What happens when an online brokerage goes bankrupt?

It seems like all the other online companies are biting it, but their bankruptcies don’t really have any effect on anyone. What about the brokerages?

(In particular, I’m concerned about the uninvested cash that’s sitting in my account. Is it “safe”?)

It depends.

If the brokerage is a member of the Securities Investor Protection Corporation (SIPC) then your funds are protected up to $500,000, with a limit of $100,000 for cash balances. SIPC members will usually display their membership on all advertisements, brchures, etc. Since most SIPC members are also members of the National Securities Dealers Association (NASD) you may see it rendered “Member NASD/SIPC”. Some brokerage firms offer separate protection over and above the SIPC limits, usually through a surety bond.

If the brokerage does not offer the protections above, then you’re on your own with other claiments in bankruptcy court.

Most brokerages are members of the Security Investors Protection Corporation (SIPC). It works pretty much like the FDIC – if the brokerage goes under, investors get their money back up to a certain limit.

You can find out information at http://www.sipc.org

Just be sure your broker says he’s an SIPC member.