Security of Your Assets
The Safety of Your Securities
SWS Financial Services, Inc. believes our customers should have complete confidence in the
safety of their securities and the cash held at our firm. Following are a number of ways in
which our customers are protected.
Corporate Structure of the Firm
SWS Group, Inc. (NYSE-SWS) is a Dallas-based, full-service securities and banking firm,
using technology to deliver a broad range of investment and related financial services
through its subsidiaries: Southwest Securities, Inc., Southwest Securities Bank, SWS
Financial Services, Southwest Insurance Agency, May Financial Corporation and SWS
Capital Corporation. Clients of the company include individual and institutional investors,
broker/dealers, corporations, governmental entities and financial intermediaries. The
company's common stock is listed and traded on the New York Stock Exchange under the
symbol SWS.
Southwest Securities, Inc. (member NYSE, NASD and SIPC), SWS' principal subsidiary,
provides securities execution and clearing, full-service securities brokerage, investment
banking and capital markets services nationwide. May Financial is a broker/dealer focusing
on wholesale equities trading and retail market making, and Southwest Insurance Agency
offers a wide range of insurance products. The company's banking subsidiary, Southwest
Securities Bank, provides complete traditional and online banking services and financial
tools. SWS Financial Services, Inc. contracts with independent registered representatives for
the administration of their securities business, and SWS Capital Corp. administers the Local
Government Investment Cooperative (LOGIC) fund for school districts and local
governments across Texas.
The company was co-founded in 1972 by Chairman of the Board, Don A. Buchholz, and the
late Allen Cobb. Southwest Securities was built on integrity, responsibility, and the belief that
service to customers should always be the first priority.
Our Capital Strength
Approximately $200 million of capital protects our customers. Historically, the firm has
always maintained greater capital than required by any regulatory authority.
The SEC and New York Stock Exchange
SWS Group 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 SWS
Group or any of its subsidiaries.
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 $1,000,000.00 margin debt, regardless of the size of the account, the
total value of securities that may be hypothecated or loaned by SWS Group is limited to
$1,400,000.00 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, PricewaterhouseCoopers LLP, and is aggressively monitored internally
on a daily basis.
Securities Investor Protection Corporation
SWS Financial Services, Inc. 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 the 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:
1. 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.
2. 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 $500,000.00 per account (of which $100,000.00 may be in cash).
Additional protection (Excess SIPC) is provided by private insurers.
3. An excess of SIPC insurance bond provides coverage in excess of the protection
provided by SIPC (described above) for the net equity of all cash and securities of
customers on deposit with SWS Group, Inc. This enhanced account protection is
provided through Lloyd’s of London. Lloyd's of London is the world's leading
insurance market providing specialist insurance services to businesses in over 189
countries.
4. 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 isn’t 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.
SWS Group Provides Additional Protection for your Account
In addition, we have purchased from an underwriting syndicate at Lloyd's of London
additional securities protection up to an aggregate of $80 million, limited to a combined
return to any customer from a Trustee, SIPC and the London underwriters of up to $20
million.
Further Safeguards
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 instruction from the court. In addition, we make a
practice of not issuing checks or delivering securities (except against payment) form 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 SWS
Group’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 SWS Group’s Internal Audit Department reviews, the effectiveness of these
systems is also audited by our independent accountants, PricewaterhouseCoopers LLP.