When SIPC Can Help Investors

The Securities Investor Protection Corporation is the brokerage industry's safety net, but it isn't the savior you might think.

SIPC, created in 1970 after a string of Wall Street failures left investors in the lurch, covers you in the event that a brokerage house collapses. It will see to it that you get your stocks, bonds and cash back. It uses its treasury, built with industry contributions, to make up for any assets it can't recover from the failed firm.

Be aware, though, that there are limits to the coverage: The maximum reimbursement is $500,000 for each account you hold. The cash limit is $100,000.

Sound like federal deposit insurance? Not quite. SIPC's purpose is the same, but its rules are more complex and more restrictive.

While bank and savings-and-loan depositors typically get their money back in days, it can take months even years for investors to retrieve their holdings, depending on how big the mess is. Sometimes, SIPC can find another firm to take over a troubled firm's accounts, as it did in aiding the 1987 takeover of E.F. Hutton by Shearson & Co. But mostly, the only recourse is a SIPC bailout.

That's where the hassle comes in. Quarrels break out when investors look at the fine print: SIPC won't indemnify you if the broker cheated you, say, by buying stocks you didn't order or by failing to sell stocks when you told him to.

That's a breach of contract, SIPC argues, and outside the agency's congressionally mandated custodial scope. Of course, investors are free to take a rocky route and sue the firm, getting in line with other creditors.

In short, the SIPC rules have loopholes. Others: Many limited partnerships aren't covered, nor are gold, silver and other commodity investments. And SIPC will likely shut the door on you if it can show that you had a longstanding cash balance in your account at the time your broker collapsed. Its reason: Cash should be put to work in investments or deposited elsewhere.

There's solace in the rarity of brokerage failures. SIPC intervened in only nine cases last year, well below the busy pace when the organization began.

More information about brokerage insurance may be obtained from the Securities Investor Protection Corporation Web site.