Municipal Bond Forum
Protection when banks hold your bonds
Q
We have purchased numerous long-term tax-free bonds from FMS, all of which have been transferred to, and held or administered by a major U.S. banking entity. If the major bank that holds or administers our bonds becomes insolvent, would our income stream, and/or the associated liquidity of our bonds be interrupted?
A
James A. Klotz responds:
Your bonds are going to the brokerage affiliate of your bank. That brokerage firm is subject to the rules and regulations of the securities industry, which require that all fully-paid-for customer securities be segregated from the accounts of the firm.
However, there have been instances of insolvent firms not adhering to these rules and putting their customers’ securities at risk. If that occurs and customer securities are missing, the Securities Investor Protection Corporation (SIPC) steps in and provides coverage up to $500,000 per account, including up to $250,000 in cash. You can learn more about SIPC at www.sipc.org.
Additionally, many firms purchase “excess SIPC” coverage, which increases the per-account limit to higher levels, subject to an aggregate amount of coverage for all the firm’s customers.
Depending on the size of your account(s), you may wish to contact the firm holding your bonds to determine if they have excess SIPC coverage, and if so, the limits.
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