Brokerage Safety
Stock brokerages are heavily regulated by government oversight agencies, so failure rates are very low. Rules are in place that help ensure investor money is recovered in the event that a brokerage declares bankruptcy. Nevertheless, with the failure of Bear Sterns in 2008, and the bail out of Lehman Brothers fresh on investor's minds, you might wish to take a look at some of the safety measures your brokerage has in place.
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Regulatory Agencies
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Brokerages are regulated by two separate government agencies -- the Securities and Exchange Commission and the Financial Industry Regulatory Authority. The SEC's mission is to protect investor money, and to make sure that the financial markets are fair to all investors. FINRA has virtually the same mission. The difference between it and the SEC is focus. The SEC focus is primarily on protecting investors, and FINRA primarily focuses on ensuring brokerages follow the rules.
SEC Rules
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The SEC requires all brokerages have more assets than liabilities. This ensures that clients can recover their money even if the firm fails. In addition, it requires all brokers to be members of the Securities Investors Protection Corporation, or SIPC, which provides insurance for all investor accounts. This second rule is important because even though a brokerage is required to have enough assets to cover liabilities, brokers sometimes make bad business decisions that lead to losses in excess of their available assets.
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SIPC Coverage Limits
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When a broker fails, all stocks and other securities you own are returned to you. If the broker cannot return all of your securities, the SIPC steps in and replaces any securities or cash still missing from your account. This insurance is limited to $500,000 per customer account. The SIPC treats cash and securities assets separately. Cash is only insured up to $100,000. Money market accounts, however, are treated like securities and are insured up to $500,000 per account.
When Brokerages Fail
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When a brokerage fails, the courts appoint a trustee to oversee all customer accounts. The SIPC then steps in and attempts to move all customer assets to another brokerage firm. They notify you that your account has been transferred and provide you with the details. If an account transfer is not possible, the trustee arranges for the brokerage firm to be liquefied and the cash to be distributed to clients. The SIPC then makes up for any shortfalls up to each account's insured limit.
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