What Happens If Your Broker Goes Out of Business?

There are a lot of risks involved with investing your money. While some people may never consider all the potential risks they are taking with their future nest egg, one common question people do ponder is: “What happens if my broker goes out of business?” It’s a wise question to consider. What happens to your life savings if your broker of choice goes bankrupt and disappears?


Photo by Patrick Denker via Flickr

Brokerage Risks: Two Scenarios

There are typically two situations where something can go wrong with your brokerage firm.

Brokerage Business Goes Under

The first scenario involves your brokerage company going under and being unable to continue normal business operations. In most cases the brokerage firm will not go completely out of business. When a brokerage hits hard times they are usually bought out by a larger firm who will continue to handle the affairs of the business after the buyout or merger. In this situation your paperwork and fees may change progressively during the transition period but overall your money will remain safe.

Broker Fraud Can Cost You

The second scenario may be a bit more concerning. There have been newsworthy incidents of brokerage agencies or members of the firm getting caught with their hand in the cookie jar. Broker fraud is a serious issue and fraudulent practices can lead to the closing of a company outright.

In this scenario it is important to note that legitimate brokerage accounts have the protection of Securities Investor Protection Corporation. SIPC is federal insurance similar to FDIC deposit insurance. SIPC will cover lost securities due to fraudulent practices of any member of the Financial Industry Regulatory Authority. FINRA is the industry association which regulates the brokerage firms and the employees working within.

In the event your brokerage firm goes under it is obviously too late to check into the FINRA status of a brokerage house. You can only hope your firm is a member. However, if you have not yet sought out a broker’s help it is in your best interest to check for this membership and verify the broker is legitimate.

If you are unsure of the status of your brokerage firm or one you are researching you can ask outright about their affiliation with FINRA or look up the company on FINRA’s website. You should also find indication of SIPC insurance on account statements and even the promotional materials used by the company.

What to Do After Brokerage Failure

If you hear news that your brokerage firm has failed it is in your best interest to contact them directly for the answer. You also need to ask them about what the protocol will be for your accounts moving forward. In some situations, you may be restricted in trading and transferring your accounts during the process of the closure. The firm should be able to provide you with detailed instructions for moving on. You need to follow through with what they have directed you to do.

If SIPC protection comes into play, account holders will receive a letter that confirms the closing down of your brokerage firm. The correspondence will also include a notice that a ‘Direct Payment Procedure’ will begin. There will be some information you need to gather together to ensure you can provide all the necessary information concerning your accounts for the procedure.

Here is a list of usual items you will need to locate as well as specific data as requested:

  • Find all of the information you have concerning your account including monthly/quarterly statements, trade confirmations, and any other records pertaining to your brokerage account.
  • Find your cancelled checks and the written correspondence sent between you and the firm. Those electronic trade confirmations your broker asks you to print out when you invest through their website are important.
  • Double-check your account statements from the brokerage firm and make sure the information is accurate, especially where cash deposits are concerned.
  • Double-check your account statements to be certain there are no unauthorized transactions listed.
  • Complete all forms necessary as provided by SIPC. Make sure they are filled out properly and in a timely manner. Claims that are filed too late will likely not be taken care of because no one under federal law has the authority to approve late claims.

In the event you have been made aware of your brokerage firm going under but have received no communication from the company, you should contact the SIPC immediately to find out how to proceed forward.

This article was featured in the Cavalcade of Risk at Chatswood Moneyblog.

About the Author

By , on Mar 23, 2011
Tisha Tolar
Tisha Tolar is a co-owner of Trifecta Strategies, LLC and the author of Gen X. When she is not busy being a fiction writer, she writes personal finance articles for several web sites, including Moolanomy.com.

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