Can Investors Trust Brokerage Firms to Hold Their Securities?

If a brokerage house fails due to bankruptcy or fraud, the Securities Investor Protection Corporation (SIPC) makes sure that investors who hold their stocks, bonds, and mutual funds at that brokerage house get all of their shares back in a timely manner. Due to recent bankruptcies at banks and financial troubles at brokerage firms, BWFA thought it was time to review the questions, “Is it safe to hold investments at a brokerage firm?” and “What happens to my stocks and bonds if my broker goes bankrupt?”

SIPC protects investors by guaranteeing that if securities held by a broker for a client are lost or stolen, SIPC will replace those shares of those securities or their value to the client. However, there is a ceiling of $500,000 per customer account held in each separate capacity (e.g., joint tenant or sole owner), and a limit of $100,000 for claims of uninvested cash balances. Lost or stolen money market funds are covered by the $500,000 ceiling.


Is SIPC Strong Enough?

It’s important to understand that SIPC does not “insure” the value of the shares. Share prices go up and down, and SIPC is not protecting investors from poor decisions that they or their advisors make. SIPC is quick to point out that its role is very different from the Federal Deposit Insurance Corporation (FDIC), which does insure deposits at banks. SIPC does not have the word “Insurance” in its name.


It’s also important to realize that SIPC does not protect commodity futures contracts, currency holdings, or investment contracts (such as limited partnerships) that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.

Even with those limitations, SIPC has a big job. Therefore, BWFA did a little research to find out if SIPC is up to the task. We found that SIPC is a tiny, federally chartered non-profit private organization. It employs just 30 people and has only $1.5 billion in reserves (and the ability to borrow another $2 billion), yet it is committed to protecting shares worth $7 trillion.

We called SIPC and spoke with Stephen Harbeck, President, who presented a convincing case that his organization is prepared. First, Harbeck confirmed that the safety of holding shares in a brokerage house has suddenly become an issue of concern to investors. He said that after the California bank IndyMac filed for Chapter 7 bankruptcy protection on Aug. 2, SIPC’s small staff was overwhelmed with two calls per minute from investors.

Then, Harbeck explained why he thinks SIPC can make sure investors’ shares are safe:

  • Investments held in an investor’s account are not subject to creditors’ claims in a bankruptcy, such as IndyMac’s.
  • “There are five sets of eyes on brokerage firms” to make sure shares do not go missing before SIPC takes over a failed broker. They are internal auditors, external auditors, state regulators, self-regulatory bodies, and the Securities and Exchange Commission. Harbeck did not mention that BWFA provides a sixth set of eyes to protect you!
  • While SIPC gets involved in, on average, eight proceedings a year on behalf of investors who have suffered lost securities, many of them were in the 1970s and 1980s. That number has fallen to just two proceedings in the last two years.


SIPC has been very successful. More than 99 percent of eligible investors making claims to SIPC have recovered their shares. From its creation by Congress in 1970 through December 2007, SIPC advanced $508 million in order to make possible the recovery of $15.7 billion in assets for an estimated 625,000 investors.

Furthermore, TD Ameritrade, which is the custodian for investments managed by BWFA, also supplements SIPC coverage with additional private insurance. The insurance provides total coverage up to $150 million per client with a limit of $250 million for all clients of TD Ameritrade.

At BWFA, we believe that the combination of SIPC coverage and additional insurance provided by TD Ameritrade gives our investments a high level of confidence and security.