You know that the FDIC protects your bank deposits from bank failures. You may also know that the SIPC (the Securities Investor Protection Corporation) protects your brokerage accounts from brokerage failures. (Yay!) The SIPC doesn't cover as much as you think, though, which is why there's movement afoot to broaden its power.
If your brokerage goes out of business and it was an SIPC member, your losses are covered by up to $500,000 (and up to $250,000 for cash in your account). For many people, that's not enough, which is why some good brokerages offer their customers additional protection. Schwab (Nasdaq: SCHW ) and E*TRADE (Nasdaq: ETFC ) , for example, offer coverage into the millions, through Lloyds (NYSE: LYG ) and other London insurers.
A broader scope
That $500,000 limit is being questioned, as it hasn't been increased since the agency's founding in 1970. If it's raised, some insurers might lose money, while brokerages may save money. But more interesting is this: The SIPC is being asked to protect investors not just from brokerage failures, but also from fraud. The Securities and Exchange Commission recently told the SIPC to cover those who lost money in a massive fraud allegedly conducted by financier R. Allen Stanford. This is unusual, and the SIPC hasn't even agreed to do so. It will issue its decision in September, and the SEC is ready to take the matter to court.
This might turn into an interesting slippery slope. For instance, there have been allegations that wireless-broadband provider Clearwire (Nasdaq: CLWR ) engaged in fraud to boost its income. With its stock already down some 40% in the past few months and the potential for more declines on any negative findings, investors may welcome relief from the SIPC. Then there are the numerous Chinese small caps that have been accused of fraud and other wrongdoing. If the SIPC's protections are ever extended to cover investor losses resulting from company fraud, will they also extend to fraud abroad?
The investing arena will be a lovelier place with such protections, but don't hold your breath. There may be an initial incremental broadening, but that will come at a cost. And further widening would be costlier still, in an environment where the government is looking to trim spending.
In the meantime, remember that if your brokerage fails, the SIPC has your back -- to a degree. But if a stock fails you, you're usually on your own. Still, it can't hurt to find and use the best brokerage you can find, for maximum protection.