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9/17/2008: Our office is now receiving many calls from unknown and unidentified sources proclaiming to have safe and sure answers for the market turmoil. My advice - do as our staff did, Hang Up.
* While Lehman Brothers Holdings Inc. filed for protection under Chapter 11 of the bankruptcy laws this morning, the firm's U.S. regulated broker-dealers, Lehman Brothers, Inc. and Neuberger Berman LLC, are still solvent and functioning. The U.S. broker-dealers have not filed for bankruptcy, and they are expected to close only after the orderly transfer of customer accounts to other registered and SIPC-insured broker-dealers.
* Under SEC rules, broker-dealers must keep customers' securities and cash segregated from their own so that the customers' assets will be safe.
* The SEC also requires broker-dealers to maintain adequate net capital to reduce the likelihood of insolvency.
* Broker-dealers are also required to be members of the SIPC, which insures customer securities accounts up to $500,000. SIPC is used in those rare cases of firm failure where customer assets are missing because of theft or fraud. In other words, SIPC is the last course of action in the unlikely event that the other customer protections have failed.
FINRA is working closely with Lehman Brothers, the SEC and other regulators to ensure a smooth transfer of customer accounts from Lehman to one or more broker-dealers. Still, we understand that the days ahead may cause some anxiety for customers, and we are here to help.
If a Brokerage Firm Closes Its Doors
Given the turbulence affecting the financial services industry these
days—including recent announcements concerning Lehman Brothers—you may be
wondering what would happen to your securities account if your brokerage firm
closed its doors.
In virtually all cases, when a brokerage firm ceases to operate, customer assets
are safe and typically are transferred in an orderly fashion to another
registered brokerage firm. Multiple layers of protection safeguard investor
assets. For example, registered brokerage firms must keep their customers'
securities and cash segregated from their own so that, even if a firm fails, its
customers' assets will be safe. Brokerage firms are also required to meet
minimum net capital requirements to reduce the likelihood of insolvency, and to
be members of the Securities Investor Protection Corp (SIPC), which insures
customer securities accounts up to $500,000. SIPC is used in those rare cases of
firm failure where customer assets are missing because of theft or fraud. In
other words, SIPC is the last course of action in the unlikely event that the
other customer protections have failed.
Concerning Lehman Brothers Holdings Inc., which filed for protection under
Chapter 11 of the bankruptcy laws on September 15, the firm's U.S. regulated
broker-dealer subsidiaries, Lehman Brothers, Inc. and Neuberger Berman, LLC, are
still solvent and functioning. The broker-dealer subsidiaries have not filed for
bankruptcy, and are expected to close only after the orderly transfer of
customer accounts to another registered and SIPC-insured broker-dealer. If you
are a customer of Lehman and have questions about your account or the
liquidation and transfer process, you should contact your financial advisor or
visit the firm's Web site for updates and additional information.
In light of this situation, this publication explains the role
regulators—including FINRA—play when a firm goes out of business unexpectedly,
and what you should know and do in the event that your brokerage firm ceases to
operate. While the customer safeguards are extensive and the track record of
making investors whole in the aftermath of a financial crisis is strong, not all
investor assets may be covered, and there are steps and precautions investors
can take to help protect their assets—not to mention their peace of mind.
Regulatory Safety Net
Brokerage firms are required to follow certain rules that are designed to
minimize the chances of financial failure and, more importantly, to protect
customer assets if they do fail. For example, the SEC's Rule 15c3-1—the "Net
Capital Rule"—requires brokerage firms to maintain certain levels of their own
liquid assets. The minimum net capital a firm must have on hand depends on its
size and business.
In addition, the SEC's Rule 15c3-3—the "Customer Protection Rule"—requires
brokerage firms that have custody of customer assets to keep those assets
separate from their own accounts. In other words, customers' cash must be placed
in a special, separate "reserve" account; and fully paid customer securities
must be kept separate from firm and customer margin securities.
Carrying and Introducing Firms
To understand how these rules work, it is helpful to understand the difference
between "clearing and carrying" firms (or "carrying" firms for short) and
"introducing" firms. When you open an account with a brokerage firm that is a
carrying firm, the firm not only handles your orders to buy and sell securities,
but it also maintains custody of your securities and other assets (like any cash
in your account). With an introducing firm, the brokerage firm accepts your
orders—but it will have an arrangement with a carrying firm to maintain custody
of your securities account. Because they have custody of customer assets,
carrying firms must maintain higher levels of net capital than introducing
firms—and they are responsible for segregating the customer funds and securities
in their custody.
Additional rules require firms that do business with public customers to have
their financial statements audited by an independent accounting firm annually.
