FDIC-insured banks could pounce on SIPC's failure to live up to its mandate, but with investment products ascendant, banks are holding back.

The Securities Investor Protection Corp., which is chartered by Congress to protect investors when brokerages fail, has in 30 years of operation paid more from its own coffers to lawyers processing claims than to the public.Therein would seem to be a marketing opportunity for banks, which can tout the robust consumer protection offered by the Federal Deposit Insurance Corp., upon which SIPC is loosely modeled. SIPC's shortcomings recently were featured in an article on the front page of The New York Times.

The president of SIPC, Michael Don, disputes the accuracy of that article, calling its finding regarding payment for legal work versus payment to claimants the result of "faulty math," adding, "somebody has to pay to distribute these assets."

In any case, despite the stiff competition between banks and brokerages, not many in the financial industry seem aware of any issue regarding SIPC as an insurer. A financial industry veteran in the securities unit of a big U.S. bank, told of SIPC's reported institutionalized tight-fistedness, called it, "a big surprise." This lack of awareness of SIPC's questionable value as a safety net seems widespread.

Robert Schmermund, the communications director at America's Community Bankers, based in Washington, phoned member banks at the request of U.S. Banker in a vain attempt to come up with a willing interviewee. "I spoke with eight bankers, and they all told me the same thing: 'This is news to me. I am not aware of any issues regarding problems with SIPC.'"

More telling, perhaps, was Schmermund's comment, "because they are in the brokerage business themselves, they have no desire to go out and beat up on SIPC."

That fact very likely was behind the refusal of major financial institutions, post the Gramm-Leach-Bliley Act, which eliminated barriers between commercial and investment banking, to offer comment. The big banks, of course, now own brokerage houses for which SIPC, in its limited fashion, was created.

Chicago-based Bank One Corp., for instance, after much back and forth, said through a spokesman that it "would rather not talk" and "would prefer to duck this one."

In Pittsburgh, a Mellon Financial Corp. spokesman said its New York-based Dreyfus brokerage unit felt that the "time was not right to respond" to the Times article's disclosures.

A spokesperson for U.S. Bancorp in Minneapolis, said she couldn't "find anyone at U.S. Bank to talk about this subject." Those begging off from being interviewed, she said, cited as a reason that they knew much about the FDIC or much about SPIC, "but not enough about both."

Says Trevor Jensen, editor of Adweek in the advertising industry publication's Chicago office, "These financial institutions have become so consolidated that they are not going to be calling anyone else names. They don't want to dirty their own pool."

That's true for small banks as well as big ones. According to Alisha Rindal, vice president and director of marketing at Signal Financial Corp., based in Mendota Heights, MN, "We want to start to offer those products as well. To talk all about how great FDIC is and to say that SIPC basically offers nothing would not be in our best interests."

And as regards SIPC offering "nothing," that seems close to the truth, at least in a number of cases. The Times article details the case of a man who on the advice of his stockbroker invested $100,000 in short-term bonds only to be told three months later that the money was gone, stolen by the head of the broker's firm, Old Naples Securities.

SIPC, which is industry-financed but not government-backed, is supposed to protect investors against fraud of just this kind. But, in fact, it sets the bar so high that most seeking restitution find it difficult to clear.

The president of SIPC says the corporation is "only doing its job" when it closely scrutinizes claims against the fund.

In the case of the investor the Times described, four years elapsed before the corporation recently agreed to pay him $87,000, though only after the Times reporter called SIPC to inquire about the case. Along the way, three federal courts had ruled in the investor's favor.

"SIPC is a lot more vague than the FDIC as to when you're insured. There's a huge gap between what the law says and what actually happens. You may think you have rights to $300,000, but if you don't sue, you are not going to get it. They can stall and run up your legal bills," says Andrew Winton, who lectures at the Carlson School of Management at the University of Minnesota.

In recognition of this fact, Charles Salmans, a spokesman for Quick & Reilly, the brokerage unit of FleetBoston Financial Corp., counsels a caveat emptor approach to investing: "Consumers are always well-served to look to the reputation, financial strength and capital soundness of the institutions with which they do business."

Quick & Reilly and "most of the more reputable brokerage firms" arrange additional protection from private insurance sources, up to $100 million, says Salmans.

Since its beginnings, SIPC has dealt with the liquidation of 282 brokerage firms, and completed the accounting in 247 of them, returning $3.38 billion to customers in cash and securities through the end of last year, according to the article in the Times. But more than 90% of this $3.38 billion came right from the accounts of customers of the failed broker operations.

The corporation itself has paid investors only $233 million, compared with $320 million that's gone to the lawyers that act as trustees in the cases.

This is a key finding in the Times article, but which Don of SIPC contends fails to tell the whole story. "It's not money paid to lawyers, it's the total administrative expenses of the case. In addition to trustees and lawyers, it's money paid to accountants, money for rent, money for utilities and telephone bills. It includes taxes that the trustee may have had to pay," Don says.

