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Pasted below is a recent article from the WSJ that might be of interest.
Regards,
Michael Suesserott
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February 18, 2001
Market Turmoil Leads Online Investors
To Be Concerned About Their Brokers
By DAVE PETTIT
Staff Reporter of THE WALL STREET JOURNAL
If you shop around, you can find sweet deals on trading commissions. But the
firms offering the lowest prices often aren't exactly household names.
That leaves online traders in a quandary: low fees look appealing, but
mailing a check to an unproven broker feels uncomfortable.
Especially these days, amid turmoil in the stock market and with many online
businesses -- from retailers to mortgage brokers -- disappearing, some
online investors are understandably concerned about their online brokerage
firms.
"We are starting to see the shakeout in the online world now," says Mark
Maddox, an Indianapolis lawyer who represents investors in claims against
brokerage firms. There are 150 online firms now competing for a share of the
online market. But, Mr. Maddox says, "You are going to see that diminish
over the next few years, due to mergers or just failures."
Donna Becker, a Sacramento, Calif., schoolteacher, confronted these concerns
before signing up with BuyandHold, a online firm in New York that offers
$2.99 stock trades. She wanted to open a Roth individual retirement account,
but was afraid the firm would disappear before she ever tapped into that
IRA.
Ms. Becker overcame her reluctance by doing research that started with a
tiny notation at the bottom of BuyandHold's Web site. It said the firm is a
member of SIPC, Securities Investor Protection Corp., a government-created
nonprofit corporation that insures securities held in brokerage accounts.
If a SIPC-member brokerage firm fails, SIPC will step in so investors don't
lose the securities and cash sitting in their account. It will find another
brokerage firm willing to take over the failed firm's accounts or -- if
there aren't any takers -- it will liquidate the firm and return the
contents of its accounts to investors. In these cases, SIPC may use its own
funds to step into the public market and buy shares to return to
accountholders.
Few Failures
So far, that has been rare. Over the past five years, SIPC has liquidated
fewer than 10 brokerage firms each year, says Stephen Harbeck, its general
counsel, and none of the failures were online firms.
Mergers, on the other hand, have been more common -- and more deals are
expected. Having your online firm acquired by another firm generally isn't
disruptive. Indeed, you may find more financial security under the umbrella
of a bigger firm.
SIPC's coverage is sufficient to protect most investors' entire portfolios.
As a baseline, it covers $500,000 in assets held in an account. In reality,
accounts with even greater holdings may be safe, Mr. Harbeck says, because
SIPC generally can recover some assets from a failed firm.
There are limitations to SIPC's coverage, though. Cash held in a brokerage
account is covered only up to $100,000 and mutual-fund holdings -- including
money-market funds -- aren't covered at all, if in an account with a firm
that deals only in mutual funds. Online brokers, though, usually trade both
stocks and funds.
SIPC, of course, also doesn't insure against market losses. It returns
shares of stock that are held in accounts, not the cash value of purchases.
Also, it doesn't protect investors from losses caused by fraud at the firm.
If your failed firm, for instance, sold you worthless penny stocks, you'll
have to take your case to the bankruptcy court handling the firm's demise.
Recovering money there is unlikely.
Mr. Maddox, the securities lawyer, however, says fraud cases are uncommon
against online firms because most fraud involves the misdeeds of a human
broker. Most online accounts are managed by individual investors, not by a
broker.
Despite the protections that SIPC offers, going through a brokerage-firm
failure is a considerable hassle. For one thing, your money held in the
account won't be available to you until SIPC sorts things out.
If SIPC can find another firm to assume the accounts of a failed firm, Mr.
Harbeck says investors may regain access to their money in just a few weeks.
But if the firm must be liquidated, it can take months for SIPC to resolve
all of the claims. In cases like this, it is important to have good records
to document what assets were in your account.
It pays to plan ahead -- and do some research -- to reduce the risk that
you'll be burned by a failed firm.
"The industry has a good track record and it has enough checks and balances
that an investor should feel comfortable," says Greg Smith, an analyst at
J.P. Morgan H&Q in San Francisco. "But do your homework."
Start by double-checking that the firm is a member of SIPC. Nearly all are,
but don't take an obscure Web site's assurance at face value. SIPC's Web
site (www.sipc.org) includes a database of members that you can search. You
also may want to contact the regulatory arm of National Association of
Securities Dealers (www.nasdr.com) to check the firm's disciplinary record.
Looking for Trouble
Some investors may want to delve into a firm's finances first-hand.
James Marks, an analyst at Credit Suisse First Boston in Philadelphia, says
margin lending -- loans firms make to investors to buy stock -- is the
biggest financial risk firms face. He suggests looking to two items on
firms' financial statements: their level of so-called regulatory capital and
their level of margin loans outstanding.
Use those numbers to do some math. Mr. Marks says you may feel comfortable
about a firm if its regulatory capital is at least 8% or 10% of its level of
margin loans -- that is, if it has at least $8 to $10 of capital for every
$100 of margin loans. The big firms are close to 20%.
You may be able to get a copy of the firm's financial statements directly
from the firm, though some will only provide those documents to existing
customers. Otherwise, you can get a copy at an office of the Securities and
Exchange Commission.
As for BuyandHold, Peter Breen, its chairman and chief executive, says
prospective customers shouldn't be concerned about its margin-lending risks:
The firm doesn't offer margin loans. Mr. Smith, the J.P. Morgan H&Q analyst,
says that although he doesn't formally cover BuyandHold, he views it as one
of the "definite survivors."
--Dave Pettit is deputy managing editor of WSJ.com, the online Journal. To
contact him, write: The Internet Trader, WSJ Sunday, 200 Liberty St., New
York, N.Y. 10281. E-mail: online.investing@xxxxxxx
-----Ursprungliche Nachricht-----
Von: Lawrence Chan [mailto:stnahc@xxxxxxxx]
Gesendet: Wednesday, February 21, 2001 19:59
An: Michael Berger; OmegaList; Chad
Betreff: Re: Noticeably Absent
<snip>
How can we be sure the smaller discount brokerages
will survive then? What would happen to our money
if they go under?!
I don't know.
Maybe someone on the list willing to share some ideas.
=====
Lawrence Chan http://www.tickquest.com
Innovative Analytical Software for Trading Professionals
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