When Your Broker Firm Folds

Your investments are usually in the hands of your broker which is a part of big brokerage firm. With their help, you can be sure that your investments are looked after and trading will be a lot easier. There are those who can take care of their own stocks and other investment plans but they would dedicate themselves to this industry full time to succeed.

As someone who has to take care of other things, you would have to trust a brokerage firm as they would have to take care of your different investment preferences.

But not everything is perfect or work as they should be. There are now large financial institutions that have just announced bankruptcy which means this could be reciprocated in an exponential level in other institutions. Your brokerage firm could be in a lot of trouble and could fold anytime. If you have been investing with a brokerage firm that is about to fold, you could end up with nothing at all.

This is often the common fear nowadays as large corporation folds. As everyone is trying to get out from the financial crises, brokerage firms lose clients and will find themselves bankrupt.

The Role of SIPC

When a brokerage firm goes bankrupt, it does not mean investors will lose everything. Brokers are “insured” through SIPC or Securities Investor Protection Corporation. This institution was established in 1970 by the congress to protect brokerage firms.

Although this was established by the government, the institution was never owned by the government. It is instead owned by different brokerage firms. This institution is highly controlled by the SEC (Securities and Exchange Commission) and all their members are also regulated by the same federal institution.

Through SIPC, the customers of the firms will be protected from most losses. Although there are no cash or even stocks, there are SEC approved trust companies where the funds could be extracted to support the members of the SIPC.

As a member of SIPC, the firms or more specifically the customer of the firms will be supported up to $500,000. Each customer should be able to have this amount and they could receive up to $100,000 in cash. In addition that that coverage and cash, each company could also avail of up to $500,000 in insurance. Of course, this depends on how much you have invested.

Exceptions

Not everything is covered by the SIPC. The following investments are never covered by the SIPC:

• Forex • Insurance • Mutual Funds with Sponsors • Outside SEC Investments • Commodities

Similarity with FDIC

SIPC and FDIC (Federal Deposit Insurance Corporation) are often compared to each other as they support the customers of the institutions. However FDIC only covers up to $100,000 per account.

Aside from coverage, there are also measures that the FDIC and SIPC follows to protect the company and their customers such as credit default and warning signals. These are often tools used by the financial institutions to help their customers cope with the situation. It could be a sign that they are having trouble but they are doing everything they can to help their customers.

If you are looking for brokerage firm, be sure to take a good look at their records. You should be able to notice their membership with the SIPC if you want to be protected. There are small firms that are part of the SEC but are not part of the SIPC.

Even though they have SIPC, additional insurance should be in place so that they could provide additional coverage especially for investments that are not covered. SIPC should provide customers of brokerage firms support but it may not be enough especially for firms that offers a good range of services.