The federal government has a veritable list of alphabet soup agencies that largely operate behind the scenes. You are probably already familiar with the SEC but there are other financial sectors who play a big part in the success of your investments. Agencies like FDIC, SIPC and FINRA do much to add both confidence and liquidity to the investment and financial entities.
What are these agencies, and how do they affect your investments?
FDIC – Federal Deposit Insurance Corporation
The FDIC (which stands for Federal Deposit Insurance Corporation) was created by the Banking Act of 1933, and it operates as a U.S. Government corporation, but as an independent agency.
The FDIC’s main functions include:
Bank deposit insurance.The FDIC insures bank deposits for up to $250,000 per depositor. This insurance coverage extends to deposits held in nearly 7,000 banking institutions across the country. This does not extend to credit unions, which are instead insured by the National Credit Union Administration, or NCUA.
Bank oversight. The FDIC conducts regular examinations of its member banks. These examinations relate to the safety and soundness of individual banks, and compliance with consumer protection laws.
Supervision of certain banks. The FDIC manages failed banks that are placed in receivership, primarily due to issues relating to financial soundness.
The FDIC is funded by premiums paid by member banks for the deposit insurance provided by the agency. It also earns additional revenue from interest received on investments in U.S. Treasury securities. Unlike most government organizations, and even quasi-government organizations, FDIC does not receive appropriations from the U.S. government.
What FDIC means to your finances. Because of the FDIC, and both the oversight and the deposit insurance they provide, you don’t have to concern yourself with the financial integrity of the institutions you bank with. You are free to bank with whoever like, confident in the knowledge that your money will be safe wherever it is.
SIPC – Securities Investor Protection Corporation
The SIPC (which stands for Securities Investor Protection Corporation) fills a similar role as the FDIC does, only it operates in the securities industry. It was established under the Securities Investor Protection Act (SIPA) of 1970 and mandates membership of most U.S. registered broker dealers.
One area where it does depart from FDIC is that it does not function as a regulatory body. Its sole function is to act as an insurance fund for investment organizations, and it exists as a nonprofit, membership corporation. The SIPC is overseen by the Securities and Exchange Commission (SEC).
The SIPC’s main functions include:
Investor account insurance. Because of SIPC coverage, customers of investment brokerage firms are insured for up to $500,000 in net equity in each account. That includes up to $250,000 in cash balances. The SIPC will first seek to organize the distribution of customer cash and securities, then rely upon the insurance limits to cover the balance.
It’s important to recognize that SIPC coverage is restricted to the insolvency of the investment brokerage firm. It will not cover losses that are the result of poor investment decisions by the customer, fraud or misrepresentation. In addition, while the insurance will cover cash and common securities, certain other assets are not included. These include commodities and futures contracts, and other investment types that are not registered with the SEC.
Providing order in the financial markets. At least part of the purpose of SIPC is to prevent an insolvency in one or more investment brokerage firms from escalating and destabilizing the financial markets. By insuring investor accounts with each brokerage firm, SIPC helps to prevent financial difficulties at one institution from spilling over to others. In this way, SIPC works to help stabilize the investment industry overall.
SIPC is supported by assessments on its members in the investment industry. But it's also authorized to borrow against the U.S. Treasury should additional resources become necessary.
What SIPC means to your finances. So what happens to your money if you have over the $250,000 insured cap, inside a 401(k) or other retirement account, and they go out of business? The SIPC is supposed to protect your money, but how? To answer this question, we reached out to Andrew Meadows, Consumer & Brand Ambassador at Ubiquity Retirement + Savings.
“Basically, you don’t have much coverage with a broker if you’ve exceeded the limit. In fact, if more than $250K is in cash, or a cash-like investment like money market, it’s not covered. The SIPC is a non-profit organization and a U.S. Federal Agency like the FDIC.
The best way you can protect your 401(k) is to diversify. I’m asked frequently about whether folks should consolidate all their 401(k)s by rolling them all together. It’s not a bad idea when it comes down to managing your assets. However, if you’re saving upwards of $500K, you will actually want to diversify. Brokers going out of business isn’t common, but you don't want all your eggs in one basket. Rather, if you’re an aggressive saver, leave your funds in other plans or roll them into an IRA or some other qualified type of account.”
As you can see, the SIPC covers losses sustained by investment brokerage customers, but it does not intervene to uphold the financial integrity of the brokerage itself. Its responsibility therefore is to customers of the brokerage, and not in any way to the brokerage firm itself.
Like we always say here at Investor Junkie, no one will take care of your money like you will, so you have to beware and pay attention to your investments.
FINRA – Financial Industry Regulatory Authority
FINRA (short for Financial Industry Regulatory Authority) is the successor organization of the National Association of Securities Dealers (NASD), having been founded in 2007. It is also a private corporation, and like the FDIC, it does act as a self-regulatory organization.
It functions as the member regulation, enforcement, and arbitration operations of the New York Stock Exchange (NYSE), where it regulates both participating brokerage firms and exchange markets. Like the SIPC, it's ultimately responsible to the SEC.
FINRA is funded by assessments of member firms' registered representatives and applicants, annual fees paid by its members, and also by fines levied for violations.
FINRA’s main function is:
Regulation of securities firms. FINRA is the largest independent regulator of all securities firms doing business across the nation. It overseas more than 4,000 brokerage firms, which includes more than 161,000 branch offices, and 637,000 registered securities representatives. Its activities extend to all financial markets, including the New York Stock Exchange, NASDAQ, the American Stock Exchange, and International Securities Exchange. Its primary mission is to protect investors by ensuring that the securities industry operates in a fair and honest manner.
In that regard, FINRA conducts periodic regulatory exams of its member investment firms. It also licenses both institutions and individuals to operate in the securities industry.
What FINRA means to your finances. While unlike the FDIC and SIPC agencies, FINRA doesn’t insure your money against loss in any way, it does act as a primary investment industry regulator. This keeps industry participants honest, and insures that investment activity will flow freely.
As a result of this function, you can invest in the financial markets with confidence, knowing that investment industry participants have an overseer who is looking at those things that we prefer to ignore in the regular course of business.
Most of us pay little attention to the FDIC, SIPC and FINRA organizations on a day-to-day basis. At the same time, we all enjoy the benefits of the protections that they provide to our finances.