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Is my brokerage account protected?

Most brokerage accounts are protected by the Securities Investor Protection Corporation (SIPC). Unlike the Federal Deposit Insurance Corporation (FDIC), which protects bank deposit accounts, the SIPC is not a government agency. Though created by Congress, it is a nonprofit corporation funded by its membership of broker-dealers registered with the Securities and Exchange Commission (SEC).

The SIPC helps return customer property, including securities and cash in brokerage accounts, should a broker-dealer or clearing firm experience bankruptcy, insolvency, or unauthorized trading in a customer's account. Should a SIPC member become insolvent, SIPC would ask a court to appoint a trustee to oversee transfer of customer securities to another firm, or act as the trustee itself.

SEC regulations also apply

The SEC also has provisions that can help protect investor assets. For example, the SEC requires brokerage and clearing firms to segregate money and securities in customer accounts from their own proprietary assets and funds. This helps protect customers from being harmed by a firm's own trading activity. Also, firms are required to maintain a certain level of capital reserves to enable the firm to return customers' securities and cash in case of a financial failure. Finally, the SEC specifies that customer claims take precedence over other claims on a firm's assets.

What if a firm is liquidated instead of sold?

Securities registered in a customer's name (as opposed to being held in "street name," the most common method today) are returned to customers first. Assets held in street name make up what's known as the "fund of customer property." That fund is divided on a pro rata basis; assets are shared in proportion to the size of claims. Only if securities are still missing after the pro rata distribution would SIPC coverage be applied to make up the difference, up to the statutory coverage limit.

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