CFP Notes: Professional Conduct and Regulation - Function, Purpose, and Regulation of Financial Institutions

Banks and Credit Unions
Banks are the primary depository for checking accounts as well as the primary source of short-term financing for corporations. The
Federal Deposit Insurance Corporation (FDIC) insures banks. Credit unions also serve as a depository for checking accounts, and they also provide short-term financing to corporations. However, credit unions are nonprofit, cooperative financial institutions that are owned and run by members. In a credit union, the members make loans by pooling their own funds and elect a volunteer board to oversee the credit union’s operations. Credit unions are generally created to serve people in a particular community or a group of employees. The National Credit Union Administration (NCUA), an agency of the federal government, insures credit unions.

Brokerage Companies and Insurance Companies
Brokerage companies are the primary depositories of investment accounts for the purpose of trading stocks and bonds. Brokerage firms used to be more distinct from banks than they are now. The Glass-Steagall Act of 1933, which forbids banks from underwriting corporate securities, outlines the main difference at present. The Securities Investor Protection Corporation (SIPC) insures brokerage firms. Insurance companies are the primary vendors of life, health, property, and disability insurance. According to the McCarran-Ferguson Act, the federal government can regulate insurance if the state governments are not doing a good job. The National Association of Insurance Commissioners is composed of the commissioners of insurance from each state; this group has no power over insurance regulation, but is charged with administering the law and recommending new laws.

FDIC
The FDIC will reimburse a depositor for any losses up to the amount of $250,000, even if the depositor is not a U.S. citizen or resident of the United States. The FDIC insures all types of deposits received by a financial institution regularly but not Treasury securities. Deposits made in different institutions are insured separately, as are deposits maintained in different in different categories of legal ownership.

Securities Investor Protection Corporation (SIPC)
The Securities Investor Protection Corporation protects the customers of broker-dealers so long as that broker-dealer is a member of the SIPC. If this member’s registration with the Securities and Exchange Commission is terminated the membership in the SIPC will also be terminated. The brokerage firms that are members of the SIPC pay the cost of the insurance. If a brokerage firm fails, the customers will get back all of those securities which are registered or in the process of being registered in their names. If the firm does not have enough funds in its customer accounts to satisfy these claims, the SIPC will pay the rest out of its reserve funds, up to $500,000 per customer. Commodity futures contracts, currency, and investment contracts are ineligible for SIPC protection.