When a brokerage goes bankrupt

Factual Questions
1

What happens to the stocks I own?

Theoretical question here that my friend asked me this morning. He’s looking to start investing his money and was wondering what would happen if the brokerage went belly-up.

For the sake of keeping things simple, let’s assume:

  1. This is all within the US. I live in the US, the brokerage is in the US, and all the stocks I own are traded on American exchanges.
  2. The brokerage was honest. They went bankrupt because of bad management decisions, market forces, etc. They weren’t a fly-by-night operation that took everyone’s money and ran.
  3. I’m a buy-and-hold investor, and not someone who makes a dozen trades a day.

So, if I own 100 shares of IBM that I purchased a couple of years ago through BTrade, and I don’t have the certificates for the shares, who do I turn to in order to prove that those shares are mine if BTrade collapses?

2

Every registered broker-dealer must be a member of the Securities Investor Protection Corporation, or SIPC, unless its principal business is conducted outside of the United States or consists exclusively of the sale or distribution of investment company shares, variable annuities, or insurance. Each SIPC member must pay an annual fee to SIPC. SIPC insures that its members’ customers receive back their cash and securities in the event of a member’s liquidation, up to $500,000 per customer for cash and securities. (Claims for cash are limited to $100,000.) For further information, contact SIPC, 805 15th St., NW, Suite 800, Washington, DC 20005. Telephone: (202) 371-8300, fax: (202) 371-6728, or visit SIPC’s website at www.sipc.org.

This is taken from the SEC’s broker/dealer compliance guide found online at: SEC.gov | Guide to Broker-Dealer Registration

3

Thank you for your informative reply, I figured there had to be a commonsense answer right under my nose. I’ll pass this on to my friend next time I see him.

4

The other thing to know is that a bankrupt broker’s assets are divided into two pools, customer securities and other assets. (Well, there’s a small third pool, customer-registered certificates that the broker merely holds in its vault, those go directly to the customers.) Customers get priority claim to the customer securities and, if there are enough of them, the SIPC limits never come into play. In other words, customers of an honest broker generally don’t have to worry about loss of their securities, although there can be a delay before they can start trading again. In a volatile market, that can be painful, and SIPC doesn’t cover those losses at all.