Check insurance behind securities
In case of failure, banks and brokerages heed different rules in making good on investors' assets

By JULIE TRIPP

Investors may be surprised to learn that the insurance covering their financial assets might not cover what they think it does.

As walls continue to fall between banks and brokerages, just who covers what is becoming more fuzzy. As investors put more money into the markets each year, it's more important than ever to sort out the differences in coverage if a bank or brokerage fails.

Another reason to brush up on coverage may be to assure the safety of profits you've taken out of the stock market and want to preserve.

For example, a money market fund with a mutual fund family or brokerage "sweep" account is invested in many of the same safe and liquid investments as a money market deposit account at a bank. The mutual fund is not insured by the Federal Deposit Insurance Corp. if the fund company fails, but the bank account is covered up to $100,000 by the FDIC if the bank fails.

Deposits maintained in different categories of legal ownership are separately insured by the FDIC. So customers can have more than $100,000 coverage in a single institution; a person could have coverage of up to $100,000 each on a regular account and an IRA, for example. Check with your bank for details or get assistance by calling 800-934-3342 or visiting the Web site at www.fdic.gov.

If an account is not insured, it usually pays more interest to make up for the added risk. That's the case with various money market accounts at Wells Fargo Bank and the bank's brokerage arm, Wells Fargo Securities, for instance. The FDIC-insured Porfolio Market Rate Account yields up to 4.2 percent currently while the non-insured Money Market Access Account is paying 5.14 percent.

Most people opt for the higher interest, the bank reports, but some customers only feel comfortable knowing their money is FDIC-insured.

Wells Fargo Securities consultant John Mendola tries to be very clear about the distinction between the stocks and funds he sells and the accounts and certificates of deposit sold by the bank.

"It's almost part of our mantra when we're dealing with people," Mendola says. "Non-FDIC" is stamped on all the brokerage account statements and confirmations, he says.

The FDIC requires disclosures be made to the customer about investments that are not FDIC-insured. Specifically, the sales representative is required to tell you that the product is not insured by the FDIC; not a deposit or other obligation of, or guaranteed by, the bank; and the product is subject to investment risks, including possible loss of the principal amount invested.

All the caution doesn't mean that investments Mendola sells aren't safe. He buys U.S. Treasuries, for instance, that aren't insured by the FDIC. They have the full and credit of the U.S. government standing behind them, however.

Thrifts and credit unions have the same or very similar coverage and rules as banks do. But investments at brokerage firms are covered by a different insurer.

The Securities Investor Protection Corp. is a nonprofit membership corporation funded by securities brokers and dealers. Unlike the FDIC, it is not a government agency funded by its broker dealer members. Brokers aren't allowed to suggest or imply that SIPC coverage is the same as FDIC coverage.

SIPC covers securities losses up to $500,000, including a cash limit of $100,000. It won't cover market losses when your stocks go down in price; but it will cover losses if the brokerage fails financially.

Michael Don, president of SIPC, said last week that SIPC has paid more than 300,000 customer claims in its 30 years and only about 300 didn't get fully reimbursed because their losses exceeded the limit.

But SIPC claims aren't easy to get, Portland attorney Robert Banks says.

He has half a dozen clients who suffered average losses of $250,000 when an East Coast high-pressure "boiler-room" telephone sales brokerage defrauded them. A Portland couple was awarded an arbitration settlement of $5.5 million in 1998, but has had little success in collecting it because the firm is no longer operating and its owners have pleaded guilty to racketeering.

Banks took the case to SIPC, which denied all but one claim for $36,000. SIPC doesn't pay for investment losses, but it does pay for theft losses. The claim it paid was for unauthorized trading in a customer account. The claims it didn't cover were for losses incurred after the brokerage refused to sell securities when the customers told it to sell.

"That's like theft, too," Banks maintains. Two courts have sided with SIPC, but Banks says he's prepared to appeal the case to the U.S. Supreme Court.

Other brokerages aren't content with SIPC limits. Charles Schwab, for example, has extended customer coverages by buying more insurance. Accounts there are covered for the total value of the securities in their accounts, including up to $1 million in cash. Money market mutual funds are considered securities, so that cash held in those accounts isn't subject to the limit, according to Schwab spokesman Mo Shafroth in San Francisco.

Yet another form of insurance covers you if the insurance company that sold you an annuity fails. An annuity is a mutual fund wrapped around a life insurance policy. Failures of Oregon-based insurers are covered by the Oregon Life & Health Insurance Guaranty Association. An annuity holder could collect up to $100,000 of the current value of their annuity benefit, according to Suk Ghosh, an analyst at the State Insurance Division.

The insurance for out-of-state annuities comes from the fund of the company's home
state.

Municipal bonds, sold by government entities to finance public projects, rarely default, especially if the government has a high credit rating. Cities or districts with lower credit ratings make their bonds more palatable to investors by buying insurance to cover the principal and interest of their bonds, says Katie Schwab, a vice president at Portland's Seattle Northwest Securities.