Q&A: Bank failures spotlight brokerages’ SIPC insurance: How it works

Dear Liz: In light of the recent bank failures, I am wondering about the safety of investments with a brokerage firm. If the brokerage firm that I am using fails, do I stand to lose money even though I am invested in specific stocks or bonds? Does it make a difference if I have money in one of their branded money market funds?

Answer: Your brokerage probably is a member of the nonprofit Securities Investor Protection Corp., which protects against the loss of cash and securities when a covered brokerage fails. Accounts are insured up to $500,000 per customer, including a $250,000 limit for cash.

Covered securities include stocks, bonds, Treasurys, certificates of deposit, mutual funds and money market mutual funds. (Money market accounts and certificates of deposit are considered investments rather than cash under SIPC rules.)

The “per customer” limit is based on how the accounts are owned or titled. If you have a retirement account and a regular brokerage account, for example, separate $500,000 limits would apply to each.

SIPC coverage kicks in if a brokerage fails and securities or cash are missing from your account. You also have protection in case of unauthorized trading or theft from your accounts. SIPC insurance does not protect you against stock market drops or other declines in the value of your investments.

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  1. Liz, while everything you state is true there are many more protections in place for investors. Your response implies that if an investor owns $600,000 in stocks and his brokerage firm goes bankrupt they would lose $100,000. Although it’s complicated the more likely scenario is the securities would be transferred to another brokerage firm that takes over. Bank CDs purchased through your brokerage firm are covered through FDIC. It would be messy and time consuming , however, there are other protections in place besides SIPC.

    • Liz Weston says

      Exactly. That’s why I was careful to say that “SIPC coverage kicks in if a brokerage fails and securities or cash are missing from your account.” If your investments aren’t missing, you won’t need the coverage.