All brokerage firms must file financial statements (on Form X-17A-5) with the
SEC—and those that are publicly traded must file quarterly, annual and other
periodic reports with the SEC (which investors can view using the SEC's EDGAR
database of company filings). We describe how an investor can obtain a firm's
financial statements in our Investor Checklist.
What Happens to My Account?
Historically, brokerage firms that have faced financial insolvency—meaning they
cannot meet their financial obligations as they come due—have handled the crisis
in different ways. Some have been able to find a buyer to stave off insolvency.
Bear Stearns, for example, was bought by J.P. Morgan in 2008.
Other firms self-liquidate, as did Drexel Burnham Lambert in 1990. When a
brokerage firm self-liquidates, securities regulators, including the SEC and
FINRA, work with the firm to make sure that customer accounts are protected.
That is what is currently happening in connection with Lehman Brothers, Inc. On
September 15, 2008, Lehman's parent company, Lehman Brothers Holdings Inc.,
announced that it had filed for protection under Chapter 11 of the bankruptcy
laws. None of the holding company's broker-dealer subsidiaries—including Lehman
Brothers, Inc. or Neuberger Berman LLC—are included in the bankruptcy petition.
Nevertheless, the bankruptcy filing will likely lead to the winding down—outside
of bankruptcy—of these brokerage firm subsidiaries. SEC and FINRA staff are
working on-site at Lehman Brothers to oversee the orderly transfer of customer
assets to one or more SIPC-insured brokerage firms. In the meantime, Lehman
Brothers Inc. is open for business to facilitate customer orders.
If My Firm Fails, What Do I Do?
The failure of a brokerage firm will understandably cause some anxiety for the
firm's customers. The first thing you should do is avoid panic. If you hear your
firm is in financial trouble, contact the firm to see what procedures you should
follow. For example, there may be a window of time when you cannot trade or
transfer your account.
In the specific case of Lehman Brothers, the firm announced on September 15,
2008, that customers may continue to trade or take other actions with respect to
their account. If you are a customer of Lehman and have questions about your
account or the liquidation and transfer process, you should contact your
financial advisor or visit the firm's Web site for updates and additional
information. You may also contact FINRA at (301) 590-6500 or send an email to
the SEC at help@sec.gov.
What Happens if SIPC Protection Is Invoked
SIPC is a non-profit organization created in 1970 under the Securities Investor
Protection Act (SIPA) that provides limited insurance to investors on their
brokerage accounts if their brokerage firm becomes insolvent. All brokerage
firms that do business with the investing public are required to be members of
SIPC. SIPC protection is limited. It covers the replacement of missing stocks
and other securities up to $500,000, including $100,000 in cash claims. However,
it does so only when a firm shuts down due to financial circumstances in which
customer assets are missing—because of theft, conversion, or unauthorized
trading—or are otherwise at risk because of the firm's failure.
SIPC does not cover the following:
Ordinary market loss;
Investments in commodity futures, fixed annuities, currency, hedge funds or
investment contracts (such as limited partnerships) that are not registered with
the SEC; and
Accounts of partners, directors, officers or anyone with a significant
beneficial ownership in the failed firm.
SIPC coverage of $500,000 is extended to each "legal customer." For instance, if
you have three accounts at a firm—and one is an individually held account in
your name only, another is a joint account with your spouse, and a third is an
IRA account in your name—each account is considered a separate "legal customer"
and each will be eligible for full SIPC coverage.
SIPC Liquidation: Step-by-Step
In almost four decades of operation, SIPC has advanced approximately $508
million to facilitate the return of more than $15.7 billion in cash and
securities to an estimated 625,000 customers.
If a SIPC liquidation takes place, you will be notified by letter that your
brokerage firm has closed and that SIPC has begun a "Direct Payment Procedure"
or a liquidation proceeding in court. If you receive such a letter, SIPC advises
in its Investor's Guide to Brokerage Firm Liquidations that you promptly:
Gather key information together, including brokerage account records, monthly or
quarterly statements and trade confirmations;
Locate cancelled checks and correspondence with your brokerage firm;
Check your account statements for accuracy and verify that the statements
reflect all cash deposits you sent to the brokerage firm. Determine if there are
any transactions that you did NOT authorize.
Verify your correct address. If you hear about a liquidation that involves your
firm and have not received a letter, go to the SIPC Web site for contact
information.
Follow SIPC instructions in filling our necessary forms; and
Pay strict attention to time limits set forth in the notice and claim form.
Under federal law, no one—not the trustee, SIPC or the court—has the authority
to satisfy claims that are filed late.
Once liquidation is initiated, most customers can expect to receive their assets
in one to three months. The speed at which customer funds and securities are
returned depends on a number of factors, including the accuracy of brokerage
firm records.
Investors should be aware that they may be unable to transfer accounts or
execute trades during the liquidation process. Furthermore, if a clearing firm
is in financial trouble or in liquidation, this may affect customers of
introducing firms that clear through the troubled firm, including their ability
to trade, liquidate their securities positions and/or transfer holdings to
another firm.
