What happens to my brokerage account if my firm goes bankrupt?
Brokerage firms must follow strict rules about segregating customers' investments from the firm's money, so your accounts should remain intact even if the brokerage goes under and another firm takes over its business. For example, stocks, bonds and mutual funds are physically held by an independent depository, not the brokerage firm.
What if the firm misappropriated my assets?
You have another layer of protection in case the firm hasn't followed all of the rules: The Securities Investor Protection Corp. covers stocks, bonds and other assets held at a brokerage firm that goes bust, and nearly every brokerage firm registered with the Securities and Exchange Commission must be a member.
If a brokerage firm fails, SIPC first tries to transfer the investors' securities to another firm. If that doesn't work, it then attempts to rebuild the investors' portfolios, even buying new stocks or bonds to make up for any missing shares. If the investments aren't available, SIPC will give you cash based on their value when the brokerage failed.
How much does SIPC cover?
SIPC first returns your share of the broker's remaining assets, then uses its own funds (up to $500,000 per account, including a $100,000 limit on cash) to buy the same shares that you originally owned.
What happens if I have more than $500,000 at that brokerage firm?
The $500,000 limit applies only to the maximum amount of its own money SIPC will spend to make up for any missing securities, not the total amount of money you can get back. If the customers' assets remain largely intact at the brokerage firm, then you can get back a lot more than that SIPC limit, which is a key difference between how SIPC protects brokerage customers and how the FDIC covers bank depositors.
In the 38-year history of SIPC, only 349 people have not received the full value of their accounts from their share of the firm's assets plus SIPC coverage -- and most of those instances occurred three decades ago or more.
Do I have access to my money after SIPC takes over?
That's the most common problem. It tends to take from one week to two or three months to regain control of your account while SIPC sorts everything out. It can take even longer if the brokerage firm kept shoddy records or was involved in fraud. SIPC does not protect against market losses while your account is in limbo.
For more information about how SIPC works, and to make sure your brokerage firm is a member, go to the SIPC Web site.