You read in the news that your brokerage firm is closing its doors due to financial problems and all assets will be liquidated. Does that include your own investments? How do you get them back? Fortunately, your investment assets are covered by the Securities Investor Protection Corporation (SIPC). This organization functions in a similar capacity to the Federal Deposit Insurance Corporation (FDIC). It gives restitution to investors in case a brokerage firm defaults. Many brokerage firms also purchase additional insurance to protect their clients' investment assets.
Customer Assets Segregated
By law, brokerage firms must segregate your assets from their own. They act as custodians for financial instruments you can hold yourself in the form of stock or bond certificates. Like any other company, a brokerage firm might need a loan to finance its operations. When that happens, it must use its own capital, not customer assets, as collateral. If the firm runs into financial trouble, or is otherwise unable to account for your assets, the SIPC gets involved.
When Firms Fail
Let's say the brokerage firm with custody of your securities gets into serious financial trouble and must close its doors. The SIPC asks for a federal court trustee to oversee the orderly transfer of customer assets from the failed firm to a stable brokerage firm. You'll get instructions and a claim form, at which point you could transfer your assets to your preferred brokerage firm.
In most cases, your assets will be accounted for and transferred. If they can't, the SIPC will restore them, or as much as possible of their worth on a pro-rated basis within the limits of SIPC coverage. If the failed firm liquidates its assets, full restitution could come from these funds, or from funds available from additional coverage purchased by the brokerage firm itself.
For your assets to receive this coverage, your brokerage firm must be a member of the SIPC. Most brokerage firms will confirm membership on their account statements and website, and they'll happily provide you with any additional information you request. The SIPC covers up to $500,000 on securities, including up to $250,000 coverage for uninvested cash. Many brokerage firms offer additional protection as well; as of this writing, Charles Schwab, Fidelity and Vanguard provided insurance protection above and beyond SIPC's limits through arrangements with Lloyds of London.
What's Not Protected
The SIPC provides protection only in the event of failure or fraud on the part of a brokerage firm. It won't help you If your investments lose value due to market forces. Even treasury bonds can lose value if you do not hold them to maturity.
You don't have to hold your bonds at a brokerage firm if you are concerned about default or financial trouble. You can purchase and hold treasury bonds through Treasury Direct (treasurydirect.gov), a service provided by the United States Department of the Treasury Bureau of the Public Debt. The only downside is your investment assets are more complex to manage if you hold investments other than the treasury securities.
Julia Thomson began writing professionally in 1996. Her work has appeared in "Stage Directions," "Phoenix New Times" and "The Valley Callboard." Thomson has expertise in investing and personal finance, with three brokers' licenses and certification as a budget counselor. She holds a Master of Music from Indiana University.