Some firms carry additional insurance over the protection limits currently
provided by SIPC. Protections are generally triggered only in the event of the
financial failure and liquidation of a participating securities affiliate and if
the customers' securities are not returned by the firm or through SIPC. Two
prominent names in the excess insurance business are a consortium of brokerage
firms that formed the Customer Asset Protection Co (CAPCO) and Lloyds of London.
As with all insurance, the ability to pay claims depends on the financial
strength of the carrier. In addition, some policies may have caps or other
limits on the amount of protection provided to individual customers or to the
firm's customers as a group.
SIPC vs. FDIC
While SIPC insures customer assets in brokerage accounts, FDIC insures assets in
bank accounts. The chart below outlines the major differences in coverage:
FDIC
SIPC
What's insured
Bank deposits, money market deposit accounts (which differ from money market
mutual funds) and certain retirement accounts
Securities and cash held in a brokerage account at a SIPC member firm
Protection limits
$100,000 per depositor in each bank or thrift ; $250,000 per insured retirement
account
Up to $500,000, including $100,000 in cash
What's not insured
Investments in mutual funds (stock, bond or money market mutual funds), whether
purchased from a bank, brokerage or dealer
Annuities (underwritten by insurance companies, but sold at some banks)
Stocks, bonds, Treasury securities or other investment products, whether
purchased through a bank or a broker-dealer
Losses due to market fluctuation, poor investment decisions or lost investment
opportunities;
Investments in commodity futures, fixed annuities, currency, hedge funds or
investment contracts (such as limited partnerships) that are not registered with
the SEC; and
Accounts of partners, directors, officers or anyone with a significant
beneficial ownership in the failed firm.
Investor Checklist
There are steps investors can take in advance to minimize the chances of being
involved with a brokerage firm that ends up in financial distress. For a
checklist that can help you steer clear of firms that pose financial and fraud
risk to investors click here.
FINRA's Role
FINRA monitors firms for compliance with the Customer Protection Rule, the Net
Capital Rule and other financial responsibility rules through its surveillance
and examinations programs:
Surveillance—FINRA conducts ongoing surveillance of the financial condition of
brokerage firms. This involves monitoring a firm's capital position and material
changes in its business-such as a merger, acquisition, divestiture, any change
in clearing relationships, or any change in operating systems and changes to its
business model. We also review the financial reports that firms must file with
both FINRA and the SEC, and we conduct an assessment of all carrying firms to
identify potential regulatory risks and the extent to which exposure to those
risks could impact a firm's financial stability. Separately, FINRA monitors the
customer complaints firms receive concerning both sales practice and operational
issues. We also keep a close eye on how firms handle the transfer of customer
accounts, including the timeliness of transfers of customer assets from one firm
to another.
Examinations—FINRA regularly examines regulated brokerage firms for compliance
with a host of SEC and FINRA rules, including financial responsibility and
customer protection rules. This involves reviewing financial statements and
verifying that carrying firms properly calculate cash reserves, make timely and
accurate deposits of customer funds, and follow the rules concerning custody of
customer securities. Our examiners review firms' books and records to verify
that they are current and accurate and maintained in compliance with SEC and
FINRA regulatory requirements. They also look at supervisory systems and
controls to assess whether a firm has adequate written policies, procedures, and
a practical framework to capture and monitor relevant risks related to its
business activity.
If we uncover financial problems at a brokerage firm, we promptly report issues
to the SEC and, if it appears that theft or fraud has occurred, to SIPC. These
matters are also referred to FINRA's Enforcement Division for further action.
If a failing firm is in compliance with the Customer Protection Rule, the Net
Capital Rule, and other financial responsibility rules, it will be able to
"self-liquidate"—meaning that it should be in a position to return all customer
securities and other assets in an orderly and timely fashion. In the rare
circumstance where customer assets appear to be missing—as, for example, in the
case of fraud or theft—a SIPC liquidation may be necessary.
STORM WORM VIRUS
07/30/08—Be on the lookout for spam e-mail spreading malicious software
(malware) which mentions “F.B.I. vs. facebook.” The e-mail directs the recipient
to click on a link to view an article about the FBI and Facebook. Once the user
clicks on the link, the “Storm Worm” malware is downloaded to the
Internet-connected device, causing it to become infected with the virus and part
of the Storm Worm botnet. A botnet is a network of compromised machines under
the control of a single user. Botnets are typically set up to facilitate
criminal activity such as spam e-mail, identity theft, denial of service
attacks, and spreading malware to other machines on the Internet.
The Storm Worm virus has capitalized on various holidays and fictitious world
events in the last year by sending millions of e-mails advertising an e-card
link within the text of the spam e-mail.
