Vanguard Brokerage Assets Held In Street Name

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zmaqoptyxbglp
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Vanguard Brokerage Assets Held In Street Name

Post by zmaqoptyxbglp » Wed Sep 12, 2018 9:49 pm

There are some sources claiming that cash accounts are safer, like this:

https://www.thebalance.com/rehypothecat ... ter-357232

"The best way to protect yourself against rehypothecation within an ordinary brokerage account is to refuse to hypothecate your holdings in the first place."

And then there are others that claim that it doesn't matter:

https://www.willkie.com/~/media/Files/P ... ted___.pdf

"For purposes of a liquidation under SIPA, a firm’s assets ... held for customers ... in street name ... are divided pro rata among all customers"

And looking at a few previous threads, it doesn't look like there's an agreement on which is true. I do not particularly care about the SIPC coverage or the supposed excess coverage that Vanguard has, since those are most definitely moot for a firm of its size.

So I thought the most useful thing to look at might be Vanguard's exposure (as a broker dealer) to various counterparty risks. The only thing I could find was this:

https://personal.vanguard.com/pdf/sofcdec.pdf

That has very small numbers, with less than a billion in assets, and therefore clearly ignores all the assets held under street name by VBS. Is the information on all of VBS held assets available somewhere?

zmaqoptyxbglp
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Re: Vanguard Brokerage Assets Held In Street Name

Post by zmaqoptyxbglp » Thu Sep 13, 2018 1:00 am

Having spent a lot of time looking through various pages, I find it pretty incredible that I am still unable to find out even the order of magnitude of the assets held by Vanguard Brokerage Services aka Vanguard Marketing Corporation. Am I just an idiot or is this information hidden from us somehow?

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JoMoney
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Re: Vanguard Brokerage Assets Held In Street Name

Post by JoMoney » Thu Sep 13, 2018 2:33 am

Not clear what you're looking for, but I thought I should point out that while you may own a mutual fund held with VBS
The stocks within the mutual fund are not held by VBS but with third-party custodians as listed in the funds SAI
For example:
https://personal.vanguard.com/pub/Pdf/s ... 2210142850
Vanguard 500 Index Fund
Supplement to the Statement of Additional Information Dated
April 25, 2018

Effective June 22, 2018, State Street Bank and Trust Company, One Lincoln
Street, Boston, MA 02111, serves as the custodian for Vanguard 500 Index
Fund (the “Fund”). The custodian is responsible for maintaining the Fund’s
assets
, keeping all necessary accounts and records of the Fund’s assets, and
appointing any foreign sub-custodians or foreign securities depositories.

...

Custodians. JPMorgan Chase Bank, 383 Madison Avenue, New York, NY 10179 (for the Extended Market Index, Growth
Index, Mid-Cap Index, Mid-Cap Growth Index, Mid-Cap Value Index, Small-Cap Index, Small-Cap Growth Index,
Small-Cap Value Index, and Total Stock Market Index Funds), and Brown Brothers Harriman & Co., 50 Post Office Square,
Boston, MA 02110 (for the 500 Index, Large-Cap Index, and Value Index Funds). The custodians are responsible for
maintaining the Funds’ assets, keeping all necessary accounts and records of the Funds’ assets, and appointing any
foreign sub-custodians or foreign securities depositories.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

zmaqoptyxbglp
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Re: Vanguard Brokerage Assets Held In Street Name

Post by zmaqoptyxbglp » Thu Sep 13, 2018 10:28 am

JoMoney wrote:
Thu Sep 13, 2018 2:33 am
Not clear what you're looking for, but I thought I should point out that while you may own a mutual fund held with VBS
The stocks within the mutual fund are not held by VBS but with third-party custodians as listed in the funds SAI
For example:
https://personal.vanguard.com/pub/Pdf/s ... 2210142850
Vanguard 500 Index Fund
Supplement to the Statement of Additional Information Dated
April 25, 2018

Effective June 22, 2018, State Street Bank and Trust Company, One Lincoln
Street, Boston, MA 02111, serves as the custodian for Vanguard 500 Index
Fund (the “Fund”). The custodian is responsible for maintaining the Fund’s
assets
, keeping all necessary accounts and records of the Fund’s assets, and
appointing any foreign sub-custodians or foreign securities depositories.

...

Custodians. JPMorgan Chase Bank, 383 Madison Avenue, New York, NY 10179 (for the Extended Market Index, Growth
Index, Mid-Cap Index, Mid-Cap Growth Index, Mid-Cap Value Index, Small-Cap Index, Small-Cap Growth Index,
Small-Cap Value Index, and Total Stock Market Index Funds), and Brown Brothers Harriman & Co., 50 Post Office Square,
Boston, MA 02110 (for the 500 Index, Large-Cap Index, and Value Index Funds). The custodians are responsible for
maintaining the Funds’ assets, keeping all necessary accounts and records of the Funds’ assets, and appointing any
foreign sub-custodians or foreign securities depositories.
I think my question was pretty clear, but I do not mind repeating - what is the total amount of assets held by Vanguard Brokerage Services aka Vanguard Marketing Corporation in street name?

What you're talking about is something entirely orthogonal - under the 1940 Act, the assets of mutual funds (like the Vanguard 500 Index Company or the Vanguard Total Market Index Company) are held by a separate custodian (banks). That has absolutely nothing to do with what the brokerage company does. All US brokerages are required to have direct control of all fully paid for customer assets. If you buy a mutual fund share through VBS, VBS maintains direct control over that mutual fund share, and that share is held in street name by VBS.

I specifically used "Vanguard Brokerage Services aka Vanguard Marketing Corporation", instead of "Vanguard" to be very clear that I was referring to the total assets held in street name by the brokerage firm.

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Phineas J. Whoopee
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Re: Vanguard Brokerage Assets Held In Street Name

Post by Phineas J. Whoopee » Thu Sep 13, 2018 8:29 pm

zmaqoptyxbglp wrote:
Thu Sep 13, 2018 10:28 am
...
I think my question was pretty clear, but I do not mind repeating - what is the total amount of assets held by Vanguard Brokerage Services aka Vanguard Marketing Corporation in street name?
...
Vanguard Marketing Corporation holds no customer assets at all. It is owned by the constituent mutual funds.

All client assets held by Vanguard Brokerage Service must be in street name. I don't know how much that is, but it's a lot.

Rehypothecation is a complex concept, but Vanguard does not engage in it. Firms offering prime brokerage packages sometimes do, but only with respect to those packages of services. MF Global, whose failure was due in good measure to its imprudent use of rehypothecation, bore no resemblance to Vanguard in that respect.

For those who don't already know, hypothecation is when you pledge collateral to another. The collateral is only hypothetically theirs. Rehypothecation is when the firm you pledged it to uses it, which isn't theirs yet, as collateral in a contract with somebody else.

PJW

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zaboomafoozarg
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Re: Vanguard Brokerage Assets Held In Street Name

Post by zaboomafoozarg » Thu Sep 13, 2018 9:40 pm

I never saw anywhere to enter my street name when creating my Vanguard account...

