If My Brokerage Fails, Are My Securities Safe?

If My Brokerage Fails, Are My Securities Safe?

As an investor, you may have concerns about the security of your cash and securities in the event of a brokerage firm failure. In fact, you may have been asking yourself, “If my brokerage fails, are my cash and securities safe?” And the short answer, in our opinion, is “Yes.”

The first and most important reason for this is that you own the securities in your account and they are, therefore, required to be segregated from the other activities of the bank or brokerage where your money is housed. In other words, unlike deposits, which banks can use to make loans or buy securities, the banks and brokerages are not allowed to use your securities as collateral for loans or purchases of securities. This includes cash, unless you have an agreement with your brokerage to sweep the cash into affiliated bank accounts. However, even in this case, as long as you are below the $250,000 limit on cash per bank, the government guarantees that money. And, in some cases, the brokerage will sweep the cash into multiple affiliated banks to make sure all the money is protected by the U.S. government’s deposit guarantee.

Second, regulators regularly examine all the banks, making sure they are adhering to the rules regarding brokerage segregation.

Third, brokerage accounts are insured up to $500,000 (including up to $250,000 in cash) by the Securities Investor Protection Corporation (SIPC), a federally mandated, non-profit, member-funded corporation that all the big brokerages are required to join and fund. Fourth, many big brokerage firms buy additional private insurance that further protects their clients’ brokerage accounts.

Lastly, given the size of the large brokerage firms, with many managing trillions of dollars of investor money, we believe the government likely views these entities as too big to fail and therefore would take steps to prevent them from going bankrupt, probably through a combination of dilutive capital injections, facilitations of mergers, and liquidity backstops. In summary, we believe your brokerage is unlikely to fail and that, even if it does, your account is highly likely to be fully intact and eventually available to move to another brokerage firm.