April 27, 2023 by Mike Antonacci
Recent news regarding bank failures has prompted some to question the health of Schwab as a going concern, and the safety of their investments. While these questions are understandable, we believe there is little reason to be worried.
The first thing to remember is your securities—like stocks, bonds, mutual funds, exchange traded funds, or money market funds—held at Schwab are yours. The SEC's Customer Protection Rule safeguards customer assets at brokerage firms by preventing firms from using customer assets to finance their own proprietary businesses.
At Schwab, clients' fully paid securities are segregated from other firm assets and held at third party depository institutions and custodians such as the Depository Trust Company and Bank of New York. There are reporting and auditing requirements in place by government regulators to help ensure all broker-dealers comply with this rule. In the very unlikely event that Schwab should become insolvent, these segregated securities are not available to general creditors and are protected against creditors' claims.
Clients receive additional protection through various insurance programs – FDIC insurance for cash and SIPC insurance for brokerage assets.
The Federal Deposit Insurance Corporation (FDIC) is an independent agency that maintains the Deposit Insurance Fund which is backed by the full faith and credit of the United States government. Its purpose is to protect depositors' funds placed in banks and savings associations.
The FDIC insures accounts held at member banks up to $250,000 per depositor, per insured bank, based on ownership category. However, all deposits held at the same FDIC-insured bank in the same ownership capacity are added together to determine your total amount of FDIC insurance coverage at that bank.
This rule applies whether you open an account directly at the bank (such as a Schwab Bank Investor Checking™), or whether Schwab brokerage holds the accounts on your behalf (such as through Schwab's Bank Sweep feature).
CDs are also protected by the FDIC. CDs you purchase through Schwab are aggregated with other deposits you hold at each issuing institution and are FDIC-insured up to $250,000 per bank.
Schwab is a member Securities of Investor Protection Corporation (SIPC), which provides protection for securities and cash in client brokerage accounts, including those held by clients of investment advisors with Schwab Advisor Services.
SIPC protections are activated in the rare event that the broker-dealer fails (bankruptcy) and client assets are missing due to fraud or other causes.
According to SIPC, most broker-dealer failures happen with no securities missing. Since their inception over 50 years ago, 99% of eligible investors got their investments back in the failed brokerage firms cases that it has handled.
The SIPC liquidation process generally assures that customers of a failed broker-dealer receive their securities and cash with reasonable promptness after filing a claim.