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Re: Vanguard Brokerage Assets Held In Street Name

Post by zmaqoptyxbglp » Thu Sep 13, 2018 11:19 pm

Phineas J. Whoopee wrote:
Thu Sep 13, 2018 8:29 pm
Vanguard Marketing Corporation holds no customer assets at all.
The first sentence is just incorrect. VMC offers brokerage services as VBS. You can go confirm that they're aliases by looking at VMC's FINRA BrokerCheck Page (https://brokercheck.finra.org/firm/summary/7452). If that's not enough, here is a quote from a Vanguard Source explaining their structure (https://personal.vanguard.com/pdf/sofcdec.pdf):
"The Vanguard Group, Inc. (Vanguard), the parent company, initially formed Vanguard Marketing Corporation (the Corporation), a Pennsylvania corporation, to facilitate compliance with regulatory requirements of certain states in which shares of the funds in The Vanguard Group of Investment Companies are offered. The Corporation is a broker-dealer registered with the Securities and Exchange Commission (SEC) and is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). The Corporation also provides brokerage services, such as trade clearance, settlement, and custody, as a self-clearing broker, under the name Vanguard Brokerage Services."
Not to be rude, but if I were you, I would rather not correct other people about things I didn't know about.
Phineas J. Whoopee wrote:
Thu Sep 13, 2018 8:29 pm
It is owned by the constituent mutual funds.
Who owns VMC is entirely tangential to my question, but since you decided to be incorrectly pedantic about what I said, I must note that it is VGI (The Vanguard Group Inc.) that owns VMC, and not the various Vanguard funds. These Vanguard funds in turn own VGI.
Phineas J. Whoopee wrote:
Thu Sep 13, 2018 8:29 pm
All client assets held by Vanguard Brokerage Service must be in street name. I don't know how much that is, but it's a lot.
Once again, not to be rude, by why then did you bother answering? It is just saddening that you'd make a comment like that without any helpful content.
Phineas J. Whoopee wrote:
Thu Sep 13, 2018 8:29 pm
Rehypothecation is a complex concept, but Vanguard does not engage in it. Firms offering prime brokerage packages sometimes do, but only with respect to those packages of services. MF Global, whose failure was due in good measure to its imprudent use of rehypothecation, bore no resemblance to Vanguard in that respect.
Once again, this is just false. Quotation from Vanguard Brokerage Account Agreement (https://personal.vanguard.com/pdf/v718.pdf):
As security for the repayment of all present or future indebtedness owed to Us by each Account Owner, each Account Owner grants to Us a first, perfected, and prior lien on, a continuing security interest in, and right of set-off with respect to, all Securities and Other Property that is, now or in the future, held, carried, or maintained for any purpose in or through VBS, and, to the extent of such Account Owner’s interest in or through, any present or future account with Us or Our affiliates in which the Account Owner has an interest. VBS may rehypothecate any Securities or Other Property held, carried, maintained, or in the possession and control of VBS.
PJW, please do not answer questions you do not have accurate factual knowledge on. Thank you.

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Phineas J. Whoopee
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Re: Vanguard Brokerage Assets Held In Street Name

Post by Phineas J. Whoopee » Fri Sep 14, 2018 2:20 pm

zmaqoptyxbglp wrote:
Thu Sep 13, 2018 11:19 pm
Phineas J. Whoopee wrote:
Thu Sep 13, 2018 8:29 pm
Vanguard Marketing Corporation holds no customer assets at all.
The first sentence is just incorrect. VMC offers brokerage services as VBS. You can go confirm that they're aliases by looking at VMC's FINRA BrokerCheck Page (https://brokercheck.finra.org/firm/summary/7452). If that's not enough, here is a quote from a Vanguard Source explaining their structure (https://personal.vanguard.com/pdf/sofcdec.pdf):
"The Vanguard Group, Inc. (Vanguard), the parent company, initially formed Vanguard Marketing Corporation (the Corporation), a Pennsylvania corporation, to facilitate compliance with regulatory requirements of certain states in which shares of the funds in The Vanguard Group of Investment Companies are offered. The Corporation is a broker-dealer registered with the Securities and Exchange Commission (SEC) and is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). The Corporation also provides brokerage services, such as trade clearance, settlement, and custody, as a self-clearing broker, under the name Vanguard Brokerage Services."
Not to be rude, but if I were you, I would rather not correct other people about things I didn't know about.
...
PJW, please do not answer questions you do not have accurate factual knowledge on. Thank you.
On many of these points I stand politely corrected. Thank you.

PJW

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A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 12:30 am

[Thread merged into here, see below (Page 2). --admin LadyGeek]

After reading a lot on the unfortunate realities with brokerage rehypothecation, I was pleased to read this comment from a Vanguard representative, hidden deep in the comments section of this page:

https://jlcollinsnh.com/2012/09/07/stoc ... ets-nuked/

The Vanguard funds that are held in a brokerage account are still owned by the client, in the client’s name and can always be redeemed at any point.
...
Other securities, such as individual stocks held in the brokerage account are held in street name by the client.
In other words, any Vanguard funds you hold at Vanguard's brokerage house are by default really yours, not held in street name, and hence cannot be rehypothecated in a brokerage bankruptcy, as allowed for in the Vanguard's Brokerage Service Agreement, and the service agreement for every other major brokerage house in the country.

For whatever it's worth, you also get the SIPC coverage on top of that. You don't get this if you instead had simply held the fund with VGI in a mutual funds only account, without going through VBS. So if Vanguard makes an accounting mistake and ends up missing 400K of your $5MM in assets, you are good for your entire $5MM if SIPC pays out. That I think is a pretty good reason to go with Vanguard's brokerage services rather than Fidelity's or TD Ameritrade's or Schwab's or Merrill Edge's.

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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by Vanguard Fan 1367 » Sat Sep 15, 2018 12:45 am

I assumed that if Fidelity went bankrupt that the Fidelity Funds I own would still be mine. I am mistaken?

zmaqoptyxbglp
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 1:10 am

Vanguard Fan 1367 wrote:
Sat Sep 15, 2018 12:45 am
I assumed that if Fidelity went bankrupt that the Fidelity Funds I own would still be mine. I am mistaken?
Whatever assets you hold at Fidelity are not yours now. They're held in street name. They're owned by Fidelity. They're just held in your favor. Fidelity can potentially run into various deals and hypothecate what you think is now yours, since it is actually owned by Fidelity.

Several sources like the one below claim that when a brokerage goes bankrupt, all assets held in street name are distributed pro rata.

https://www.willkie.com/~/media/Files/P ... ted___.pdf

"For purposes of a liquidation under SIPA, a firm’s assets ... held for customers ... in street name ... are divided pro rata among all customers"

This means that if Fidelity were to do an assortment of fully legal activities that makes it lose a bunch of client assets, you potentially lose any amount unrecouped from the SIPC.

anakinskywalker
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by anakinskywalker » Sat Sep 15, 2018 1:17 am

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 12:30 am
After reading a lot on the unfortunate realities with brokerage rehypothecation, I was pleased to read this comment from a Vanguard representative, hidden deep in the comments section of this page:

https://jlcollinsnh.com/2012/09/07/stoc ... ets-nuked/

The Vanguard funds that are held in a brokerage account are still owned by the client, in the client’s name and can always be redeemed at any point.
...
Other securities, such as individual stocks held in the brokerage account are held in street name by the client.
In other words, any Vanguard funds you hold at Vanguard's brokerage house are by default really yours, not held in street name, and hence cannot be rehypothecated in a brokerage bankruptcy, as allowed for in the Vanguard's Brokerage Service Agreement, and the service agreement for every other major brokerage house in the country.

For whatever it's worth, you also get the SIPC coverage on top of that. You don't get this if you instead had simply held the fund with VGI in a mutual funds only account, without going through VBS. So if Vanguard makes an accounting mistake and ends up missing 400K of your $5MM in assets, you are good for your entire $5MM if SIPC pays out. That I think is a pretty good reason to go with Vanguard's brokerage services rather than Fidelity's or TD Ameritrade's or Schwab's or Merrill Edge's.
AFAIK you don't need SIPC coverage if you hold your assets directly with Vanguard in a mutual funds only account. So holding it through a brokerage and getting SIPC coverage doesn't add any value over the former.

