I personally hope the stock markets stabilize soon. But if they don’t, if your brokerage house goes under, all is not lost.

I was working with one of our writers today on another project and she pointed me to FINRA’s educational Web site. They have an interesting piece about what to do and how you’re protected if your brokerage fails.

The Securities Investor Protection Corp (SIPC) will reimburse you up to $500,000 per account if your brokerage fails, including up to $100,000 in cash. If you have multiple accounts at the same firm, each one will be treated as a separate loss.

They won’t reimburse:

  • ordinary market losses (like those many of us have felt since the fall);
  • investments in commodity futures, fixed annuities, currency, hedge funds or investment contracts (such as limited partnerships) that are not registered with the SEC; and
  • accounts of partners, directors, officers or anyone with a significant beneficial ownership in the failed firm.

When faced with a failing brokerage firm, FINRA’s first tip is not to panic. I’m a fan of taking some deep breaths myself.

If your brokerage fails you should contact the brokerage for instructions on how to proceed. It’s also possible they will notify you with instructions.

Most often, your account will be transferred to whoever buys the failed firm or to a new SIPC-insured firm that the government finds to take over the accounts.

To protect yourself from such a situation, you should look up any broker you’re considering in FINRA’s BrokerCheck (http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm) – hopefully before you begin investing there.

Note: FINRA is the Financial Industry Regulatory Authority.

April 9, 2009