Securities Firms Form ‘Excess SIPC’ Protection Insurer; S&P Assigns ‘A+’ Rating

December 23, 2003

14 securities firms announced that they have formed the Customer Asset Protection Company (CAPCO). The captive insurer, licensed in New York, will provide excess securities account protection (“Excess SIPC”) for institutional and individual brokerage accounts of certain securities firms beginning in early 2004.

“CAPCO intends to provide account protection for the net equity of client accounts of participating firms. This ‘Excess SIPC’ protection is in excess of account protection provided by the Securities Investor Protection Corporation (SIPC),” the bulletin noted. The firms decided to form CAPCO following the decision by a number of insurers that provide Excess SIPC protection to withdraw from the market.

“CAPCO provides clients the broadest protection available in the marketplace today,” stated Michael O’Connell, a Managing Director of Marsh Inc. The broker also assisted in CAPCO’s design and development.

P. Bruce Wright, a partner at LeBoeuf, Lamb, Greene & MacRae, L.L.P., a leading legal service provider to the insurance/financial services industry, described CAPCO as “an excellent example of industry members working together to provide a solution to a capacity constraint in the insurance marketplace.” His firm also assisted in connection with the legal, tax and regulatory issues involved in the formation of the company.

“We are pleased that a number of major securities firms worked together to organize and capitalize CAPCO, and we look forward to the continuation of this important coverage for clients,” stated President Frank Lagerstedt.

The 14 firms that formed CAPCO and will employ its coverage are: A.G. Edwards, Pershing – a subsidiary of The Bank of New York, Bear Stearns, Credit Suisse First Boston, Edward Jones, National Financial Services-a Fidelity Investments company, Goldman Sachs, JP Morgan Chase, Legg Mason Wood Walker, Inc., Lehman Brothers, Morgan Stanley, Robert W. Baird & Co., Raymond James & Associates, and Wachovia Securities.

Standard & Poor’s Rating Services promptly assigned CAPCO its ‘A+’ counterparty credit and financial strength ratings and gave it a “stable” outlook. S&P noted that its ratings were based on “the risk-remote nature of the company’s liabilities as well as CAPCO’s strong capital and reinsurance, stable earnings, and low-risk investment portfolio.”

It also noted that “Losses to CAPCO are expected to be exceedingly rare, as multiple triggers would have to occur for CAPCO to sustain a loss. These triggers include the insolvency of an insured broker/dealer, losses to customer accounts, and the depletion of other resources that would inure to CAPCO’s benefit, such as fidelity bonds, support from the broker/dealer’s parent company, and Securities Investor Protection Corp. coverage. CAPCO’s strong capitalization, reinsurance protection, and management by experienced risk managers are expected to continue.”

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