I've been reading about the financial troubles that E-Trade is having now and am concerned about my accounts. What happens to investors' accounts if their brokerage firm has financial trouble?
There are several safeguards in place to protect your money if your broker goes bust.
Most important, brokers have to follow strict SEC rules about segregating the firm's money from the customers' investments. Even if the broker has financial trouble, the investors' money should still remain intact.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
"Even if a firm is in very serious trouble, it can either merge with another brokerage firm or sell part of its business," says Stephen Harbeck, president and CEO of the Securities Investor Protection Corporation. "We only get involved when a firm used up its capital and has misappropriated customers' securities." SIPC has only been involved in six cases in the past four years.
Brokerage firms are members of SIPC, which protects investors when brokers go under and works a bit like the Federal Deposit Insurance Corporation (with some key differences). If a brokerage firm fails, SIPC first tries to transfer the investors' securities to another firm. If that doesn't work, then it tries to rebuild the investors' portfolios, even buying new stocks or bonds to make up for any missing shares.
"To the maximum extent practicable, we give you exactly what was in your account, and if we have to buy it we will," Harbeck says. If the investments aren't available, SIPC will give you cash based on their value when the brokerage went under.
Options are tricky, though. "We close out all options transactions on the date of the brokerage failure and either credit or debit the account as appropriate," Harbeck says.
SIPC first returns your share of the broker's remaining assets, then uses its own funds (up to $500,000 per account, with a $100,000 limit on cash) to buy the same number of shares that you originally owned. That $500,000 limit only applies to the maximum amount SIPC will spend on its own to make up for any missing securities; not the total amount of money you can get back. If many of the customers' assets remain intact, you can get back a lot more than that SIPC limit.
But the downside is that you may lose access to your money for a while. "The fastest that an investor could conceivably get back in control of one's account is one week," Harbeck says.
That happened during the MJK Clearing case in 2001, when the acquiring brokerage had the same computer system as the firm that went under. "In most situations, it takes two to three months," he says. And the process can stretch out even longer if the brokerage firm kept shoddy records.
SIPC does not protect against market losses while your account is in limbo.
In the very rare cases in which an investor's losses exceed SIPC's limits, most brokers have supplemental insurance that kicks in to make up the difference. E-Trade, for example, has a total of $600 million in extra coverage, with a $150 million limit on the combined return to any customer from trustee distributions, SIPC and the extra coverage.
SIPC covers cash and securities, such as stocks and bonds, held at a brokerage firm. Deposits at insured banks, such as E-Trade Bank, are covered by the FDIC. For more information about how the FDIC works -- and what happened to depositors when NetBank went under last month -- see my When a Bank Closes column. Also see the FDIC's Web site.
For more information about how SIPC works, and to make sure your brokerage firm is a member, see SIPC.org.
-
What the Comcast Cable Spinoff Means for InvestorsComcast has announced plans to spin off select cable networks and digital assets into a separate publicly traded company. Here's what you need to know.
-
TJX Stock: Wall Street Stays Bullish After EarningsTJX stock is trading lower Wednesday despite the TJ Maxx owner's beat-and-raise quarter, but analysts aren't worried. Here's why.
-
SEC Cracks Down on Misleading Fund Names: The Kiplinger LetterThe Kiplinger Letter The SEC rules aim to crack down on so-called “greenwashing” — misleading or deceptive claims by funds that use ESG factors.
-
Best 1-Year CD Rates November 2024Savings Many 1-year CD accounts are already offering rates of 5% or more. We look at the options on the market.
-
What Is a High-Yield Savings Account?A high-yield savings account is essentially the same as a traditional account with one key difference — it pays a higher-than-average APY on deposits.
-
For a Concentrated Stock Position, Ask Your Adviser ThisThere can be advantages to having a lot of stock in one company, but ‘de-risking’ can help avoid some significant disadvantages.
-
Trusting Fintech: Four Critical Moves to Protect YourselfA few relatively easy steps can help you safeguard your money when using bank and budgeting apps and other financial technology.
-
Four Steps to Prepare Your Finances for DivorceDivorce is rarely easy, but getting financial paperwork in order, working with professionals and making tough decisions now can take some of the stress out of it.
-
Stock Market Today: Nasdaq Gains as Treasury Yields CollapseThe tech-heavy index swung higher Monday as investors sought out safety in government bonds.
-
Silicon Valley Bank, Signature Bank Failures Send Bank Stocks ReelingFinancial stocks continued to sell off following the collapse of regional lenders SVB and Signature Bank.
