If your brokerage firm goes out of business and is a member of the Securities Investor
Protection Corporation (SIPC), then your cash and securities held by the brokerage firm may be
protected up to $500,000, including a $250,000 limit for cash. Some firms obtain private insurance policies to
provide protection beyond SIPC limits. When a SIPC member becomes insolvent, SIPC will ask a court to appoint a
trustee to supervise the firm's liquidation and to process investors' claims.
SIPC covers most types of securities, such as stocks, bonds, and mutual funds. But SIPC does not
protect you against losses caused by a decline in the market value of your securities. And it does not
provide protection for investment contracts not registered with the SEC.
One of the most frequent - and most difficult - issues a SIPC trustee must resolve when a firm goes out of
business involves coverage for unauthorized transactions. To qualify for SIPC coverage on an unauthorized trade, the
investor must demonstrate that the trade was, in fact, unauthorized. That's why it is so important
that you send a complaint in writing to your broker as soon as you become aware of an unauthorized
transaction. That written complaint may be the only way to prove that you complained to the firm about
unauthorized transactions. If you do nothing - or if your broker persuades you to "ratify" the trade or agree to
it after the fact - you will have a difficult time proving that you did not authorize the trade. Always read
your account statements carefully and complain promptly in writing about unauthorized transactions.
Another coverage problem may occur when investors place their cash or securities in the hands of a non-SIPC
member. This sometimes happens when the firm you do business with doesn't actually execute buy and sell orders but
instead uses another firm — known as a "clearing firm" — to process its trades. Always make sure that the
brokerage firm and its clearing firm are members of SIPC. Firms are required by law to tell you if they're
not. You can also search SIPC's Membership Database or contact its Membership Department at the address below to find
out whether a firm is a member of SIPC:
You can also protect yourself by making payments only to firms that are members of SIPC. Never make a check out
to a sales representative, and never send checks to an address different from the business address of the brokerage
firm or a designated address listed in the prospectus.
Note: In this article I have integrated the
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Jeroen Snoeks is the founder of UndervaluedEquity.com, a website for
investors passionate about investing in undervalued stocks. ThroughUndervaluedEquity.com, he shares his
experience and knowledge and will soon reveal his personal stock portfolio.