Federal officials say they engineered the rescue of Bear Stearns because its failure could have undermined the nation's financial system. But if you're a client of Bear or another tottering brokerage, you likely have a more mundane matter on your mind: Is your money safe?
The answer is, almost certainly yes.
To protect investors, federal law requires that brokers segregate customer assets from their own. When bankruptcy appears inevitable, the Securities Investor Protection Corp. steps in. In most cases, it transfers customer accounts to a healthy brokerage before a sick one declares bankruptcy so that investors retain control over their assets.
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If the brokerage is already insolvent, SIPC puts bankruptcy proceedings on hold while it replaces securities or other assets missing from clients' accounts. It covers losses of up to $500,000 per account, including up to $100,000 in cash. Many brokers also carry supplemental insurance.
Don't expect SIPC to protect you against fraud, inappropriate investment decisions or declines in the value of your stocks, bonds and mutual funds, says SIPC president Stephen Harbeck. "We don't bail out investors from trading losses."
Fund concerns. What if you own a broker-sponsored mutual fund or exchange-traded fund? No sweat. Funds are set up as independent legal entities, and money in them is kept separate from brokers' assets. If, say, UBS or Morgan Stanley were to collapse, fund directors would just hire new advisers.
Broker-sponsored exchange-traded notes are another issue. ETNs, such as the Bear Stearns-sponsored BearLinx Alerian MLP Select Index ETN (symbol BSR), don't actually invest in assets. Rather, they are unsecured debts, with the issuer pledging to repay shareholders based on how the index fares. If an ETN's issuer goes belly-up, holders will have to stand in line with other creditors and may or may not get back their full investment.