Why Is “FDIC and SIPC Insured” Important?

On Thursday, Robinhood announced a high interest, zero-fee checking and savings account. It got a lot of hype among the tech community and had over 750K people on the waitlist. Robinhood published a blog post this morning, explaining that they will change the name and marketing materials.

How does this affect the launch? According to TechCrunch, “Robinhood planned to start shipping its Mastercard debit cards to customers on December 18th with users being added off the waitlist in January. That may now be delayed due to the insurance problem and it’s announcement that it will change how it works and is positioned.”

The issue came in when the CEO of the SIPC (Securities Investor Protection Corporation), a nonprofit member a nonprofit membership corporation that insures stock brokerages told TechCrunch that it’s insurance would NOT apply to checking and savings account the way Robinhood claimed. “Robinhood would be buying securities for its account and sharing a portion of the proceeds with their customers, and that’s not what we cover,” says SIPC CEO Stephen Harbeck. “I’ve never seen a single document on this. I haven’t been consulted on this.”, Techcrunch reported.

Why is bank insurance important and why should you care?

If Robinhood, or any institution you are trusting with your money does not have insurance, in case of a crash, those customers are at risk of losing the money they deposited.

Robinhood co-CEO Baiju Bhatt told TechCrunch that “Robinhood invests users’ checking and savings money into government-grade assets like U.S. treasuries and we collect yield from those assets and pay that back to customers in the form of 3 percent interest.” But Harbeck tells TechCrunch “that means users would effectively be loaning Robinhood their money, and the SIPC doesn’t cover loans. If a market downturn caused the values of those securities to decline and Robinhood couldn’t cover the losses, the SIPC wouldn’t necessarily help users get their money back.”

FDIC vs SIPC insurance explained.

FDIC insurance

It sounds like something out of a movie, but banks can fail. That is why the government has an agency that protects customers, up to $250,000. The FDIC was created by congress in 1933 to maintain stability and public confidence in the United States’ financial system.

The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the United States government that protects you against the loss of your insured deposits if an FDIC-insured bank or savings association fails.

According to the government website, “FDIC deposit insurance covers the depositors of a failed FDIC-insured depository institution dollar-for-dollar, principal plus any interest accrued or due to the depositor, through the date of default, up to at least $250,000. For example, if a person had a CD account in her name alone with a principal balance of $195,000 and $3,000 in accrued interest, the full $198,000 would be insured, since principal plus interest did not exceed the $250,000 insurance limit for single ownership accounts.”

SIPC insurance

Where the FDIC protects customers that deposit at banks, the SIPC protects customers of brokerage firms. The SIPC was also created by Congress, (in 1970 though), to protect clients of brokerage firms that are forced into bankruptcy. The SIPC will work to recover assets on behalf of the investor or step in as trustee for the insolvent institution.

SIPC provides up to $500,000 insurance coverage for cash and securities held by the firm; of that amount there is a $250,000 limit of coverage on cash. There is no requirement that a customer reside in or be a citizen of the United States.

SIPC does not protect against the decline in value of any securities. Nor does it protect individuals who are sold worthless stocks and other securities. SIPC does not protect claims against a broker for bad investment advice, or for recommending inappropriate investments.

What are the differences between FDIC and SIPC?

SIPC protection is not the same as protection for your cash at a Federal Deposit Insurance Corporation (FDIC) insured banking institution because SIPC does not protect the value of any security. SIPC protects customers of SIPC member broker-dealers if the firm fails financially. SIPC does not provide blanket coverage, where the FDIC does.

What does “not protecting the value” mean? It means that if you have a stock, and it declines in value – for example if you bought it at $5 and now it’s worth $1–the SIPC protects the stock, so it would get you the stock back, and it would still be worth $1. Money market mutual funds, often thought of as cash, are protected as securities by SIPC.

FDIC insurance covers all deposit accounts, including:

  • Checking accounts
  • Savings accounts
  • Money market deposit accounts
  • Certificates of deposit

FDIC insurance does not cover other financial products and services that banks may offer, such as stocks, bonds, mutual funds, life insurance policies, annuities or securities.

SIPC insurance covers all securities, including:

  • Note
  • stock
  • treasury stock
  • bond
  • debenture
  • evidence of indebtedness
  • any collateral trust certificate, preorganization certificate or subscription
  • transferable share
  • voting trust certificate
  • certificate of deposit
  • certificate of deposit for a security
  • any investment contract or certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or mineral royalty or lease (if such investment contract or interest is the subject of a registration statement with the Commission pursuant to the provisions of the Securities Act of 1933 [15 U.S.C. 77a et seq.]),
  • any put, call, straddle, option, or privilege on any security, or group or index of securities (including any interest therein or based on the value thereof), or
  • any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency,
    any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase or sell any of the foregoing, and
  • any other instrument commonly known as a security.

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