Brokerages Failing: How to Protect Your Money

We were watching the financial news on cable TV and almost spit out our coffee. The news was breaking about Lehman Brothers filing bankruptcy, Merrill Lynch being sold to Bank of America, and AIG asking the Federal Reserve for help.

It was a year's worth of news in one morning, we admit, but it is no excuse for the bad information we heard.

One of the commentators made reference to brokerage accounts being insured for up to $100,000, which is absolutely wrong. He was obviously thinking about FDIC protection of bank accounts (find out how to protect your bank deposits with FDIC insurance here), but he was confused.

We know this is a serious and unsettling situation, so we want to make sure you have the right information. (Learn 6 Ways to Protect Your Money Now in light of the recent news from Wall Street.)

Protect Your Brokerage Account

Let's start with the two most important points you need to know if your broker fails:

1. The Securities and Exchange Commission requires brokers to keep enough net capital on hand to return cash and securities (stocks, bonds, mutual funds) to investors should the firm fail. Most firms abide by this rule, so the good news is that you are not likely to lose anything.
2. If a firm does not have enough capital on hand, the Securities Investor Protection Corporation (SIPC) is available as a backup. The SIPC will step in to help you recover any cash and securities that were not returned to you up to $500,000 (which includes a maximum of $100,000 in coverage for cash), although many brokerage firms offer even higher amounts of SIPC protection.

The SIPC was created nearly 40 years ago by Congress just for this purpose. It is not a government agency but a non-profit corporation funded by brokers who are members.

Most reputable brokerages are members. In fact, you've probably heard the phrase "Member Securities Investor Protection Corporation" or "Member SIPC," which appear in all signs and ads of member firms. Now you know why.

If you'd like to know whether your brokerage is a member, look for that language on the firm's website or check out the SIPC's member database. Click here to go right to the page that will allow you to search for your brokerage firm.

Next: Follow These Steps if Your Broker Fails