Security safekeeping, defined as the keeping of assets which include securities by a financial institution, is a service provided by many banks and other financial institutions. The name itself implies that securities being held at an institution are safely kept. In general, this statement is used loosely and can be a little misleading.
Many brokerage houses offer a custody service to their customers for little or no fee; however, this service is not the same as security safekeeping. Why? The biggest difference is these brokers hold the securities in “street name”. Under street name, the broker keeps record showing the credit union as the real or "beneficial" owner, but the credit union will not be listed directly on the issuer's records. Instead, the brokerage firm will appear as the owner on the issuer's records. Many brokerage firms will automatically put your securities into street name unless you give them specific instructions. Be sure to read the fine print in your Broker/Dealer Agreement.
Here are a few risks to consider if your securities are held in street name:
- Because the securities are listed under the broker’s name and subject to SEC rules, your broker can lend your securities (and charge hefty fees) to short sellers, hedge funds, etc.
- Broker dealers do not generally pass any profit back to the buyer.
- What if a broker dealer fails? If a broker dealer fails and their regulator (Securities and Exchange Commission) takes over, the first action is to distribute customer-named securities back to their owners.
- Securities held in street name (vast majority) would likely be included in a pot of customer property, which is later distributed to customers – a process that could take several years.
- Securities Investor Protection Corporation (SIPC) covers only up to $500,000 of unregistered securities missing from a brokerage account, including maximum $250,000 cash, in the case of a failure or bankruptcy of a broker dealer. For more information on SIPC coverage, go to www.sipc.org.
- Securities held in street name are more difficult to pledge as collateral.
- With the broker dealer listed as owner with the issuer, it becomes more burdensome to prove the true owner. Additionally, it is harder to pledge securities that are loaned on the street.
Another difference between brokerage custody and security safekeeping is that most brokers don’t accept securities purchased from competing brokers. This binds a buyer to purchasing securities from a broker’s inventory versus a competitor’s, which limits the opportunity to shop for a better deal. One way around this would be to have several broker dealer accounts, but that is not an efficient way to manage a portfolio, especially considering the regulatory burden. A better solution would be to open a security safekeeping account with a financial institution, like SunCorp, that allows safekeeping of securities from any broker, thus holding them all in one place in customer name.
SunCorp provides third-party safekeeping of marketable securities to its members. Prudent investment management suggests that the safekeeping function be separate from the brokerage function. SunCorp's program allows your credit union to settle security purchases using the "delivery-versus-payment" (DVP) method — which ensures that funds are not disbursed until the security has been received into safekeeping. This method maximizes your earnings, and guarantees that your credit union is either holding the funds, or the marketable security — at all times.
SunCorp does all of the work, providing monthly statements of holdings and month-end market values to assist you in your accounting. All coupon payments are credited directly into your Cash Management Account, where they begin earning interest immediately. You can also borrow against your securities in safekeeping with a simple phone call. Our secured loans provide immediate liquidity to your credit union at competitive market rates.
For more information regarding SunCorp’s safekeeping services, please contact your Business Development Officer at 877-786-2677, option 2.