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SIPC will protect you against fraud, up to whatever their level currently is.  That is fraud committed by the brokerage.  Think Bernie Madoff.

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I wouldn't bet on that.  See this article:
http://market-ticker.org/akcs-www?post=229401

So in the case of Stanford and Madoff what happened is that we had a crook that stole the funds.  If you get a statement from a broker that says you own 100 shares of IBM and when the time comes there really aren't 100 shares of IBM being held in street name for your benefit, the SIPC is supposed to cover that.

That's the entire point of the SIPC.

But what they argued, successfully in court, is that a Ponzi Scheme unknown to the customer is not "missing securities."

In other words theft is only theft when they say it is.



Also, look what happened at MF Global.  MF Global was mostly a commodities/futures broker, but when they filed for bankruptcy, they did so as a securities (i.e.) broker instead of a futures broker.

The other part of what is happening is due to the Bankruptcy Reform Act of 2005.  One of the things this Act did was to put "derivatives" in front of depositors in terms of who gets the bank's equity.  With trillions of dollars of derivatives at banks, depositors will not stand a chance at getting anything from whatever is left of a bank's funds at bankruptcy.  I'm not sure, but I believe there is a similar issue with at stock brokers.

I am not giving any financial advice, just telling you what I did.  To give myself the best chance of keeping what is in my account if my brokerage goes under, I've registered my brokerage account as a "Cash" account, instead of a "Margin" account.  It used to be a choice when opening a brokerage account, but I think that these days, when opening an account, it is automatically designated as a "Margin" account.   "Margin" accounts allow you to borrow money to buy stocks with, or to do short selling, or to buy and sell stock options.  In addition, it allows the brokerage company to borrow the shares of stock and other securities in your account for their own purposes (like using it as collateral to borrow money or other assets, for example).  This is where the "owner" of a margin account will likely get into trouble if the brokerage goes under....they won't be able to return your shares because they won't have them...they have been used as collateral, or hypothecated/re-hypothecated away.  


So that takes care of the stocks and corporate bonds (i.e., they will be gone).  What about the cash and treasury bonds in the brokerage accounts?  They will disappear also.  They will be taken by other creditors of the brokerage.  This is part of what happened at MF Global, and I believe the creditors got away with it because of the Bankruptcy Reform Act of 2005.

That brings us to how your brokerage account is designated at your broker: "Margin" account vs "Cash" account.  Maybe, and this is a big maybe, to avoid the above issues, when I opened my most recent brokerage account a few years ago, I designated my brokerage account as a "Cash" account. When I opened my first brokerage account 25 years ago, there was a clearly marked section on the application that gave this choice. These days, I get the impression that a new brokerage account is automatically designated as "Margin" account.  A call to customer service was needed to make sure the account is a "Cash" account.  My broker tried to fool me by just taking away my "margin" permission (i.e., take away permission for me to borrow cash to buy more stocks, using existing stocks in my account as collateral) on my margin account.  But that is not the same thing.  Not only do I not want to borrow on margin, but the whole account needs to be designated as a "Cash" account; i.e., an account where I am NOT giving the broker any permission to borrow from, or use, for its own purposes.