Investors unnerved by last weeks bankruptcy filing by Lehman Brother Holding and by Merrill Lynch’s abrupt sale to Bank of America can cross at least one worry off their list.
In general brokerage firms are required to keep clients assets, including 401k and other retirement plans, separate from their own holding. The assets of mutual funds managed by the firm are also kept separate. (Of course, you still bear the risk of securities declining in market value).
When a brokerage firm fails, customer assets are typically transferred to another brokerage firm in their entirety; investors then can choose to move them to another brokerage firm or remove the funds.
There is a safety net that will help protect your assets it is called Protecting Customer Accounts (SIPC). The Securities Investor protection Act established procedures for the protection of customer’s funds and securities in the event a broker-dealer becomes Bankrupt.
SIPC provides coverage for each customer up to a maximum of $500,000 of which no more than $100,000 may be for cash losses. If a customer has both cash and margin accounts, all their accounts are combined to determine the maximum amount of coverage that the investor receives. If the customer has a joint account with their spouse, the joint account is covered separately.
SIPC coverage applies to public customers only. It does not apply to other broker-dealers who have securities at the failed broker-dealer. If a broker-dealer fails, the federal courts appoint a trustee to distribute funds and securities to customers. The trustee is required to notify customers of the broker-dealer that it is bankrupt and handle its liquidation in an orderly fashion.
In the case of Lehman Brothers, only the holding company declared bankruptcy. Many of Lehman’s healthy operations are being acquired by Barclay’s. The SIPC last week stepped in to assist in the transfer of Lehman’s customer accounts.
For more information on SIPC you can to go www.SIPC.org.
Dee Asay
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