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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 1:23 am

anakinskywalker wrote:
Sat Sep 15, 2018 1:17 am
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 12:30 am
After reading a lot on the unfortunate realities with brokerage rehypothecation, I was pleased to read this comment from a Vanguard representative, hidden deep in the comments section of this page:

https://jlcollinsnh.com/2012/09/07/stoc ... ets-nuked/

The Vanguard funds that are held in a brokerage account are still owned by the client, in the client’s name and can always be redeemed at any point.
...
Other securities, such as individual stocks held in the brokerage account are held in street name by the client.
In other words, any Vanguard funds you hold at Vanguard's brokerage house are by default really yours, not held in street name, and hence cannot be rehypothecated in a brokerage bankruptcy, as allowed for in the Vanguard's Brokerage Service Agreement, and the service agreement for every other major brokerage house in the country.

For whatever it's worth, you also get the SIPC coverage on top of that. You don't get this if you instead had simply held the fund with VGI in a mutual funds only account, without going through VBS. So if Vanguard makes an accounting mistake and ends up missing 400K of your $5MM in assets, you are good for your entire $5MM if SIPC pays out. That I think is a pretty good reason to go with Vanguard's brokerage services rather than Fidelity's or TD Ameritrade's or Schwab's or Merrill Edge's.
AFAIK you don't need SIPC coverage if you hold your assets directly with Vanguard in a mutual funds only account. So holding it through a brokerage and getting SIPC coverage doesn't add any value over the former.
I disagree with that. If securities are held directly, you do remove the risk that the brokerage will fail and hence potentially take any assets with it. This is one of the things the SIPC protects against, that I agree becomes moot in holding securities directly.

But the SIPC insurance also protects against accounting errors and fraud in the process of holding the security. Both mistakes and fraud is definitely possible in this holding process even when held directly, and you do gain an extra layer of SIPC protection from this case when held in a brokerage account.

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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by anakinskywalker » Sat Sep 15, 2018 1:30 am

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:10 am
Vanguard Fan 1367 wrote:
Sat Sep 15, 2018 12:45 am
I assumed that if Fidelity went bankrupt that the Fidelity Funds I own would still be mine. I am mistaken?
Whatever assets you hold at Fidelity are not yours now. They're held in street name. They're owned by Fidelity. They're just held in your favor. Fidelity can potentially run into various deals and hypothecate what you think is now yours, since it is actually owned by Fidelity.

Several sources like the one below claim that when a brokerage goes bankrupt, all assets held in street name are distributed pro rata.

https://www.willkie.com/~/media/Files/P ... ted___.pdf

"For purposes of a liquidation under SIPA, a firm’s assets ... held for customers ... in street name ... are divided pro rata among all customers"

This means that if Fidelity were to do an assortment of fully legal activities that makes it lose a bunch of client assets, you potentially lose any amount unrecouped from the SIPC.
Fidelity like any other broker-dealer is required to segregate client assets from its own. So Fidelity going bankrupt just by itself should not cause any issues with client assets.

However if your shares are lent out, and the borrower goes bankrupt, and Fidelity goes bankrupt as well, then you could lose whatever is not covered by SIPC and not recovered from the bankrupt borrower and Fidelity.

To avoid this risk you can simply choose to not let your shares be lent out.

anakinskywalker
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by anakinskywalker » Sat Sep 15, 2018 1:32 am

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:23 am
anakinskywalker wrote:
Sat Sep 15, 2018 1:17 am
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 12:30 am
After reading a lot on the unfortunate realities with brokerage rehypothecation, I was pleased to read this comment from a Vanguard representative, hidden deep in the comments section of this page:

https://jlcollinsnh.com/2012/09/07/stoc ... ets-nuked/

The Vanguard funds that are held in a brokerage account are still owned by the client, in the client’s name and can always be redeemed at any point.
...
Other securities, such as individual stocks held in the brokerage account are held in street name by the client.
In other words, any Vanguard funds you hold at Vanguard's brokerage house are by default really yours, not held in street name, and hence cannot be rehypothecated in a brokerage bankruptcy, as allowed for in the Vanguard's Brokerage Service Agreement, and the service agreement for every other major brokerage house in the country.

For whatever it's worth, you also get the SIPC coverage on top of that. You don't get this if you instead had simply held the fund with VGI in a mutual funds only account, without going through VBS. So if Vanguard makes an accounting mistake and ends up missing 400K of your $5MM in assets, you are good for your entire $5MM if SIPC pays out. That I think is a pretty good reason to go with Vanguard's brokerage services rather than Fidelity's or TD Ameritrade's or Schwab's or Merrill Edge's.
AFAIK you don't need SIPC coverage if you hold your assets directly with Vanguard in a mutual funds only account. So holding it through a brokerage and getting SIPC coverage doesn't add any value over the former.
I disagree with that. If securities are held directly, you do remove the risk that the brokerage will fail and hence potentially take any assets with it. This is one of the things the SIPC protects against, that I agree becomes moot in holding securities directly.

But the SIPC insurance also protects against accounting errors and fraud in the process of holding the security. Both mistakes and fraud is definitely possible in this holding process even when held directly, and you do gain an extra layer of SIPC protection from this case when held in a brokerage account.
SIPC does not protect against accounting errors or fraud by the security issuer itself. Only those by your broker.

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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 1:38 am

anakinskywalker wrote:
Sat Sep 15, 2018 1:30 am
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:10 am
Vanguard Fan 1367 wrote:
Sat Sep 15, 2018 12:45 am
I assumed that if Fidelity went bankrupt that the Fidelity Funds I own would still be mine. I am mistaken?
Whatever assets you hold at Fidelity are not yours now. They're held in street name. They're owned by Fidelity. They're just held in your favor. Fidelity can potentially run into various deals and hypothecate what you think is now yours, since it is actually owned by Fidelity.

Several sources like the one below claim that when a brokerage goes bankrupt, all assets held in street name are distributed pro rata.

https://www.willkie.com/~/media/Files/P ... ted___.pdf

"For purposes of a liquidation under SIPA, a firm’s assets ... held for customers ... in street name ... are divided pro rata among all customers"

This means that if Fidelity were to do an assortment of fully legal activities that makes it lose a bunch of client assets, you potentially lose any amount unrecouped from the SIPC.
Fidelity like any other broker-dealer is required to segregate client assets from its own. So Fidelity going bankrupt just by itself should not cause any issues with client assets.

However if your shares are lent out, and the borrower goes bankrupt, and Fidelity goes bankrupt as well, then you could lose whatever is not covered by SIPC and not recovered from the bankrupt borrower and Fidelity.

To avoid this risk you can simply choose to not let your shares be lent out.
There are two issues here:

1. It is unclear that even using a cash only account prevents the broker from lending out securities since the law simply states that the broker can lend out upto 140% of the issued line of credit, and they can always claim that the line of credit had been extended but was just not being used.

2. Even if you were to be able to prevent lending out your securities, which it isn't clear you can do, the brokerage will still lend out others' securities, and if the pro rata rule applies, whatever loss accrues is borne by everyone, immaterial of whether they wanted their securities lent out.

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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 1:45 am

anakinskywalker wrote:
Sat Sep 15, 2018 1:32 am
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:23 am
anakinskywalker wrote:
Sat Sep 15, 2018 1:17 am
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 12:30 am
After reading a lot on the unfortunate realities with brokerage rehypothecation, I was pleased to read this comment from a Vanguard representative, hidden deep in the comments section of this page:

https://jlcollinsnh.com/2012/09/07/stoc ... ets-nuked/

The Vanguard funds that are held in a brokerage account are still owned by the client, in the client’s name and can always be redeemed at any point.
...
Other securities, such as individual stocks held in the brokerage account are held in street name by the client.
In other words, any Vanguard funds you hold at Vanguard's brokerage house are by default really yours, not held in street name, and hence cannot be rehypothecated in a brokerage bankruptcy, as allowed for in the Vanguard's Brokerage Service Agreement, and the service agreement for every other major brokerage house in the country.

