12.4 SIPC, Fidelity Bonds, Proxy Materials, and Financial Reports

SIPC Protection

The Securities Investor Protection Corporation responds when a SIPC member broker-dealer fails financially and customer cash or securities are missing. The general limit is $500,000 per customer in each separate capacity, including up to $250,000 for cash. Separate capacity follows legal ownership categories—not the number of account statements, account numbers or securities.

SIPC seeks to return customer property and can advance funds within the limits. It does not insure market loss, guarantee an issuer, protect a decline in a mutual fund or variable contract, or cover every asset sold by a broker. Securities not registered with the SEC and certain commodity or investment-contract interests can fall outside the statutory definition for SIPC purposes.

Rule 2266 requires SIPC members to tell new customers in writing at account opening, and all customers in writing at least once a year, that they may obtain information about SIPC, including the SIPC brochure, by contacting SIPC, and to give SIPC's website address and telephone number. Members excluded from SIPC membership, and members whose business consists exclusively of selling investments ineligible for SIPC protection, are excepted. When an introducing firm and a clearing firm both service an account, they may assign the duty to one of them.

SIPC Versus FDIC

A money market mutual fund is a security and is not FDIC insured. A bank money market deposit account can be an insured deposit. Sales on bank premises require clear not-a-deposit, not-insured, not-guaranteed, may-lose-value disclosures.

Fidelity Bonds

FINRA Rule 4360 requires each member that must join SIPC to maintain blanket fidelity bond coverage with insuring agreements covering at least fidelity (dishonest acts), on premises and in transit losses, forgery and alteration, securities, and counterfeit currency. The bond must provide per-loss coverage without an aggregate limit and must cover every associated person except directors or trustees who are not performing employee duties.

• Minimum coverage. A member with a net-capital requirement below $250,000 must carry the greater of 120% of its required net capital or $100,000; larger requirements follow a table in the rule.
• Deductibles. A deductible of up to 25% of coverage is allowed, but any deductible above 10% of coverage must be deducted from net worth in computing net capital.
• Annual review. Each year, as of the bond's anniversary date, the member reviews coverage using its highest net-capital requirement during the preceding 12-month period.
• Notice. The bond must carry a rider under which the carrier uses best efforts to notify FINRA of cancellation, termination or substantial modification, and the member must immediately advise FINRA in writing of any such event.

Insurance is a loss backstop, not a substitute for custody, segregation, access control or supervision.

Proxy and Issuer Communications

Under Rule 2251, a member holding stock in its own name for beneficial owners must promptly forward proxy materials to those owners when the issuer or soliciting shareholder furnishes sufficient copies and gives satisfactory assurance of reimbursement of the member's reasonable expenses, and it forwards annual reports, information statements and similar material on the same conditions. A member may not give a proxy to vote stock registered in its name unless it is the beneficial owner, it is following the rules of an exchange of which it is a member and its records show that procedure, or it holds the stock as a fiduciary with voting authority. A beneficial owner may designate in writing a registered investment adviser with discretion over the account to receive the materials and vote, and may rescind that designation in writing at any time. Exchange Act Section 14 and the SEC proxy rules govern the solicitation itself, including the framework for objecting and non-objecting beneficial owners.

The firm must not vote customer securities without authority. Operational controls reconcile positions and record dates, suppress duplicate or ineligible distributions appropriately, forward materials promptly and document reimbursement and voting instructions.

Financial and Product Reports

Under Rule 17a-5(c), a broker-dealer generally must send customers an audited statement of financial condition within 105 days after its fiscal year-end and an unaudited statement dated six months later within 65 days of that date. Firms whose activities are limited to introducing accounts on a fully disclosed basis, promptly forwarding subscriptions with checks payable to the issuer, or selling and redeeming mutual fund shares are excepted, which covers many Series 26 firms. Rule 2261 separately lets regular customers inspect the member's most recent balance sheet on request. Mutual funds provide prospectuses and periodic shareholder reports containing fund-specific performance, expenses, holdings and financial information. Trade confirmations and account statements describe transactions and positions; they do not replace issuer reports.

The principal should map each report to its owner, recipients, source data, due date, delivery evidence and exception process. Returned mail, stale electronic consent, position mismatches and outdated SIPC disclosures require follow-up. No report or insurance logo should imply protection against investment loss.

Separate Capacity and Customer Education

Separate capacity can distinguish, for example, an individual's own account from an account properly held as trustee, but opening several individual accounts does not multiply protection. Joint and retirement accounts follow SIPA capacity rules. Firms should avoid calculating an assured recovery because liquidation facts, asset eligibility and customer status determine the result.

SIPC signs and disclosures must not be placed so that they imply endorsement of a product or performance. The same principle applies to an insurer's guarantee: it depends on the insurer and contract, not SIPC or FDIC.

Proxy controls should also address securities lending and record-date positions because voting entitlement may differ from an ordinary month-end holding. Customer communications must describe any material effect accurately.

Fidelity-bond claims, near misses and changes in headcount should inform the annual coverage review. A loss below the deductible can still expose a supervision or control weakness and may have separate customer-restoration and reporting consequences. Document the decision and any revised control in the annual review file.