Brokerage Account: Is Your Money Safe In One?

Lehman's gone, Merrill's been swallowed. Goldman and Morgan Stanley are trying to calm everyone down.

What about your money?

Even as the money in your low-interest bearing savings account is probably making you more this week than the money in your trading account, the money in your brokerage account is actually probably safer from an insurance perspective.

I spoke today with Stephen Harbeck, President of the Securities Investors Protection Corporation, SIPC, a non-governmental entity which insures brokerage accounts the way the FDIC insures bank accounts. (By the way, check if your bank accounts are fully insured by using the new FDIC website.)

While the FDIC protects up to $100,000 per individual depositor and $250,000 for IRAs, the SIPC insures up to $500,000 in missing brokerage funds. Nearly every brokerage registered with the SEC has to be a member of SIPC.

Most likely, says Harbeck, you won't lose a dime. That's because brokerages have to prove to regulators on a weekly basis "that customers' assets have been properly segregated from the broker's own assets and the broker's business." Lehman'sproblems should not be your problems. Everything should still be in your account, and, in fact, you should continue to have uninterrupted access to it.

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But, Harbeck says, "If customer assets are missing for any reason, misappropriation...each customer gets a pro rata share of what is, in fact, found, and the SIPC funds (up to $500,000 per customer) are available to top off any missing customer funds."

$100,000 of that can be given to you in cash.

So, what exactly does the SIPC cover? Most securities instruments--stocks, bonds, mutual funds, variable annuities, cash. What isn't covered? "We don't cover most commodities transactions, and we don't cover most future transactions, we don't cover currency transactions," Harbeck says. "Hedge funds tend to be done as investment contracts rather than registered securities, and so, therefore, if you deposited money to purchase a hedge fund...there would be no coverage." He also says there is no coverage for insurance instruments like fixed annuities.

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Many brokerages also buy excess insurance above what SIPC provides, and here is where you can find participants in that coverage.

Harbeck's best advice is that you check your broker statements, and if you disagree with what you see, say something. "If something does go wrong with your brokerage firm, and you haven't gone on record in writing that you object to the contents, what you're going to get is what the records of the brokerage firms reflect," says Harbeck.

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Does the system work? Harbeck says in its 38 years, only 350 people have not been made "100 percent whole." There are occasional delays in transferring accounts, making some funds inaccessible to customers, the longest delay being a week after a brokerage went defunct because of 9/11.

"The regulatory system really is very difficult to circumvent," says Harbeck. "It works well. That's why, for example, SIPC did not have to take action with respect to Bear Stearns. All the customer assets were, in fact, present and accounted for."

The first video clip is more of my interview with Harbeck.

Second video: Shares of Washington Mutual are down today, on talk that it could be yet another victim of the credit crunch.

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