Protection for Investors: How It Works

Safety above all else.

That seems to be the prevailing thought among investors large and small as the nation's financial crisis continues to unfold.

As banks fail, Wall Street firms collapse and money market funds teeter, investors and depositors alike want assurances that their funds are secure in the event the financial services firm they to do business with goes under.

Most savers understand how the insurance on their bank or credit union deposits work. They know the Federal Deposit Insurance Corporation or the National Credit Union Administration insure their deposits up to $100,000 in most cases, even if they don't know the intricacies of how the limits apply to various account types.

But there's another form of protection that remains a mystery to many investors even though they may have enjoyed its protection for decades.

I'm talking about the protection provided to investment accounts by the Securities Investors Protection Corp., an industry nonprofit created by Congress in 1970.

The SIPC serves as the first line of defense for investors in the event a brokerage firm fails or securities are missing from a customer's account.

The organization currently is overseeing the transfer of more than 135,000 client accounts to either Barclays Capital, which is buying parts of the Lehman Brothers business, or Neuberger Berman, a healthy Lehman Brothers subsidiary slated to be sold to a pair of private equity firms.

It could be called on to oversee more liquidations if the current crisis worsens.

By law, every brokerage firm operating is required to be an SIPC member, and that means if yours is not, you should take your business elsewhere right away.

Firms that are members typically display on their account statements, Web sites and other advertising one of the following phrases: "MEMBER SECURITIES INVESTORS PROTECTION CORPORATION" or "Member SIPC."

You'll find that on materials for the big Wall Street brokerages such as Morgan Stanley and Smith Barney, online operations such as E*Trade and TradeKing, and even small independent broker-dealers you've never heard of.

Once you get past confirming membership, the first thing to know about SIPC coverage is that it differs in significant ways from the FDIC coverage that insures bank deposits. Not every loss, nor every investor, is covered by SIPC.

First, the SIPC protects brokerage accounts up to $500,000, including up to $100,000 for cash held in the account. Those limits apply per "legal customer," meaning if you maintain multiple accounts at one firm -- say an individual account, a joint account and an IRA -- then your personal limit will exceed the basic $500,000 limit.

In truth, SIPC protection is the bare minimum protection brokerage customers should expect. Many brokerage firms also carry extra insurance to protect clients over and above the $500,000 limit. In some cases, the coverage amount may be unlimited.

After the SIPC coverage limit, a second critical difference from FDIC insurance is what SIPC covers -- and what it does not.

With respect to stocks, mutual fund shares and other securities, SIPC coverage protects only the shares or notes themselves, not their underlying values. That means if your shares are lost, SIPC will replace them. If your securities are stolen by a broker, SIPC will cover the theft.

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