Insurance, education help investors hang on

April 5, 2009
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With trillions of dollars up in smoke in investment losses during the current recession, many investors are singing along with Frankie Valli and the Four Seasons: “Let’s hang on to what we’ve got.”

Investor education resources in Michigan will be on the rise. In January, Gov. Jennifer Granholm signed into law a bill modernizing the Uniform Securities Act, which created the Investor Education Fund, funded by securities fines, and used by the Office of Financial and Insurance Regulation to educate Michigan investors to prevent scams.

OFIR intends to use the funding to expand its Investor Education in Your Community program, to expand securities crime training for the law enforcement community and to track unscrupulous promoters of “free lunch seminars” that are really sales pitches, according to Jason Moon, spokesman from the Department of Energy, Labor and Economic Growth.

But scams like the Ponzi scheme perpetrated by New York financier Bernie Madoff are only part of investors’ worries. With banks and insurance companies in trouble, investors need to make money decisions that take advantage of programs that protect their shrunken nest eggs or buy-out checks.

Gordon Lewis, a partner at Warner Norcross & Judd specializing in banking, a Miller Canfield newsletter and the state Office of Financial and Insurance Regulation provided the Business Journal with information on the basics of investor protection.

Federal Deposit Insurance Corp.

This is a government insurance program, funded by member financial institutions, that protects money on deposit in checking, money market, savings accounts and certificates of deposit at banks and savings and loan associations. Should one of those organizations fail, the FDIC covers the account.

The FDIC also regulates many banks, including most in Michigan, Lewis said. So when a bank fails and the FDIC steps in on a Friday, it’s already arranged for a transfer of assets to a different bank by Monday, and depositors are protected without much ado, Lewis said.

For 2009, Congress increased the limit of FDIC coverage from $100,000 per account holder per bank to $250,000. That was done to bolster consumer confidence in banks in the wake of the financial crisis, Lewis said.

But as of next Jan. 1, the limit goes back to $100,000. But since the insurance is available in as many banks as you want, the solution is to keep no more than the FDIC limit in any particular bank, Lewis said.

Find more details at www.fdic.gov; click on Consumers & Communities.

Securities Investor Protection Corp.

Nobody will protect you against investments that go south. But if your brokerage collapses, SIPC makes sure that you get the current amounts in accounts of cash, stock, mutual funds and other securities. The limits are up to $100,000 in cash and up to $500,000 total at each brokerage.

Miller Canfield notes that brokerages often carry private insurance that covers amounts beyond that. Exceptions to SIPC coverage are commodity futures contracts, currency and investments not registered with the U.S. Securities and Exchange Commission.

Created by Congress in 1970, SIPC is a government entity and, along with the SEC, also has a regulatory role over brokerages. Its focus is on recovering assets for investors from bankrupt brokerages or in cases of financial difficulty and missing assets. However, SIPC does not fight fraud; other agencies are assigned to that duty.

The law firm recommended in its newsletter that deposits should always be made payable to the broker-dealer only, not to an individual. Investors should look for the “Member SIPC” designation, but to double-check whether a firm is under the umbrella, check the Web site at www.sipc.org or call (202) 371-8300.

Investments purchased through a bank’s brokerage would be under SIPC rather than FDIC, Lewis pointed out.

National Credit Union Administration

The organization is an independent federal agency that charters and supervises federal credit unions, and runs an insurance program to cover shareholders in federal and most state-chartered credit unions. Visit www.ncua.org to find out if a particular credit union is part of the insurance program. Those that are display an NCUA sign by the tellers.

NCUA limits are similar to the FDIC limits at $250,000 per account holder at one institution. Also like FDIC, that limit drops back to $100,000 at the end of the year.

Not insured are stocks, bonds, municipal bonds, mutual funds, other securities, annuities or any insurance products.

The Web site has a calculator to help shareholders determine which accounts and amounts are covered by the National Credit Union Share Insurance Fund.

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