How Safe Is Your Brokerage Account?

WHENEVER a stock brokerage firm fails, investors start wondering "What happens if my broker goes broke?"

Despite the market frenzy in 1987, only four brokerage firms went under. In 1988, five did. Their total is the lowest two year combination in the last 18 years. So it is very unlikely that yours will collapse. But if it does, your stocks, bonds and money fund shares are protected by the Securities Investor Protection Corporation against losses up to $500,000. This government chartered private corporation nicknamed "Sipic" oversees liquidations of brokerages and restores securities to clients. To do this, SIPC has more than a $400 million fund raised by assessing the brokerage firms. It also can tap a $1 billion line of credit at the U.S. Treasury, and a $500 million credit line with private banks.

But commodity futures contracts are not covered by SIPC, nor is cash left with a broker specifically to earn interest. Options are covered, but when a firm fails, they are closed out as of the date SIPC files for trusteeship in court.

One problem is that providing customers with access to their accounts usually takes from one to six months. In the meantime, customers cannot sell any securities in their accounts. Customers first receive any securities held in their own names, If their stocks or bonds are in the firm's name that is, in "street name" clients will be given a prorated share of any street name securities that the firm can produce. SIPC then will make up the difference between what the clients got and what they are owed.

If you are worried about your broker's financial health, there are signs of trouble to watch for, Does it take a long time for your broker to execute your orders to buy and sell? Do confirmation slips fail to square with transactions? Are your monthly statements inaccurate? Problems like these suggest the firm could be having back office snarls, and it might be time to move your account.

Even if you are confident of your broker's stability, you should take steps to protect yourself. Certainly, don't hold more than $500,000 worth of securities at any single brokerage house. If you are really skittish, you can hold securities in your name instead of the firm's name or even keep the certificates at home or in a safe deposit box.

In a liquidation, you will get the shares in your name back faster than shares in a street name. And you will have them back in no time if they never leave your possession.