For whatever it's worth, you also get the SIPC coverage on top of that. You don't get this if you instead had simply held the fund with VGI in a mutual funds only account, without going through VBS. So if Vanguard makes an accounting mistake and ends up missing 400K of your $5MM in assets, you are good for your entire $5MM if SIPC pays out. That I think is a pretty good reason to go with Vanguard's brokerage services rather than Fidelity's or TD Ameritrade's or Schwab's or Merrill Edge's.
AFAIK you don't need SIPC coverage if you hold your assets directly with Vanguard in a mutual funds only account. So holding it through a brokerage and getting SIPC coverage doesn't add any value over the former.
I disagree with that. If securities are held directly, you do remove the risk that the brokerage will fail and hence potentially take any assets with it. This is one of the things the SIPC protects against, that I agree becomes moot in holding securities directly.

But the SIPC insurance also protects against accounting errors and fraud in the process of holding the security. Both mistakes and fraud is definitely possible in this holding process even when held directly, and you do gain an extra layer of SIPC protection from this case when held in a brokerage account.
SIPC does not protect against accounting errors or fraud by the security issuer itself. Only those by your broker.
I feel like you are mixing up the issuer (which is a mutual fund like the Vanguard 500 Index Fund Company), and the holder (The Vanguard Group Inc) in the case where you hold directly in a mutual funds only account.

The SIPC protects against accounting or fraud in the holding process, when done by a registered broker, like Vanguard Marketing Corporation/Vanguard Brokerage Services. If this holding is done by VGI, you don't get this protection. That's all.

anakinskywalker
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by anakinskywalker » Sat Sep 15, 2018 5:10 am

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:45 am
anakinskywalker wrote:
Sat Sep 15, 2018 1:32 am
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:23 am
anakinskywalker wrote:
Sat Sep 15, 2018 1:17 am
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 12:30 am
After reading a lot on the unfortunate realities with brokerage rehypothecation, I was pleased to read this comment from a Vanguard representative, hidden deep in the comments section of this page:

https://jlcollinsnh.com/2012/09/07/stoc ... ets-nuked/




In other words, any Vanguard funds you hold at Vanguard's brokerage house are by default really yours, not held in street name, and hence cannot be rehypothecated in a brokerage bankruptcy, as allowed for in the Vanguard's Brokerage Service Agreement, and the service agreement for every other major brokerage house in the country.

For whatever it's worth, you also get the SIPC coverage on top of that. You don't get this if you instead had simply held the fund with VGI in a mutual funds only account, without going through VBS. So if Vanguard makes an accounting mistake and ends up missing 400K of your $5MM in assets, you are good for your entire $5MM if SIPC pays out. That I think is a pretty good reason to go with Vanguard's brokerage services rather than Fidelity's or TD Ameritrade's or Schwab's or Merrill Edge's.
AFAIK you don't need SIPC coverage if you hold your assets directly with Vanguard in a mutual funds only account. So holding it through a brokerage and getting SIPC coverage doesn't add any value over the former.
I disagree with that. If securities are held directly, you do remove the risk that the brokerage will fail and hence potentially take any assets with it. This is one of the things the SIPC protects against, that I agree becomes moot in holding securities directly.

But the SIPC insurance also protects against accounting errors and fraud in the process of holding the security. Both mistakes and fraud is definitely possible in this holding process even when held directly, and you do gain an extra layer of SIPC protection from this case when held in a brokerage account.
SIPC does not protect against accounting errors or fraud by the security issuer itself. Only those by your broker.
I feel like you are mixing up the issuer (which is a mutual fund like the Vanguard 500 Index Fund Company), and the holder (The Vanguard Group Inc) in the case where you hold directly in a mutual funds only account.

The SIPC protects against accounting or fraud in the holding process, when done by a registered broker, like Vanguard Marketing Corporation/Vanguard Brokerage Services. If this holding is done by VGI, you don't get this protection. That's all.
Very interesting point. I'm looking forward to what the more experienced Vanguard investors have to say on this point.

I'm wondering if the Investment Advisers Act of 1940 can help given VGI seems to be an RIA with custody of client assets (mutual fund shares) in this context.

The fund themselves own VGI and are subject to the Investment Company Act of 1940. How does that get translated into obligations on the part of VGI, if any?

Presumably VGI would also have fidelity bond coverage to address this.

grok87
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by grok87 » Sat Sep 15, 2018 9:40 am

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:10 am
Vanguard Fan 1367 wrote:
Sat Sep 15, 2018 12:45 am
I assumed that if Fidelity went bankrupt that the Fidelity Funds I own would still be mine. I am mistaken?
Whatever assets you hold at Fidelity are not yours now. They're held in street name. They're owned by Fidelity. They're just held in your favor. Fidelity can potentially run into various deals and hypothecate what you think is now yours, since it is actually owned by Fidelity.

Several sources like the one below claim that when a brokerage goes bankrupt, all assets held in street name are distributed pro rata.

https://www.willkie.com/~/media/Files/P ... ted___.pdf

"For purposes of a liquidation under SIPA, a firm’s assets ... held for customers ... in street name ... are divided pro rata among all customers"

This means that if Fidelity were to do an assortment of fully legal activities that makes it lose a bunch of client assets, you potentially lose any amount unrecouped from the SIPC.
interesting.
Keep calm and Boglehead on. KCBO.

talzara
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by talzara » Sat Sep 15, 2018 11:06 am

The Vanguard representative seems to be confused. This is the full quote from the Vanguard representative:
“The Vanguard funds that are held in a brokerage account are still owned by the client, in the client’s name and can always be redeemed at any point.

“They can certainly be co-mingled with other funds, but the client still remains the owner. Plus, each Vanguard fund can stand on it’s own, and is still backed by the assets held in the fund. If Vanguard Brokerage Services was to go bankrupt, the Vanguard funds would have the ability to find a new broker / dealer to administer the assets.

“Other securities, such as individual stocks held in the brokerage account are held in street name by the client.

“For accounts other than a retirement account, clients have the right at any time to request delivery to the client of any such securities or other property that are fully paid for or are in excess of margin requirements.”

https://jlcollinsnh.com/2012/09/07/stoc ... ets-nuked/
The second paragraph doesn't make sense.

The first sentence says that the mutual fund shares are commingled but still belong to you. How can this be? They're not commingled if they belong to you. They would be commingled if they are in street name.

The second sentence is talking about assets that the mutual fund owns. Vanguard mutual funds do not hold their assets at Vanguard Brokerage Services. They hold them in unaffiliated custodian banks.

talzara
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by talzara » Sat Sep 15, 2018 11:11 am

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:10 am
Whatever assets you hold at Fidelity are not yours now. They're held in street name. They're owned by Fidelity. They're just held in your favor. Fidelity can potentially run into various deals and hypothecate what you think is now yours, since it is actually owned by Fidelity.
We do not know what Fidelity does. I cannot find anything in the Fidelity brokerage agreement about how mutual funds are held.

I did find this in Fidelity's Personal Advisor Services agreement, which just says that it's their choice:
In the case of mutual funds, your shares will be held either in your name or in the name of NFS or its agents on the records of the funds’ transfer agents. Your investments in ETFs will be held in street name by NFS (or at a securities depository on its behalf). You will receive shareholder communications relating to the funds in your Account.

https://www.fidelity.com/bin-public/060 ... eement.pdf

talzara
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by talzara » Sat Sep 15, 2018 11:18 am

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:23 am
I disagree with that. If securities are held directly, you do remove the risk that the brokerage will fail and hence potentially take any assets with it. This is one of the things the SIPC protects against, that I agree becomes moot in holding securities directly.

But the SIPC insurance also protects against accounting errors and fraud in the process of holding the security. Both mistakes and fraud is definitely possible in this holding process even when held directly, and you do gain an extra layer of SIPC protection from this case when held in a brokerage account.
The SIPC insures the custody function of the brokerage, not the mutual fund.