"Basically, it should be total administrative expenses versus total assets to customers, which is a ratio of one to 10," approximately $300 million in "administrative" costs compared with over $3 billion in assets returned to customers, he adds. "I think that's pretty good."

Nevertheless, SIPC refuses to pay investors with failed brokerage houses for a broad range of reasons. For instance, losses from unauthorized trading are covered only if an investor can convince SIPC that he or she quickly complained about the matter to the broker.

Customers of a failed broker that used another company to clear its trades and carry out administrative work are not compensated by SIPC, a fact that would leave millions with money in brokerages without any recourse in the event of a failure.

"Clearly FDIC insurance is superior to this securities insurance, which is really a fraud," says Craig Hudson, Western regional director for the Independent Community Bankers of America. "But banks are failing to do a good job of marketing this fact," he says.

Since the FDIC's founding in 1933, banks have been beating the drum about its benefits, but lately the importance of FDIC coverage has declined as the prospect of bank failures seem highly remote.

The agency works so well in monitoring the health of banks (whereas SIPC involves itself only when a brokerage fails), or in coming in and making things right when a bank does fail that the possibility of bank failures are only dimly appreciated.

"Bankers may say that none of their customers ask about deposit insurance coverage. I tell them they will if a bank in California goes down," says Hudson. "It works so well in creating confidence in the system that people don't have to think about it, it becomes part of the scenery," he adds.

Of course, this no doubt has contributed to the trend that has seen millions of Americans taking their money out of banks and putting it into brokerage firms. But brokerage firms, themselves, seem aware that many investors might again seek the safety provided by the FDIC. Merrill Lynch, for example, now owns three banks with FDIC coverage.

"In the early 1980s brokerage firms started coming up with their mutual funds, and it hurt us--still does. The money we used to have in deposits was eaten away. They hurt us pretty bad," says Craig Collette, chief executive officer of Marathon National Bank in West Los Angeles, CA.

Smaller bank operations such as his tried in the past to play up the difference in deposit protection between banks and the brokers, but to no avail. "It didn't discourage anybody from using the brokerage firms," says Collette. "What the brokers seem to do is tell their customers that they are protected by SIPC and by the health of the stock itself. That seems to satisfy most investors."

At the same time, bankers are reluctant to criticize the competition, for various reasons. Originally, banks might have shied away from "going negative," to use the parlance of politics, out a sense of that it would not be dignified. Banks, of course, have an image as a trusted and steady resource to preserve, and taking the high road in marketing served their interests.

"There's not a lot of negative advertising out there. You are loath to talk disparagingly about what might be perceived as competitors, lest you find yourself a target," says Jensen of Adweek.

"In this business," says Jack Crombie, CEO of Citizens Bank of Nevada County, based in Nevada City, CA, "we're so very careful of badmouthing any other financial institution."

However, according to Dan Jaffe, executive vice president at the Association of National Advertisers, based in Washington, DC, banks will change their circumspect marketing approach if "they think this is an issue that's important enough to consumers, or if the banks have a particularly important story to tell that they feel is really going to shift demand. If you get those factors together, even in areas where people are generally very conservative, things could change."

Much more to the point is that since the banks themselves are buying brokerages or offering investment products through third-party arrangements, they are in no position to target an entity like SIPC that may help the bank sell investment products.

Regulators, of course, lean heavily on the banks to make clear to their customers that their brokerage accounts are not FDIC-insured. "Given that," says Winton, "the banks don't want to advertise the fact that SIPC has holes in it. It wouldn't be good marketing."

With margins "being squeezed, we don't want to put the securities industry down, we want to get into it," says Rindal of Signal.

She thinks the best time to tell people about the kind of insurance coverage they can expect in a non-traditional investment product is at the point of sale. "Best not to point that out in advertising. Doing it at the point of sale is better timing. The customer comes in and we offer him a CD. If he wants something with a higher return, we lead him to the investor desk with the understanding that this is not an insured product," she says, adding, "SIPC insurance has never been a selling point at all."

Collette of Marathon National Bank suggests that there's really no turning back. "I think people have invested pretty heavily in the stock market, in mutual funds and annuities to the point where they don't fear any calamity. I don't think the average investor knows what SIPC is, and I don't think they care."

If anything, the issue of FDIC versus SIPC points up the divide between big and small banks. The difference between the two insurance funds is irrelevant as far as the major financial institutions are concerned, since, "big banks want to do away with deposit insurance, anyway, says Hudson of ICBA.

"BofA will tell its customers off the record, 'Go ahead and put the $600,000 in CDs with us. You surely don't want to put it in those small banks. You don't know anything about them, they could be liquidated and you'd only get $100,000 back,'" he says. "It's too big to fail for the bigger banks and too small to save for our banks."

At the same time, Hudson adds, "most of the securities people are going to want to get in the FDIC, and to do that they buy a bank."

After Gramm-Leach-Bliley, "everyone can own everyone else; there are firewalls, but those things tend to melt down in a crisis."

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