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Protections in place

Every business needs one critical thing besides cash: insurance. It not only protects the principals but also the clients. If you’re worried about your broker, figuring out their insurance situation is the logical place to start.

The good news is that brokerage firms must submit to many regulations and agencies to reduce the risk of failure. The United States Securities and Exchange Commission (SEC) also has a Customer Protection Rule. This forces firms to separate firm assets from client assets, on risk of committing fraud by accessing client accounts. The Financial Industry Regulatory Authority (FINRA) also watches closely to make sure brokers follow these rules.

The Securities Investor Protection Corp (SIPC) provides the insurance we spoke about earlier. It helps investors transfer accounts and protect assets should a firm close up shop. This can protect up to $500,000 in cash and securities. Many firms also carry insurance on top of that in the event of financial failure.

When a company undergoes liquidation, the SIPC supervises the process. Meanwhile, the SIPC may also name another brokerage firm that would inherit the clients, with accounts transferred after they are notified.

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How likely is all this?

Not likely, it turns out: about as rare as American banks going under. Even with the three banks that have failed, there are about 4,844 banks across America, according to Money Crashers. (To be clear, that’s banks and not branches, which number in the tens of thousands.)

Put in simple terms, we’ve just seen 1 in about 1,600 banks go down. If the headlines make it seem more like 1 in 16, now you know why: banks that stay solvent don’t make for sexy headlines.

When a brokerage goes bankrupt, it’s often because they’re mediocre to begin with — they take on unnecessary risk, succumb to mismanagement, or get hobbled by a parent company. Think back to when Bear Stearns and Lehman Brothers went under, thanks to overexposure to the subprime mortgage market.

As the SEC later reported, Bear Stearns had a large amount of exposure to mortgage-backed securities. It had “less capital and was less diversified” than its peers, which resulted in lower liquidity. In this case, JPMorgan Chase bought Bear Stearns; in other instances, accounts are transferred to a new firm, as mentioned above.

So what can you do? You’ll want to stop reading the news and start doing research. Make sure your mutual fund company or broker offers SIPC protection and a diverse portfolio and keep all your records in order. The combination of critical information and savvy preparation will ensure secured funds and sound sleep.

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About the Author

Amy Legate-Wolfe

Amy Legate-Wolfe

Freelance contributor

Amy Legate-Wolfe is an experienced personal finance writer and journalist. She has a Bachelor of Arts in History from the University of Toronto, a Freelance Writing Certificate in Journalism from the University of Toronto Schools, and a Master of Arts in Journalism from Western University. Amy has worked for Huffington Post,, CBC, Motley Fool Canada, and Financial Post. She is skilled at analyzing trends and creating content for digital and print platforms. In her free time, Amy enjoys reading and watching British dramas on BritBox. She is a mother and dog-mom to a Wheaten Terrier.

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