The Safety of Your Securities
Robert W. Baird & Co. Incorporated (“Baird”) believes our customers should have complete confidence in the safety of their securities and cash held at our firm. Following are a number of ways in which our customers are protected.
Corporate Structure of the Firm
Baird is an employee-owned, privately held broker-dealer. Baird provides customers in the United States with wealth management, investment banking, asset management and private equity services. Robert W. Baird Group Limited, Baird’s subsidiary, provides investment banking and private equity services to corporate customers in Europe. Baird Holding Company is the ultimate parent company of Baird and Robert W. Baird Group Limited.
Robert W. Baird & Co. Incorporated Success and Credit
The first and foremost protection for our customers is the long-term success and creditworthiness of Baird. Baird is a highly capitalized firm and has been consistently profitable, both in good and lean markets. Baird was established in 1919 and is run by dedicated employees who personally own approximately 93% of the firm. As of June 30, 2008, Baird had total capital -- including shareholders’ equity and subordinated debt -- exceeding $600 million. Baird is also a member firm of the NYSE and the Financial Industry Regulatory Authority (FINRA).
The SEC and New York Stock Exchange
Baird is regulated both by the Securities Exchange Commission and the New York Stock Exchange, Inc., both of which set and enforce various rules and regulations protecting customers. For instance, SEC Rule 15c3-3 requires that securities firms maintain fully paid and “excess margin” customer securities in their possession or in a control location (free from hypothecation). These securities cannot be used by the broker or dealer for any purpose whatsoever; they must be held for the exclusive benefit and subject to the exclusive instructions of the customer owning them. Net customer cash balances not required to be used for customer transactions must be maintained in an account segregated for “the exclusive benefit of customers.” Such funds are not available for the general use of Baird.
The term “excess margin” relates to the requirement under SEC Rule 15c3-3 that even in a margin account, only securities with a market value up to 140% of the margin loan can be removed from a control location and used for hypothecation or securities lending. For example, if you have a $1 million margin debt, regardless of the size of the account, the total value of securities that may be hypothecated or loaned by Baird is limited to $1.4 million. Similarly, securities deposited or held as collateral for short selling, futures, or options transactions may not be removed from possession or control, unless there is a margin debit balance. Compliance with these rules at all securities firms is regularly reviewed and strictly enforced by the regulatory agencies. Compliance is also audited by our independent auditors, Grant Thornton, and is aggressively monitored internally on a daily basis.
Securities Investor Protection Corporation
Baird is a member of the Securities Investor Protection Corporation (SIPC). SIPC was created by Congress to protect customers of securities brokers and dealers and to promote public confidence in the U.S. securities markets. Customers of a SIPC-covered firm that fails financially are afforded special benefits under the Securities Investor Protection Act of 1970, as amended (SIPA).
In such an insolvency, SIPC may ask a federal court to appoint a trustee to liquidate the firm or, in limited situations involving small firms, SIPC may choose to carry out the liquidation itself. A fundamental rule of SIPC liquidations is that customer assets are not part of the bankrupt’s estate, i.e., the property of customers is not broker-dealer property for purposes of the liquidation of the broker-dealer. Therefore, so long as customer property held by the broker-dealer remains identifiable as such (i.e., such property can be located and is identifiable through the firm’s records or otherwise as belonging to customers), such property will not be subject to the claims of creditors of the insolvent broker-dealer.
The trustee or SIPC may arrange to have some or all customer accounts of a failed firm transferred to another SIPC member firm. Customers whose accounts are transferred will be notified immediately and will be permitted to deal with the new firm or to transfer their accounts to firms of their own choosing. This procedure is intended to minimize disruptions in customers’ trading activities. In some cases (for example, where there are questions as to the accuracy of the failed firm’s records), the transfer of accounts will not be feasible. When this happens, protection is afforded to each securities customer in the following manner:
Under SIPA, customers of a broker-dealer enjoy a preferred status in any liquidation of that broker-dealer under SIPC auspices. Thus, in the very first distribution pursuant to any such liquidation, all customers (both cash and margin) receive, on a pro rata basis, with respect to all customer cash and securities held by the failed broker-dealer to satisfy their claims for the “net equity” in their accounts. This is a preferential distribution in which general creditors of the broker-dealer do not share. There is no limit on the value of such “Customer Property” that will be returned.
In the event customers’ claims are not fully satisfied by this distribution, remaining customer claims may be covered by a combination of SIPC protection and other protection that may have been obtained by the broker-dealer in question. SIPC protection (i.e., in the form of either a cash payment or delivery of securities purchased by the SIPC trustee) will be available to satisfy any shortfall in the return of securities and cash to customers. SIPC protects accounts against such a shortfall for up to $500,000 per account (of which $250,000 may be in cash). Additional protection (Excess SIPC) is provided by private insurers.
For additional security, Baird offers coverage in excess of SIPC limits through an insurance policy purchased through Lloyd's of London. The Lloyd's policy has an aggregate coverage limit of $250 million for all claims of Baird customers eligible for distributions under the Securities Investor Protection Act (SIPA). The policy has a sublimit of $1.9 million per customer for cash awaiting reinvestment.
Under SIPC rules, an individual’s interests in securities accounts maintained with a single brokerage firm are covered in the aggregate; that is, they would represent a single claim up to the maximums described above. Of course, a customer who holds several accounts in different legal capacities (for example, as trustee for several different trusts with different beneficiaries) may receive separate protection for each account.
Although created by Congress, SIPC is not a government agency. It is a non-profit membership corporation that receives its revenue from those brokers and dealers who are required by law to be SIPC members. SIPC also receives revenues from its investments. If the Fund proves insufficient to satisfy customers’ claims, SIPC can draw upon a $1 billion line of credit that it has with the SEC which, in turn, borrows from the U.S. Treasury. In addition, SIPC maintains a $1 billion revolving line of credit with a consortium of banks.
Baird Provides Additional Protection for Your Account
As additional protection, Baird has a Financial Institution Bond totaling $60 million per occurrence or $120 million in the annual aggregate. This is provided under a comprehensive Stockbrokers’ Blanket Bond. The Blanket Bond affords coverage against loss of securities due to fraud (including employee fraud), theft, mysterious disappearance, damage, destruction, and forgery or alteration.
To insure the integrity of our customers’ accounts, instructions are not accepted from anyone except the account’s beneficial owner, or from the beneficial owner’s authorized agent pursuant to a written power of attorney. In the event that we were served with a court order, we would, of course, be bound to comply. Most court orders arise in a matrimonial context and initially require that we hold the assets in an account until there is a judicial resolution of the matter. In those cases, we restrict activity in the accounts, unless the order directs otherwise, pending further instructions from the court. In addition, we make a practice of not issuing checks or delivering securities (except against payment) from an account to any name other than the beneficial owner or owners of the account. Any single exception to that policy must be specifically approved by the manager of the branch office servicing the account and by our main office.
Controls and operating systems are continuously evaluated by management and by Baird’s Internal Audit Department, which is responsible for auditing and monitoring the activities of the firm and its subsidiaries on a regular basis to ensure that employee duties are properly segregated and that counter-control procedures are functioning properly. As a back-up to Baird’s Internal Audit Department reviews, the effectiveness of these systems is also audited by our independent accountants, Grant Thornton
The Safety of Your Securities