Recent developments in the U.S. banking sector have a lot of people thinking back to the unprecedented events of 2008 and questioning the stability of well-known financial services organizations. As a Financial Advisor in Murfreesboro, TN, it's our desire to continue serving clients throughout the uncertain times. It is natural to have concerns during times like these about the financial strength of the firm that supports our business, Cambridge Investment Research (Cambridge). Although some firms have seen difficulty over the last weeks, Cambridge remains financially sound and committed to providing resources and support to its financial professionals to serve the needs of our clients.
On Wednesday, March 8, Silvergate Capital (SI), a leader in lending to cryptocurrency-based companies, announced that the bank would wind down operations and voluntarily liquidate. Additionally, SVB Financial Group (SIVB), the holding company of Silicon Valley Bank, announced that the firm had sold a significant amount of securities at a loss and would be raising capital through a $2.25 billion equity offering. After failing to raise capital and facing $42 billion in withdrawals from depositors, the bank was closed on Friday, March 10, by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.
On March 12, state regulators closed New York-based and cryptocurrency industry lender Signature Bank (SBNY), citing systematic risk. The FDIC took control of the firm’s $110 billion in assets and $88.6 billion in deposits. The Federal Reserve, U.S. Department of the Treasury, and FDIC announced that the FDIC’s insurance funds would be used to cover all depositors of Silicon Valley Bank and SBNY, again citing systemic risk. The Fed also announced it would make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors via the creation of a new Bank Term Funding Program. This program will provide short-term loans up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt, mortgage-backed securities, and other qualifying assets as collateral.
Based on recent events above, Cambridge’s research and enterprise risk teams have confirmed the following information:
- Cambridge’s Insured Deposit Program: At both Fidelity and Pershing, the Cambridge program did not have any exposure to the aforementioned banks. They are working with our service providers and monitoring the current list of available banks to determine if any additional changes need to be made.
- Cambridge’s Clearing and Custodial Partners: Cambridge immediately reached out to Fidelity, Pershing, and Schwab to review any potential impact or exposure that SI, SIVB, and SBNY had on our business. All have confirmed that they had minimal to no exposure to the banks, and they do not represent a material risk to their firm’s financial stability. See links to commentary from these partners, and check their websites for updated information.
- Fidelity: FI Customer Asset Protection Overview Fact Sheet | Fidelity Institutional
- Pershing: Strength and Stability - Pershing - BNY Mellon | Pershing
- Schwab: My Perspective on Recent Industry Events | Charles Schwab
- WealthPort® CAAP®1 SMA Strategists:
- No strategists included SI in their models.
- Three strategists held SIVB prior to the bank’s failure:
- Harding Loevner Global Equity ADR
- Trillium ESG Core Equity
- Trillium Sustainable Opportunities
- One strategist held SBNY prior to the bank’s failure
- Aristotle Capital Boston
- FDIC Coverage of Deposits at U.S. Banks: According to the Federal Financial Institutions Examination Council, there are a number of U.S. domestic deposits that are not covered by the Federal Deposit Insurance Corporation at the end of 2022 based on regulatory filings.
- Yield Chasing: While there are many factors affecting the banks mentioned above, an additional item to note in regards to SIVB was their large unrecognized losses on bond portfolios. SIVB was chasing yield on their excess liquidity, and it subsequently created issues when clients started to take monies out of the bank(s). While the FDIC has stepped in to cover all deposits, it is at the expense of their shareholders. Yield chasing has been an important topic of discussion as it relates to excess client cash in a brokerage account and what is the right cash position or investment option for our clients.
To help address the most common questions, I would like to share with you some information about the steps Cambridge takes to help protect client accounts and assess risk with other parties.
Cambridge provides its financial professionals with technology, brokerage, and investment advisory services through a broad array of financial products and services. Cambridge does not engage in the business practices of investment banks or provide other alternative financial services. Nor does Cambridge engage in market-making activities or in lending activities to hedge funds or other business speculators.
Financial Performance and Liquidity
Based on the scalability of the Cambridge platform and that the vast majority of financial professionals are independent contractors, Cambridge Investment Group, Inc. has not posted a net loss in earnings since beginning operations on January 1, 1998. The firm’s revenue comes through its 3,800 plus financial professionals and relationships with banks, credit unions, investment companies, insurance carriers, and other financial institutions.
The Financial Industry Regulatory Authority (FINRA), our industry’s regulatory body, mandates that all broker-dealers must maintain net capital equal to or in excess of the minimum regulatory requirement to provide a level of comfort in the firm’s ability to meet its financial obligations and support its business. As of January 31, 2023, Cambridge was required to have a minimum net capital of $4,546,268, and the firm had $53,993,013 in net capital resulting in excess capital of $49,446,745. Throughout 2022, Cambridge maintained an average of 8x the minimum net capital requirement.
Like many financial services firms, Cambridge carries some debt on its balance sheet. Cambridge is currently in compliance with all of its lender covenants, and has lines of operating credit which provide liquidity to the firm in addition to cash assets held on the balance sheet. Therefore, Cambridge believes it has enough liquidity for its capital needs.
Client Account Protection
Cambridge is a member firm of the Securities Investor Protection Corporation (SIPC). Membership provides account protection up to a maximum of $500,000 per client, of which $250,000 may be in cash. For an explanatory brochure, please visit www.sipc.org.
Cambridge also provides its clients an optional bank sweep account for excess cash that is FDIC insured up to a $250,000 limit per customer at each FDIC-Insured bank that participates in the bank sweep program. For additional information, please visit www.fdic.gov.
The financial services industry is subject to regulation by U.S. Federal and State agencies and securities exchanges. Cambridge takes an active role in advocacy through the Financial Services Institute (FSI), and it has invested in its compliance capabilities to monitor for legal and regulatory requirements.
In summary, Cambridge will continue to monitor the market trading activity of many regional banking indices and firms. It will continue to leverage its scale and financial stability to minimize risk to the firm and the financial professionals and clients that it serves while limiting the risk from business partners through routine review of its processes.
We hope this provides you some clarity in regards to recent events, as well as the financial stability of Cambridge and its business partners. Thank you for the opportunity to serve your financial needs.
1CAAP® is a registered mark of Cambridge Investment Research, Inc. for its program for investment managers.