Dear Liz: This is a follow-up question to your column concerning stock brokerage accounts and the coverage provided by Securities Investor Protection Corp. My husband and I are puzzled as to how the failure of a brokerage, which does not actually own our shares of stock, could cause us to lose that stock, leaving us to the limited protection the SIPC can provide. Can you explain what the sequence of events would be?
Answer: SIPC coverage kicks in when a brokerage fails and customer assets are missing. You’re correct that brokerages are required to keep customer assets separate from their own, so missing stocks and other investments would probably be due to fraud, which is rare. Most of the time when a brokerage fails, all customer assets are simply transferred to another firm.
SIPC protects up to $500,000, including a $250,000 limit for cash. Many brokerages also have private insurance in addition to SIPC coverage to protect against such losses.