A Bond, A Bear and a Bind

LOOKING FOR MUNIS TO ADD TO YOUR PORTFOLIO? Fidelity Investments has teamed with the electronic bond-trading outfit TheMuniCenter to increase the mutual-fund giant’s municipal-bond offerings by about 40%. Fidelity’s Open Bond Market service, available to customers online at http://www.fidelity.com, contains educational material as well as screeners and other tools designed to make trading of all sorts of bonds more accessible and understandable.

Fidelity’s customers also can now trade Treasury Inflation Protected Securities (TIPS) online at Fidelity.com; previously they could only trade TIPS through Fidelity’s phone representatives or in person at an investor center.

Launched in 2004, the Open Bond Market offers U.S. Treasuries and CDs (certificates of deposit), as well as corporate, municipal, government agency and principal-protected notes. The fees were lowered last year to $1 per bond (subject to $8 minimum); Treasuries can be traded at no cost.

IN THE WAKE OF BEAR STEARNS’ RECENT COLLAPSE, industry analysts worried about the financial stability of the Customer Assets Protection Company, which carries the brokerage firm’s coverage beyond that of the mandatory Securities Investor Protection Corp., or SIPC, coverage. Capco is backed by a consortium of brokers and SIPC is funded by member-brokers. SIPC covers individual accounts up to $500,000, and firms like Capco cover amounts in excess of that. (See “Are You Covered If Your Broker Fails?,” Dec. 17, 2007, and “If Your Broker Goes Belly Up, Part II,” Dec. 31, 2007 for more.) A Bear unit is a major securities-clearing firm and therefore handles transactions for lots of regional banks and brokers. The concern is that any failure would jeopardize these trades.

Standard & Poor’s issued a bulletin on March 19 in which it said that Capco is maintaining its A+/Stable rating, in spite of the claims that may ensue in a post-Bear Stearns universe. Of interest is the rating agency’s assertion that “In the event of an excess SIPC claim related to Bear Stearns, Capco should benefit from a guarantee provided by JPMorgan Chase for Bear Stearns’ obligations. In addition, clients withdrawing funds from their personal accounts actually reduces CAPCO’s potential maximum loss.” (Sentence Italicized by Barron’s.)

As the S&P bulletin spells out, SIPC, and excess coverage like that of Capco, is aimed at restoring missing, lost or stolen accounts. They don’t cover a decline in the market value of a client’s investments.

We’re looking at a problem of market value, which was adversely affected by management choices that turned out to be inappropriate, rather than outright theft. Alas, there’s no insurance against poor judgment.

online brokerage and lives outside the U.S. described an interesting situation via e-mail recently:

“I am a long-time investor who generally purchases shares of undervalued micro-caps that are often thinly traded, which I usually hold for periods of over a year. In recent months, my broker is refusing to allow Internet purchases for many of these companies, requiring me to phone a broker. They are vague about why they are doing this; for legal and security reasons, they say. This requirement has even been in place when I wanted to add to a holding that I originally purchased in an Internet trade, and when I tried to adjust the price of an open order by a few pennies.”

My theory, verified by the broker in question, is that the trading pattern—even though it’s completely above board—resembles that of a crooked pump-and-dump scheme that usually involves stealing an online trader’s identity and then redirecting his account to buy securities at huge premiums that benefit the thief. The broker, in my view, is being appropriately cautious, particularly since this is a ploy often used by overseas scamsters. It may be really inconvenient for an honest trader, which is a terrible drag, but it’s just part of the current reality.

The writer’s broker verified that it monitors securities for suspicious activities and will, from time to time, restrict those transactions until the client phones a broker so that the firm can verify that he or she is in fact a client and not an identity thief. “It is for the protection of our clients that we make these decisions, and while we realize that it can be an inconvenience to them, it is done with their best interests in mind,” says the broker.

More patience—or a change in investing strategy—may be needed.

Posted by on 04/12 at 01:28 AM






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