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What happens if a brokerage firm fails?

Here’s what happens to your money if your brokerage fails, and how your assets are protected.

US deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 in the event the bank goes bust, but what happens if a brokerage firm fails?

Find out what happens to your money and securities in the rare event your broker goes under and what, if any, insurance protection is available for your assets.

What happens if your brokerage fails?

When a brokerage firm fails, the Securities Investor Protection Corporation (SIPC) steps in to initiate and oversee the liquidation process and restore securities and cash to customers. The SIPC is a non-profit membership organization created by the Securities Investor Protection Act of 1970 with the goal of protecting customers in the event their brokerage firm fails.(1)

Did you know?
The SIPC is a non-profit membership corporation created under the Securities Investor Protection Act to protect customers against certain types of loss resulting from a broker failing financially. SIPC membership is required for most US brokers, and there are currently more than 3,500 member brokers.(3) Since its creation by Congress in 1970, the SIPC has recovered more than $141 billion in assets for an estimated 773,000 investors.(4)

What is SIPC insurance?

In addition to handling the liquidation process of a failed brokerage, the SIPC provides limited coverage to affected customers. Funded by member brokers, the SIPC protects the securities and cash in your brokerage account up to $500,000, which includes a $250,000 limit for cash in your account.

The $500,000 coverage applies to each customer account deemed to be a “separate capacity.” For instance, if you have two individual brokerage accounts with the same broker, the accounts are combined for purposes of the SIPC protection limits. If you have, say, an individual brokerage account and an individual retirement account (IRA) with the same broker, each account is protected up to $500,000 for securities and cash.

Examples of separate capacities include:

  • Individual accounts
  • Joint accounts
  • Corporate accounts
  • Trusts
  • IRAs
  • Roth IRAs
  • Estate accounts
  • Custodial accounts

What SIPC insurance protects

  • Stocks
  • Bonds
  • Treasurys, such as Treasury Bills, Treasury Notes and Treasury Bonds
  • Certificates of deposit (CDs)
  • Mutual funds
  • Money market mutual funds
  • Cash in a brokerage account from the sale of or for the purchase of securities

What SIPC insurance doesn’t protect

  • Most commodity futures contracts
  • Foreign exchange trades
  • Investment contracts, such as limited partnerships and fixed annuity contracts that are not registered with the US Securities and Exchange Commission (SEC)

How does FDIC insurance work?

Among other priorities, the FDIC insures customer deposits held at a financially-troubled or bankrupt FDIC-insured bank. Unlike SIPC insurance, coverage is automatic whenever an individual opens a deposit account at an FDIC-insured bank.

What does FDIC insurance cover?

  • Checking and savings accounts
  • Savings Negotiable Order of Withdrawal (NOW) accounts
  • Money market accounts
  • CDs and other time deposits
  • Cashier’s checks and money orders issued by a bank

What does FDIC insurance not cover?

  • Stocks
  • Bonds
  • Mutual funds
  • Life insurance policies
  • Annuities
  • Municipal securities
  • Safe deposit boxes or their contents
  • US T-Bills, bonds or notes

How much is FDIC insurance per account?

FDIC insurance covers up to $250,000 per depositor, per insured bank and per account ownership type. This means the FDIC provides separate insurance coverage for deposits held in different account ownership categories, similar to SIPC insurance.(5)

For example, if you have an individual account and a joint account at a bank, FDIC provides $250,000 of insurance for each account ownership type. If, on the other hand, you have two accounts that fall under the same ownership category — like two individual savings accounts at the same bank — all those deposits are added together and insured up to the standard insurance amount of $250,000.

So what happens if you have more than $250,000 in a single account ownership type?
Unfortunately, it’s not insured. The FDIC notes, however, that customers with funds above the insured limit may recover some portion of the lost funds from the proceeds from the sale of failed bank assets, but this can take years to finalize.

Bottom line

If an SIPC member broker goes under and customer assets are missing or are in jeopardy, the SIPC steps in and protects the securities and cash in your brokerage account up to $500,000, which includes a $250,000 limit for cash in your account.

Importantly, you must remember to file a claim within the specified time to receive protection from the SIPC.

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