Even with SIPC protection on the brokerage account, and with the mutual fund shares held in customer name, you still run the risk that the mutual fund says you do not own the shares.
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:45 am
I feel like you are mixing up the issuer (which is a mutual fund like the Vanguard 500 Index Fund Company), and the holder (The Vanguard Group Inc) in the case where you hold directly in a mutual funds only account.
VGI doesn't rehypothecate the shares. What's the risk that you're trying to insure?

You get a statement that says you own 500 shares. Are you worried that they'll go bankrupt and claim that you own 0 shares? It's the same accounting system.

talzara
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by talzara » Sat Sep 15, 2018 11:55 am

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:38 am
1. It is unclear that even using a cash only account prevents the broker from lending out securities since the law simply states that the broker can lend out upto 140% of the issued line of credit, and they can always claim that the line of credit had been extended but was just not being used.
No, they can't. That's not what Rule 15c3-3 says:
The term “excess margin securities” shall mean those securities referred to in paragraph (a)(4) of this section carried for the account of a customer having a market value in excess of 140 percent of the total of the debit balances in the customer's account or accounts encompassed by paragraph (a)(4) of this section which the broker or dealer identifies as not constituting margin securities.

...

A broker or dealer shall promptly obtain and shall thereafter maintain the physical possession or control of all fully-paid securities and excess margin securities carried by a broker or dealer for the account of customers.

https://www.finra.org/sites/default/fil ... 15c3-3.pdf
They can lend out 140% of your total debit balance. Anything above 140% is "excess margin," which must be maintained under "physical possession or control."

If you have no margin loans, then your debit balance is $0, so none of your securities can be lent out. All of them must be maintained under the broker's physical control.
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:38 am
2. Even if you were to be able to prevent lending out your securities, which it isn't clear you can do, the brokerage will still lend out others' securities, and if the pro rata rule applies, whatever loss accrues is borne by everyone, immaterial of whether they wanted their securities lent out.
No, they aren't. Rule 15c3-3 says that segregated securities are maintained "free of lien." The failed brokerage's creditors only have a lien on the non-segregated funds.
The SEC has prescribed the following conditions for holding “Qualified Securities” on deposit in a Rule 15c3-3 Special Reserve Account for the Exclusive Benefit of Customers:

Physical Certificates: The bank actually holding the certificates must acknowledge to the broker-dealer in writing that the certificates are identified on the bank’s books as being held free of lien in a special account for the exclusive benefit of customers of the broker-dealer.

Uncertificated Securities: The bank having the direct access to the Federal Reserve Bank book entry system must acknowledge in writing to the broker-dealer that the securities are held free of any lien in a special reserve account for the exclusive benefit of customers of the broker-dealer.

https://www.finra.org/sites/default/fil ... 15c3-3.pdf

AlphaLess
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by AlphaLess » Sat Sep 15, 2018 12:08 pm

anakinskywalker wrote:
Sat Sep 15, 2018 1:17 am

AFAIK you don't need SIPC coverage if you hold your assets directly with Vanguard in a mutual funds only account. So holding it through a brokerage and getting SIPC coverage doesn't add any value over the former.
Why is that?
Also: are you the anakinskywalker from the fatwallet forums?
"You can get more with a kind word and a gun than with just a kind word." George Washington

zmaqoptyxbglp
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 12:11 pm

talzara wrote:
Sat Sep 15, 2018 11:55 am
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:38 am
1. It is unclear that even using a cash only account prevents the broker from lending out securities since the law simply states that the broker can lend out upto 140% of the issued line of credit, and they can always claim that the line of credit had been extended but was just not being used.
No, they can't. That's not what Rule 15c3-3 says:
The term “excess margin securities” shall mean those securities referred to in paragraph (a)(4) of this section carried for the account of a customer having a market value in excess of 140 percent of the total of the debit balances in the customer's account or accounts encompassed by paragraph (a)(4) of this section which the broker or dealer identifies as not constituting margin securities.

...

A broker or dealer shall promptly obtain and shall thereafter maintain the physical possession or control of all fully-paid securities and excess margin securities carried by a broker or dealer for the account of customers.

https://www.finra.org/sites/default/fil ... 15c3-3.pdf
They can lend out 140% of your total debit balance. Anything above 140% is "excess margin," which must be maintained under "physical possession or control."

If you have no margin loans, then your debit balance is $0, so none of your securities can be lent out. All of them must be maintained under the broker's physical control.
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:38 am
2. Even if you were to be able to prevent lending out your securities, which it isn't clear you can do, the brokerage will still lend out others' securities, and if the pro rata rule applies, whatever loss accrues is borne by everyone, immaterial of whether they wanted their securities lent out.
No, they aren't. Rule 15c3-3 says that segregated securities are maintained "free of lien." The failed brokerage's creditors only have a lien on the non-segregated funds.
The SEC has prescribed the following conditions for holding “Qualified Securities” on deposit in a Rule 15c3-3 Special Reserve Account for the Exclusive Benefit of Customers:

Physical Certificates: The bank actually holding the certificates must acknowledge to the broker-dealer in writing that the certificates are identified on the bank’s books as being held free of lien in a special account for the exclusive benefit of customers of the broker-dealer.

Uncertificated Securities: The bank having the direct access to the Federal Reserve Bank book entry system must acknowledge in writing to the broker-dealer that the securities are held free of any lien in a special reserve account for the exclusive benefit of customers of the broker-dealer.

https://www.finra.org/sites/default/fil ... 15c3-3.pdf
As I pointed out above, 15c3-3 can be made void by extending the line of credit which just remains unused. The brokerage could definitely argue that if you have $1MM free and clear, they're implicitly offering at least 700K in line of credit, on which you don't pay interest, but is available to you, and hence they're free to lend out all of it as they please.

zmaqoptyxbglp
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 12:14 pm

talzara wrote:
Sat Sep 15, 2018 11:18 am
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:23 am
I disagree with that. If securities are held directly, you do remove the risk that the brokerage will fail and hence potentially take any assets with it. This is one of the things the SIPC protects against, that I agree becomes moot in holding securities directly.

But the SIPC insurance also protects against accounting errors and fraud in the process of holding the security. Both mistakes and fraud is definitely possible in this holding process even when held directly, and you do gain an extra layer of SIPC protection from this case when held in a brokerage account.
The SIPC insures the custody function of the brokerage, not the mutual fund.

Even with SIPC protection on the brokerage account, and with the mutual fund shares held in customer name, you still run the risk that the mutual fund says you do not own the shares.
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:45 am
I feel like you are mixing up the issuer (which is a mutual fund like the Vanguard 500 Index Fund Company), and the holder (The Vanguard Group Inc) in the case where you hold directly in a mutual funds only account.
VGI doesn't rehypothecate the shares. What's the risk that you're trying to insure?

You get a statement that says you own 500 shares. Are you worried that they'll go bankrupt and claim that you own 0 shares? It's the same accounting system.
I never said SIPC insures the mutual fund. As I pointed out to the person above, the mutual fund issuer (like the Vanguard 500 Index Company) is not the holder (which is VGI) in the case where you hold it directly. SIPC is protecting against holding issues, not issues in the fund itself.

And you are incorrect about Vanguard rehypothecating securities. Quotation from Vanguard Brokerage Account Agreement (https://personal.vanguard.com/pdf/v718.pdf):
As security for the repayment of all present or future indebtedness owed to Us by each Account Owner, each Account Owner grants to Us a first, perfected, and prior lien on, a continuing security interest in, and right of set-off with respect to, all Securities and Other Property that is, now or in the future, held, carried, or maintained for any purpose in or through VBS, and, to the extent of such Account Owner’s interest in or through, any present or future account with Us or Our affiliates in which the Account Owner has an interest. VBS may rehypothecate any Securities or Other Property held, carried, maintained, or in the possession and control of VBS.

anakinskywalker
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by anakinskywalker » Sat Sep 15, 2018 12:16 pm

AlphaLess wrote:
Sat Sep 15, 2018 12:08 pm
anakinskywalker wrote:
Sat Sep 15, 2018 1:17 am

AFAIK you don't need SIPC coverage if you hold your assets directly with Vanguard in a mutual funds only account. So holding it through a brokerage and getting SIPC coverage doesn't add any value over the former.
Why is that?
Also: are you the anakinskywalker from the fatwallet forums?
The part about whether risk of fraud at VGI is covered, is still unclear to me.

