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March 3, 2009

What if Your Broker Goes Out of Business?

Ever wonder what would happen if your brokerage firm went out of business? Brokerage firms are required to segregate customer assets from their own in order to keep them safe. In the majority of cases, customer assets are safely transferred to another brokerage firm.

When a brokerage firm fails and customer assets are missing or have been stolen from their accounts, its the job of the Securities Investor Protection Corporation (SIPC) to step in. SIPC, however, should not be confused with the Federal Deposit Insurance Corporation (FDIC), which offers blanket protection of FDIC-insured bank deposits. As discussed below, SIPC protection is more limited.

What Does SIPC Cover?

In a nutshell, SIPC will replace missing stocks and other securities that have been stolen by a brokerage firm. However, SIPC does not protect the value of your investments or provide relief if you were sold worthless stocks. SIPC is not insurance against securities fraud or account mismanagement. If your portfolio were to crash and the underlying security values were to drastically decline, SIPC will not bail you out.

What SIPC will do is help investors get back all of the securities (such as stocks and bonds) that are registered in their name. SIPC will also distribute the brokerage's remaining customer assets on a pro rata basis. If the failed firm's funds are insufficient to satisfy customer claims, SIPC will supplement the distribution from its reserve funds, up to a ceiling of $500,000 per customer, including a maximum of $100,000 for cash claims.

Make Sure Your Broker is an SIPC Member

Appearances can be deceiving. Some SIPC members have affiliations with entities that are not SIPC members. These non-SIPC affiliates may even operate out of the same offices and have the same employees. The SIPC gives the following useful advice to investors:

Be sure you receive written confirmation of each securities transaction in your securities account with the SIPC member, and that each confirmation statement and each statement of account is issued by the SIPC member and not by a non-SIPC affiliate. Deposits for credit to your securities account, by check or otherwise, should not be made payable to your account executive, registered representative, or to any other individual, but generally only to your SIPC member broker-dealer or, if your account is carried at another SIPC member who provides clearing services for your SIPC member broker-dealer, then to that other SIPC member. If your check or deposit is payable to other than a SIPC member broker-dealer (such as to the issuer of the securities you are purchasing or to a bank escrow agent), you should take steps to insure that your funds are properly applied.

For more information about the SIPC, visit www.sipc.org or call the SIPC Membership Department at (202) 371-8300 to find out the status of your brokerage firm.