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Custody of client assets at a brokerage firm

At Mosaic Pacific Investment Advisors we are a Registered Investment Advisor and not a brokerage firm in custody of your assets. As your investment advisor we direct trades on your behalf through Charles Schwab or TD Ameritrade account held in your name.

As the recent news of the Silicon Valley Bank (SVG Financial) failure along with other related banks prevail we wanted to share insights on how assets held at a brokerage firm differs from a bank. Unlike banks who are regulated by both state and federal statue, US brokerage firms/broker dealers fall under the governance of FINRA (Financial Industry Regulatory Authority) a government-authorized not-for-profit organization. Under FINRA’s Customer Protection Rule (Exchange Act Rule 15c3-3) customer securities must be segregated from the brokerage firms’ assets, this is a legal requirement for all broker-dealers. In the unlikely event of insolvency of a broker-dealer, these segregated assets are not available to general creditors and are protected against creditors’ claims.
Another difference is who insurers client cash and securities. The SIPC (Securities Investors Protection Corporation) is what the FDIC (Federal Deposit Insurance Corporation) is to banks. The SIPC responsibility is to restore securities and cash to customers as soon as possible in the unlikely event of a brokerage firm failure. Note the SIPC does not protect against the decline in market value of your securities due to market fluctuations.

The limits of SIPC protection are $500,000 which include up to a $250,000 limit for cash. The protection to each account is determined by “separate capacity”. Examples of separate capacities are:
individual account;
joint account;
an account for a corporation;
an account for a trust created under state law;
an individual retirement account;
a Roth individual retirement account;
an account held by an executor for an estate; and
an account held by a guardian for a ward or minor.

Additional information can be found on the www.sipc.org.

In addition to SIPC protection Schwab provide additional brokerage insurance through Lloyd's of London and other London insurers. The combined total of our SIPC coverage and "excess SIPC" coverage means Schwab provides protection up to an aggregate of $600 million, limited to a combined return to any customer from a trustee, SIPC, and London insurers of $150 million, including cash of up to $1.5 million. This additional protection becomes available in the event SIPC limits are exhausted.

As with other large brokerage firms Schwab also has a banking feature for client cash deposits, Schwab Bank. From a CNBC’s interview with Schwab’s CEO Walt Buttinger on 3/14/23 Schwab has about $7.4 Trillion of client assets of which $7 Trillion are segregated client assets (marketable securities, not Schwab’s assets) and $400 billion in client deposits in Schwab Bank which falls under FDIC coverage. (FDIC coverage is up to $250,000 per account or “ownership category”. Example of FDIC ownership categories including single accounts, certain retirement accounts and employee benefit plan accounts, joint accounts, trust accounts, business accounts as well as government accounts.)

Please feel free to contact me with any questions on coverages by phone at 808-380-2520, by email matt@mosaicpacific.com or if you prefer visit the SIPC website www.sipc.org, www.fdic.gov and or www.finra.org for more information.

Matt Tanaka
Chief Compliance Officer
Mosaic Pacific Investment Advisors

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