Yes. Pray introduce yourself, kind sir :-)

Anakin

anakinskywalker
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by anakinskywalker » Sat Sep 15, 2018 12:22 pm

talzara wrote:
Sat Sep 15, 2018 11:18 am
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:23 am
I disagree with that. If securities are held directly, you do remove the risk that the brokerage will fail and hence potentially take any assets with it. This is one of the things the SIPC protects against, that I agree becomes moot in holding securities directly.

But the SIPC insurance also protects against accounting errors and fraud in the process of holding the security. Both mistakes and fraud is definitely possible in this holding process even when held directly, and you do gain an extra layer of SIPC protection from this case when held in a brokerage account.
The SIPC insures the custody function of the brokerage, not the mutual fund.


Even with SIPC protection on the brokerage account, and with the mutual fund shares held in customer name, you still run the risk that the mutual fund says you do not own the shares.

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:45 am
I feel like you are mixing up the issuer (which is a mutual fund like the Vanguard 500 Index Fund Company), and the holder (The Vanguard Group Inc) in the case where you hold directly in a mutual funds only account.
VGI doesn't rehypothecate the shares. What's the risk that you're trying to insure?

You get a statement that says you own 500 shares. Are you worried that they'll go bankrupt and claim that you own 0 shares? It's the same accounting system.
If shares were issued and held by the brokerage, the mutual fund can't just "say" that you do or don't own shares. The process of issuing shares and treatment thereof is covered by strict rules such as the Investment Company Act of 1940, the Securities Act of 1933, the Uniform Securities Act, etc.

Anakin

talzara
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by talzara » Sat Sep 15, 2018 12:26 pm

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 12:14 pm
And you are incorrect about Vanguard rehypothecating securities. Quotation from Vanguard Brokerage Account Agreement (https://personal.vanguard.com/pdf/v718.pdf):
I didn't say anything about VBS. This is what I said:
talzara wrote:
Sat Sep 15, 2018 11:18 am
VGI doesn't rehypothecate the shares. What's the risk that you're trying to insure?
You're the person who was worried about VGI. I'm pointing out that VGI doesn't rehypothecate shares. Only VBS does that.
Last edited by talzara on Sat Sep 15, 2018 12:35 pm, edited 2 times in total.

zmaqoptyxbglp
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 12:27 pm

anakinskywalker wrote:
Sat Sep 15, 2018 12:16 pm
AlphaLess wrote:
Sat Sep 15, 2018 12:08 pm
anakinskywalker wrote:
Sat Sep 15, 2018 1:17 am

AFAIK you don't need SIPC coverage if you hold your assets directly with Vanguard in a mutual funds only account. So holding it through a brokerage and getting SIPC coverage doesn't add any value over the former.
Why is that?
Also: are you the anakinskywalker from the fatwallet forums?
The part about whether risk of fraud at VGI is covered, is still unclear to me.

Yes. Pray introduce yourself, kind sir :-)

Anakin
Hey Anakin, to your question above, I agree that it is reasonable to assume that the fiduciary standards from the Investment Advisers Act would apply, but if things did go wrong, I am not inclined to think that there is any implicit insurance scheme in place there, the way we have it with the SIPC.

zmaqoptyxbglp
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 12:28 pm

talzara wrote:
Sat Sep 15, 2018 12:26 pm
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 12:14 pm
And you are incorrect about Vanguard rehypothecating securities. Quotation from Vanguard Brokerage Account Agreement (https://personal.vanguard.com/pdf/v718.pdf):
I didn't say anything about VBS. This is what I said:
talzara wrote:
Sat Sep 15, 2018 11:18 am
VGI doesn't rehypothecate the shares. What's the risk that you're trying to insure?
You're the person who was worried about VGI. I'm pointing out that VGI doesn't rehypothecate shares. Only VBS does that.
I apologize for misreading your quote, but the risk I am trying to secure against is the risk that there is fraud or an accounting error at VGI, as pointed out above.

talzara
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by talzara » Sat Sep 15, 2018 1:01 pm

anakinskywalker wrote:
Sat Sep 15, 2018 12:22 pm
If shares were issued and held by the brokerage, the mutual fund can't just "say" that you do or don't own shares. The process of issuing shares and treatment thereof is covered by strict rules such as the Investment Company Act of 1940, the Securities Act of 1933, the Uniform Securities Act, etc.
Of course, but the OP is worried about fraud. It doesn't matter what the law says.

zmaqoptyxbglp
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 1:07 pm

talzara wrote:
Sat Sep 15, 2018 1:01 pm
anakinskywalker wrote:
Sat Sep 15, 2018 12:22 pm
If shares were issued and held by the brokerage, the mutual fund can't just "say" that you do or don't own shares. The process of issuing shares and treatment thereof is covered by strict rules such as the Investment Company Act of 1940, the Securities Act of 1933, the Uniform Securities Act, etc.
Of course, but the OP is worried about fraud. It doesn't matter what the law says.
There is no way to get around fraud at the mutual fund, if you are holding it in any form. But you can get some sort of protection for the holding process if you hold it SIPC insured at a brokerage, versus uninsured at the advisory firm, which is a great deal if you also get the mutual fund in your name.

I wasn't saying that I am heavily concerned, or other people should be heavily concerned about this given the presumably low chance of the firm failing. My goal in making this post was just to point out that this great bonus feature is available to people that want it/care about it. That's all.

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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by Nate79 » Sat Sep 15, 2018 1:17 pm

I do not understand the big worry here. My understanding is that even though shares held in street name have the brokers name on the certificate (which allows them to be traded more efficiently) these shares are held in separate accounts at a custodian and the customer still retains ownership rights and beneficiary rights. That the shares would be transferred in a bankrupcy pro rata is just a way of splitting them according to the documented ownership rights that you hold. Pro rata splitting doesn't actually mean that you have any risk from creditors trying to get assets from these separate accounts since they are separate from the assets of the broker for a reason.

talzara
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by talzara » Sat Sep 15, 2018 1:28 pm

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:45 am
I feel like you are mixing up the issuer (which is a mutual fund like the Vanguard 500 Index Fund Company), and the holder (The Vanguard Group Inc) in the case where you hold directly in a mutual funds only account.
The investor is the "holder."

VGI is the transfer agent. It says so in the fund prospectus. Actually, it just says "Vanguard," but that's VGI.
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:07 pm
There is no way to get around fraud at the mutual fund, if you are holding it in any form. But you can get some sort of protection for the holding process if you hold it SIPC insured at a brokerage, versus uninsured at the advisory firm, which is a great deal if you also get the mutual fund in your name.
If you hold mutual fund shares in a brokerage, then VGI is still the transfer agent. If you instruct the broker to sell shares, it can't just go directly to the mutual fund and get the money. It has to instruct VGI to sell shares. Then VGI records the trade in the fund's ledger and tells the fund to redeem X shares for $Y. VGI transfers $Y to the broker, which deposits it in your settlement account.

The brokerage adds an extra layer on top. It does not replace VGI.

If you own shares through a brokerage, you're still exposed to the risk of any fraud at VGI. You have not gained anything from the SIPC insurance.

