Asset protection when your brokerage, bank or pension fails

As some of Wall Street's most venerable firms topple like dominos, even the most hardened individuals are wondering if their assets are adequately protected.

This week the markets opened with the news that investment bank Merrill Lynch was scooped up by Bank of America, ending its 94-year reign as one of the world's most recognized brokerage houses. Lehman Brothers, another investment bank, announced its filing for Chapter 11 bankruptcy. This follows the collapse of other financial institutions, most notably Bear Sterns, bought up last spring by J.P. Morgan Chase.

Officials and other experts were quick to assure investors that money is safe.

Insurance plan
Investors do get some measure of protection when the big banks and brokerages fall, and also if their pensions get terminated.

"People don't need to be panicking. Unless you've had some massive fraud and conversion, and the brokerage is stealing money -- and there's no evidence of that -- the funds should still be good," says Mark Maddox, former securities commissioner for the state of Indiana and investor attorney. "Consumers don't need to worry; they don't have to stand in line and draw assets from brokerage accounts."

In a statement, Lehman said that none of its broker-dealer subsidiaries or other subsidiaries are included in the bankruptcy filing. Furthermore, it is "exploring the sale of its broker-dealer operations, which continue to operate." Its customers, including those of Lehman and Neuberger Berman, can "continue to trade or take other actions with respect to their accounts," Lehman said.

Meanwhile, the Securities and Exchange Commission in a statement said Lehman customers "will benefit from their extensive protections under SEC rules, including segregation of customer securities and cash as well as insurance by the Securities Investor Protection Corporation (SIPC)."

That's all well and good. But how do the SIPC and other agencies protect you? As it turns out, there are safety nets to catch you, but how much protection you have depends largely on the kind of assets you own and where you hold them, be they certificates of deposit, a pension plan or a checking account.

Security for brokerage accounts 

SIPC is funded by private "member" firms. Brokerage losses, including 401(k) and other retirement plans held at, say, Fidelity or Vanguard, are protected by SIPC up to $500,000 per person, per account. Of that amount, up to $100,000 cash losses are included. If you have, say, a retirement fund and a "rainy day" fund at a brokerage, each of those separate accounts would be protected up to the $500,000 threshold, says SIPC President Stephen Harbeck.

To qualify for SIPC protection, your brokerage must be a member. Most firms are. In fact, firms that are registered brokerages with the Securities and Exchange Commission "are virtually required to become members of SIPC," says Harbeck.

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