with regulators after legislators raised concerns . The company wanted its turbocharged account protected by the Securities Investor Protection Corporation (SIPC). However, Robinhood's account was not insured by the Federal Depository Insurance Corporation (FDIC), as most bank savings.

The regulators' greatest concern: Was depositors protected how passport-saving account holders are insured by bank errors? Robinhood said in the beginning yes, regulators said no, and 3 percent accounts can be in limbo as a result.

"We are planning to work closely with regulators as we prepare to launch our cash management program and we renew our marketing materials, including the name," Robinhood's co-founder Baiju Bhatt and Vlad Tenev wrote in a new blog post about the company's cash management program.

Robinhood saga shone a clear light on the important issue of deposit insurance and protection, something most people do not like. Americans trust they will never lose money they spend on savings ̵

1; even if their bank fails. That trust is absolutely necessary for the work of the financial system.

Here is what you should know about these safeguards:

What FDIC insures

If savers ever became afraid of a mass and a "run on the bank", the consequence of the domino effect on the financial system may be devastating – as we learned during the Great Depression.

Later, federal regulators created the Federal Depository Insurance Corporation, which ensured that savers did not have to worry about losing their deposits up to a certain point. Today, the score is $ 250,000.

Deposit insurance has worked. Even during the major recession in 2008-2009, a fear of "riding on the banks" never occurred. As the FDIC likes to point out, "No depositary has ever lost a penny insurance amount, because the FDIC was created in 1933."

What protects SIPC

In 1970, a similar – but not exactly identical – protection plan was created for investors whose money and stocks are held by brokerage firms. Directly by the Congress through the Investment Investors Act of 1970, Wall Street companies created a non-profit organization called the Securities Investor Protection Corporation that protects consumers if their brokers go up. The limits reach $ 500,000 in total and $ 250,000 in cash. SIPC protection kicked in when Lehman Brothers failed in 2008. Over 110,000 accounts were transferred to SIPC's control and all account holders had their investments restored.

So from the consumer's point of view, SIPC is basically the same as the FDIC? No.

Stephen P. Harbeck, CEO and CEO of SIPC, simply says: "If you deposit with a bank, you cannot lose money. This is not the case with investments protected by SIPC," he told me in a recent phone call.

At one level, the difference makes quite obvious. SIPC does not stop investors from losing money due to bad investments – because stock drops or a company you have invested in go bankrupt. SIPC only helps if the broker who holds the storage of your investments fails, as Lehman did.

Say you have $ 50,000 of Bob's Coffee Shops you bought through a broker. The coffee stinks and the bearing value goes down to zero. The SIPC would not help you. On the other hand, say you have $ 50,000 in Microsoft stock, which you bought through a broker. If this broker suddenly went bankrupt, SIPC would replace your $ 50,000 in Microsoft stock.

"SIPC protests on the custody function that brokerage firms perform," Harbeck said. If you held Bob's coffee and was valued at $ 0, and then failed your broker, the SIPC would only work to replace the shares for you. You will still be leaving shares worth $ 0.

So if you are looking for a "safe" place to stash your money, a SIPC-protected account with some risk that FDIC-insured accounts will not.

SIPC is not a regulator. It is a non-profit, non-governmental entity and has great authority to make decisions about who is protected and who does not. In addition, investors cannot appeal directly to SIPC. According to the law, only the Securities and Exchange Commission or the Financial Regulatory Authority can govern SIPC to engage in a situation, Harbeck said. The SEC can sue the SIPC if it doesn't, which only happened once after Allen Stanford's infamous Ponzi system. SIPC decided not to cover investor losses, the SEC sued, and in 2014 SIPC won.

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FDIC vs SIPC: Why It Role [19659008] So what does this mean for you? In today's volatile market, and with interest rates rising, some investors have sold some of their holdings to hold cash. However, a SIPC-protected account can be a risky vehicle to do so because money deposited on a broker account just to gather interest is not protected according to Harbeck. Only cash deposited with a broker "for the purpose of buying securities" is protected, Harbeck said. It is unlikely, but if your brokerage firm fails, if you keep money in an account without any intention of ever investing, you may decide not to recover your losses. That's the obstacle that Robinhood's cash management program ran into.

An Important Note: Most "cash" held on broker accounts are actually deposited into money market accounts, which usually pay a higher tax rate than savings accounts and invest in depositary receipts, government bonds and commercial debt. So it's not really money – it's an investment in SIPC's eyes. It is good. Money market accounts would be entitled to SIPC protection, and that protection is limited to $ 500,000 – not $ 250,000.

Basics of Savers: The FDIC insured bank accounts are guaranteed not to lose the value up to the $ 250,000 limit. SIPC-protected accounts have no such guarantee when it comes to cash.

Bob Sullivan is a veteran journalist and author of five books, including the bestseller in the New York Times 2008, "Gotcha Capitalism" and the 2010 New York Times Best Seller, "Stop Getting Ripped Off!" He specializes in computer crime and consumer fraud. He has won the Society of Professional Journalists' Public Service Award, a Peabody Award, and the Consumer Federation of America's Betty Furness Consumer Media Service Award. He is now a syndicated columnist and frequent TV guest. He also hosts the podcast crime, which examines history's greatest hacking stories.

Haven Term is a Term Life Insurance Policy (ICC17DTC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111 and offered exclusively by the Haven Life Insurance Agency, LLC. The number and features of policies and riders may vary by state and may not be available in all states. In New York, Haven Term DTC-NY is 1017. Our license number in California is OK71922 and in Arkansas, 100139527.


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