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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 1:30 pm

Nate79 wrote:
Sat Sep 15, 2018 1:17 pm
I do not understand the big worry here. My understanding is that even though shares held in street name have the brokers name on the certificate (which allows them to be traded more efficiently) these shares are held in separate accounts at a custodian and the customer still retains ownership rights and beneficiary rights. That the shares would be transferred in a bankrupcy pro rata is just a way of splitting them according to the documented ownership rights that you hold. Pro rata splitting doesn't actually mean that you have any risk from creditors trying to get assets from these separate accounts since they are separate from the assets of the broker for a reason.
You are correct that the segregation requirement means that run-of-the-mill creditors of the brokerage house cannot touch client assets. However, the segregation requirement does not mean that the brokers are forbidden from hypothecating and potentially losing all your assets. They are specifically permitted to do that up until 140% of the line of credit they have issued to you. And since most brokerages offer more than $70 in margin for $100 you put in, they can always say that you were just not using your line of credit, but it was available to you and hence you could have used it and hence they can hypothecate any and all client assets, and potentially lose it.

The pro rata rule comes into the picture in the context of who bears any losses the brokerage has in aggregate due to the rehypothecations. The pro rata rule holds that any losses due to rehypothecation are evenly distributed across clients, based on how much money they're getting back. So even if your specific assets were somehow prevented from being lent out, you don't really end up with less suffering than anyone else.

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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 1:36 pm

talzara wrote:
Sat Sep 15, 2018 1:28 pm
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:45 am
I feel like you are mixing up the issuer (which is a mutual fund like the Vanguard 500 Index Fund Company), and the holder (The Vanguard Group Inc) in the case where you hold directly in a mutual funds only account.
The investor is the "holder."

VGI is the transfer agent. It says so in the fund prospectus. Actually, it just says "Vanguard," but that's VGI.
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:07 pm
There is no way to get around fraud at the mutual fund, if you are holding it in any form. But you can get some sort of protection for the holding process if you hold it SIPC insured at a brokerage, versus uninsured at the advisory firm, which is a great deal if you also get the mutual fund in your name.
If you hold mutual fund shares in a brokerage, then VGI is still the transfer agent. If you instruct the broker to sell shares, it can't just go directly to the mutual fund and get the money. It has to instruct VGI to sell shares. Then VGI records the trade in the fund's ledger and tells the fund to redeem X shares for $Y. VGI transfers $Y to the broker, which deposits it in your settlement account.

The brokerage adds an extra layer on top. It does not replace VGI.

If you own shares through a brokerage, you're still exposed to the risk of any fraud at VGI. You have not gained anything from the SIPC insurance.
You are the named owner in the first case, but if VGI as the holder makes accounting mistakes in the process of holding it like an accounting error, there is nothing protecting against it. In holding it through the broker, there is insurance against risk of any accounting errors or fraud happening in the holding process.

You were talking about the liquidation process and I am talking about the holding process.

If Vanguard felt that the risk here is so close to zero, why do they say "Vanguard funds not held in a brokerage account are held by The Vanguard Group, Inc., and are not protected by SIPC" over and over on every webpage and document? They are agreeing that there is risk involved in the fact that VGI is holding it in your name, and there is nothing insuring against this risk.

talzara
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by talzara » Sat Sep 15, 2018 2:49 pm

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:36 pm
You are the named owner in the first case, but if VGI as the holder makes accounting mistakes in the process of holding it like an accounting error, there is nothing protecting against it. In holding it through the broker, there is insurance against risk of any accounting errors or fraud happening in the holding process.

You were talking about the liquidation process and I am talking about the holding process.
I am talking about both. The process of liquidation is directly connected to the process of holding. The communications flow during liquidation tells you who's responsible for which pieces of the puzzle.

The point is that you do not eliminate VGI by opening a brokerage account. All you've done is to add a brokerage layer on top.

If you hold shares directly, then you're exposed to VGI risk.

If you hold shares through a brokerage, then you're exposed to brokerage risk + VGI risk. The SIPC insures only the brokerage risk, so you still have the uninsured VGI risk.
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:36 pm
If Vanguard felt that the risk here is so close to zero, why do they say "Vanguard funds not held in a brokerage account are held by The Vanguard Group, Inc., and are not protected by SIPC" over and over on every webpage and document? They are agreeing that there is risk involved in the fact that VGI is holding it in your name, and there is nothing insuring against this risk.
Vanguard is trying to move customers to brokerage accounts, so they say something that makes brokerage accounts look good. They leave out the fact that Vanguard funds held in a brokerage are still uninsured at the VGI layer.

The transfer agent never goes away. If shares are in customer name, then they're recorded directly at the transfer agent. When shares are held in street name, then they're recorded in an "omnibus account" that the broker has at the transfer agent. You never eliminate your exposure to the transfer agent, because that's the entity that records who owns the shares.
Under an omnibus system, intermediaries maintain and keep records for individual shareholder accounts almost exclusively on their own books, aggregating records into a single account on the transfer agent system.

https://www.pwc.com/us/en/industries/as ... ution.html

talzara
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by talzara » Sat Sep 15, 2018 2:57 pm

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:30 pm
You are correct that the segregation requirement means that run-of-the-mill creditors of the brokerage house cannot touch client assets. However, the segregation requirement does not mean that the brokers are forbidden from hypothecating and potentially losing all your assets. They are specifically permitted to do that up until 140% of the line of credit they have issued to you.
You keep saying this, without showing any evidence that it's true.

I have already quoted directly from Rule 15c3-3 to show that the broker can only rehypothecate up to 140% of the customer's debit balance. It doesn't matter how big your line of credit is. If you're not using it, then they can't lend out your shares.

In response, you claimed that Rule 15c3-3 doesn't apply.
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 12:11 pm
As I pointed out above, 15c3-3 can be made void by extending the line of credit which just remains unused. The brokerage could definitely argue that if you have $1MM free and clear, they're implicitly offering at least 700K in line of credit, on which you don't pay interest, but is available to you, and hence they're free to lend out all of it as they please.
Please quote the law or regulation that says Rule 15c3-3 doesn't apply.

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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 3:03 pm

talzara wrote:
Sat Sep 15, 2018 2:57 pm
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:30 pm
You are correct that the segregation requirement means that run-of-the-mill creditors of the brokerage house cannot touch client assets. However, the segregation requirement does not mean that the brokers are forbidden from hypothecating and potentially losing all your assets. They are specifically permitted to do that up until 140% of the line of credit they have issued to you.
You keep saying this, without showing any evidence that it's true.

I have already quoted directly from Rule 15c3-3 to show that the broker can only rehypothecate up to 140% of the customer's debit balance. It doesn't matter how big your line of credit is. If you're not using it, then they can't lend out your shares.

In response, you claimed that Rule 15c3-3 doesn't apply.
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 12:11 pm
As I pointed out above, 15c3-3 can be made void by extending the line of credit which just remains unused. The brokerage could definitely argue that if you have $1MM free and clear, they're implicitly offering at least 700K in line of credit, on which you don't pay interest, but is available to you, and hence they're free to lend out all of it as they please.
Please quote the law or regulation that says Rule 15c3-3 doesn't apply.
I said that it does apply, but that the broker can claim that they extended the line of credit to you, that you didn't use (if you have $1000, they extending a line of credit more than $700 means that 140% of that is about $1000 which they are free to loan out). So an argument could be made that they are legally permitted to loan out your assets.

zmaqoptyxbglp
Posts: 111
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 3:06 pm

talzara wrote:
Sat Sep 15, 2018 2:49 pm
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:36 pm
You are the named owner in the first case, but if VGI as the holder makes accounting mistakes in the process of holding it like an accounting error, there is nothing protecting against it. In holding it through the broker, there is insurance against risk of any accounting errors or fraud happening in the holding process.

You were talking about the liquidation process and I am talking about the holding process.
I am talking about both. The process of liquidation is directly connected to the process of holding. The communications flow during liquidation tells you who's responsible for which pieces of the puzzle.

The point is that you do not eliminate VGI by opening a brokerage account. All you've done is to add a brokerage layer on top.

If you hold shares directly, then you're exposed to VGI risk.