Be wary of any e-mail received from an unknown sender. Do not open any
unsolicited e-mail and do not click on any links provided.
If you have received this, or a similar e-mail, please file a complaint at
www.ic3.gov.
ECONOMIC STIMULUS CHECK SCAM
PHISHING RELATED TO ISSUANCE OF ECONOMIC STIMULUS CHECKS
05/08/08—The FBI warns consumers of recently reported spam e-mail purportedly
from the Internal Revenue Service (IRS) which is actually an attempt to steal
consumer information. The e-mail advises the recipient that direct deposit is
the fastest and easiest way to receive their economic stimulus tax rebate. The
message contains a hyperlink to a fraudulent form which requests the recipient's
personally identifiable information, including bank account information. To
convince consumers to reply, the e-mail warns that a failure to complete the
form in a timely manner will delay the issuance of the rebate check.
One example of this IRS spam e-mail message is as follows:
"Over 130 million Americans will receive refunds as part of President Bush's
program to jumpstart the economy.
Our records indicate that you are qualified to receive the 2008 Economic
Stimulus Refund.
The fastest and easiest way to receive your refund is by direct deposit to your
checking/savings account.
Please follow the link and fill out the form and submit before May 10th, 2008 to
ensure that your refund will be processed as soon as possible.
Submitting your form on May 10th, 2008 or later means that your refund will be
delayed due to the volume of requests we anticipate for the Economic Stimulus
Refund.
To access Economic Stimulus refund, please click here."
Consumers are advised that the IRS does not initiate taxpayer communications via
e-mail. In addition, the IRS does not request detailed personal information via
e-mail or ask taxpayers for the PIN numbers, passwords, or similar secret access
information for their credit card, bank, or other financial accounts.
Please be cautious of unsolicited e-mails. It is recommended not to open e-mails
from unknown senders because they often contain viruses or other malicious
software. It is also recommended to avoid clicking links in e-mails received
from unknown senders as this is a popular method of directing victims to
phishing websites.
SCHOLARSHIP SCAMS
You have a goal - visit with us - let us help you to keep that goal alive and active.
Bob Parrish CPA, P.C. is a small business and our staff members are innovators. As such we will make earnest efforts, to assist you to accomplish your goal and rarely tell you - "you cannot do that". I, personally, do not like to hear a staff member comment, "I cannot do that" - nor do our staff members appreciate any of our suppliers or service providers for our corporation being so negative. Bob Parrish CPA was one of the first CPA's to take control of data processing and information technology, using it before the personal computer was on the market. Bob Parrish CPA implemented accounting and tax preparation functions using computer technology in the mid to late 1970's. Bob Parrish CPA is one of the first CPA's to become licensed in the securities area and to add financial planning, employee benefits, and asset allocation and hedging strategies to the services we provide - offering these services since 1982. Bob Parrish has served in middle management of corporations, worked in an international accounting firm, and managed the tax department of a law firm.
Two Robins sitting up in a tree. "I'm hungry!" said the
first robin.
"Me, too" said the second. "Let's fly down and find some lunch."
They flew to the ground and found a nice plot of plowed ground full of worms.
They ate and ate and ate and ate 'til they could eat no more.
"I'm so full I don't think I can fly back up to the tree", said the first robin.
"Me neither. Let's just lay here and bask in the warm sun", said the second
robin.
"O.K." said the first. They plopped down, basking in the sun.
No sooner than they had fallen asleep when a big fat tom cat snuck up and
gobbled them up.
As he sat washing his face after his meal, he purred, "I love baskin'robins."
Bob Parrish CPA, P.C.
Bob Parrish CPA Should Be Your Team Leader
Fact gathering is a combination of several efforts. Fact gathering can be fundamentally quantitative, however to stop at that can make any plan doomed to failure.
Fact gathering can be subjective. Both must be included to make a plan.
Circumstances and events can make plans change. Plans must be dynamic. The rules with which one must comply do change — plans and solutions must adapt.
Sometimes new views, & new approaches, or slightly different techniques are brought to the discussion table — simply from listening and visiting. One of my tools is to visit with those I serve. (I am a ‘servant’ and do not mind that term. In my business, I cannot really help anyone if I do not ‘Serve’.) Too numerous to discuss in this text, I have many times discovered deductions, client fears, client needs, simply by visiting — most of the time seemingly unrelated to the plan’s objectives.
Discover how Bob Parrish CPA can help you to join your planning into a direction that matches all aspects of the planning and your personal goals, your needs, your desires and your risk profile.
Call me to discover the benefits of consolidating the planning and implementation.
CALL ME FOR IMPLEMENTING THIS PLANNING OPPORTUNITY – BOB PARRISH CPA
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Bob Parrish CPA, P.C.
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