If you hold shares through a brokerage, then you're exposed to brokerage risk + VGI risk. The SIPC insures only the brokerage risk, so you still have the uninsured VGI risk.
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 1:36 pm
If Vanguard felt that the risk here is so close to zero, why do they say "Vanguard funds not held in a brokerage account are held by The Vanguard Group, Inc., and are not protected by SIPC" over and over on every webpage and document? They are agreeing that there is risk involved in the fact that VGI is holding it in your name, and there is nothing insuring against this risk.
Vanguard is trying to move customers to brokerage accounts, so they say something that makes brokerage accounts look good. They leave out the fact that Vanguard funds held in a brokerage are still uninsured at the VGI layer.

The transfer agent never goes away. If shares are in customer name, then they're recorded directly at the transfer agent. When shares are held in street name, then they're recorded in an "omnibus account" that the broker has at the transfer agent. You never eliminate your exposure to the transfer agent, because that's the entity that records who owns the shares.
Under an omnibus system, intermediaries maintain and keep records for individual shareholder accounts almost exclusively on their own books, aggregating records into a single account on the transfer agent system.

https://www.pwc.com/us/en/industries/as ... ution.html
I feel like you are willfully mischaracterizing my point here. I never said that VGI goes away in the liquidation process. They are not involved in the holding process if you hold in a brokerage account. I repeated multiple times that you are only reducing your risk in the holding process, since any accounting errors in the holding process are insured.

VGI risk of "they need to pay me in the next few days" is different from "they need to hold my assets for the next five decades". You just make "VGI risk" into this one thing just to make your strawman work.

talzara
Posts: 624
Joined: Thu Feb 12, 2009 7:40 pm

Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by talzara » Sat Sep 15, 2018 3:17 pm

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 3:03 pm
I said that it does apply, but that the broker can claim that they extended the line of credit to you, that you didn't use (if you have $1000, they extending a line of credit more than $700 means that 140% of that is about $1000 which they are free to loan out). So an argument could be made that they are legally permitted to loan out your assets.
Please quote the law or regulation that says they can calculate 140% of the line of credit, rather than the debit balance.

zmaqoptyxbglp
Posts: 111
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 3:22 pm

talzara wrote:
Sat Sep 15, 2018 3:17 pm
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 3:03 pm
I said that it does apply, but that the broker can claim that they extended the line of credit to you, that you didn't use (if you have $1000, they extending a line of credit more than $700 means that 140% of that is about $1000 which they are free to loan out). So an argument could be made that they are legally permitted to loan out your assets.
Please quote the law or regulation that says they can calculate 140% of the line of credit, rather than the debit balance.
The definition of the debit balance can be argued to include a 0% interest loan, which is the allowed margin.

talzara
Posts: 624
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by talzara » Sat Sep 15, 2018 3:33 pm

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 3:06 pm
I feel like you are willfully mischaracterizing my point here. I never said that VGI goes away in the liquidation process. They are not involved in the holding process if you hold in a brokerage account. I repeated multiple times that you are only reducing your risk in the holding process, since any accounting errors in the holding process are insured.

VGI risk of "they need to pay me in the next few days" is different from "they need to hold my assets for the next five decades". You just make "VGI risk" into this one thing just to make your strawman work.
I never said that VGI doesn't go away "in the liquidation process." I said that it never goes away, period.

Nobody is holding physical share certificates anymore. VGI, as the transfer agent, keeps the list of shareholders on its books. It never goes away, even when you hold mutual fund shares in a brokerage. VGI is there when you buy, VGI is there when you hold, and VGI is there when you sell.

talzara
Posts: 624
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by talzara » Sat Sep 15, 2018 3:37 pm

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 3:22 pm
The definition of the debit balance can be argued to include a 0% interest loan, which is the allowed margin.
No, it can't. It doesn't matter what the interest rate is: 0%, 10%, or even -10%. If you do not take out the loan, your debit balance is still zero.

zmaqoptyxbglp
Posts: 111
Joined: Wed May 16, 2018 10:17 pm

Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 3:39 pm

talzara wrote:
Sat Sep 15, 2018 3:33 pm
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 3:06 pm
I feel like you are willfully mischaracterizing my point here. I never said that VGI goes away in the liquidation process. They are not involved in the holding process if you hold in a brokerage account. I repeated multiple times that you are only reducing your risk in the holding process, since any accounting errors in the holding process are insured.

VGI risk of "they need to pay me in the next few days" is different from "they need to hold my assets for the next five decades". You just make "VGI risk" into this one thing just to make your strawman work.
I never said that VGI doesn't go away "in the liquidation process." I said that it never goes away, period.

Nobody is holding physical share certificates anymore. VGI, as the transfer agent, keeps the list of shareholders on its books. It never goes away, even when you hold mutual fund shares in a brokerage. VGI is there when you buy, VGI is there when you hold, and VGI is there when you sell.
VGI isn't there when you hold. It only comes into the picture again when you sell. That's an almost infinitesimal share of the duration for a buy and hold investor and hence the long run firm risk, which goes with duration.

zmaqoptyxbglp
Posts: 111
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 3:40 pm

talzara wrote:
Sat Sep 15, 2018 3:37 pm
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 3:22 pm
The definition of the debit balance can be argued to include a 0% interest loan, which is the allowed margin.
No, it can't. It doesn't matter what the interest rate is: 0%, 10%, or even -10%. If you do not take out the loan, your debit balance is still zero.
They can argue that you do take out a loan implicitly by having the line of credit available when you open a brokerage account. You are just choosing not to invest it.

jalbert
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Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by jalbert » Sat Sep 15, 2018 3:48 pm

If holding mutual fund shares issued by Vanguard, Fidelity, T-Ro, etc. your protection against accounting errors or fraud is that the assets are held by a 3rd party custodian and regular audits of the assets at the custodian have to be trued up with regular audits at the fund provider.
Risk is not a guarantor of return.

talzara
Posts: 624
Joined: Thu Feb 12, 2009 7:40 pm

Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by talzara » Sat Sep 15, 2018 4:36 pm

zmaqoptyxbglp wrote:
Sat Sep 15, 2018 3:39 pm
VGI isn't there when you hold. It only comes into the picture again when you sell. That's an almost infinitesimal share of the duration for a buy and hold investor and hence the long run firm risk, which goes with duration.
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 3:40 pm
They can argue that you do take out a loan implicitly by having the line of credit available when you open a brokerage account. You are just choosing not to invest it.
No, VGI is involved when you hold. A line of credit is not a debit balance.

Since we're both repeating ourselves, there's really nothing more for me to say. I've already backed up my points with evidence from regulations and other documents. Where's your evidence?

zmaqoptyxbglp
Posts: 111
Joined: Wed May 16, 2018 10:17 pm

Re: A Great Reason to Consider Vanguard's Brokerage Services

Post by zmaqoptyxbglp » Sat Sep 15, 2018 4:48 pm

talzara wrote:
Sat Sep 15, 2018 4:36 pm
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 3:39 pm
VGI isn't there when you hold. It only comes into the picture again when you sell. That's an almost infinitesimal share of the duration for a buy and hold investor and hence the long run firm risk, which goes with duration.
zmaqoptyxbglp wrote:
Sat Sep 15, 2018 3:40 pm
They can argue that you do take out a loan implicitly by having the line of credit available when you open a brokerage account. You are just choosing not to invest it.
No, VGI is involved when you hold. A line of credit is not a debit balance.

Since we're both repeating ourselves, there's really nothing more for me to say. I've already backed up my points with evidence from regulations and other documents. Where's your evidence?

You've not backed anything you said. You've merely provided SEC regulations, which I obviously don't disagree with. But saying that "A line of credit is not a debit balance." is an opinion, and I disagree with that opinion. You've provided nothing backing up this opinion.

VGI is definitely not involved in the holding process during the time where you hold a fund at VBS, since the brokerage is entirely distinct from VGI. Vanguard makes this distinction very clear on their website. I'm under no obligation to convince you of anything.

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