Is Your Money Safe? Checking Out Your Online Broker
When you’re about to hand over your life’s savings to a broker, especially one with no offices, you want to make sure that it’s a reputable outfit. As investors in the Bernie Madoff investment scam learned the hard way, it’s up to you to make sure that you’re dealing with a legitimate broker. Unlike bank savings accounts, brokerages have no government guarantee. But you still have some safeguards.
Your first layer of protection comes from the Securities Investor Protection Corporation (SIPC). The SIPC was formed by Congress in 1970 to protect investors by promising to help recover and return cash to investors if their brokerage closes due to bankruptcy. If cash or stock mysteriously goes missing in your account, the SIPC might help you recover the funds.
The SIPC has provided $2.3 billion in funds and helped in the recovery of $134 billion in assets for 773,000 investors since it was formed in 1970 through 2014. If a brokerage fails and doesn’t have enough money to repay customers, the SIPC covers up to $500,000 per customer.
You should always check whether a broker is an SIPC member. In addition, some brokers carry additional insurance to protect customer assets beyond $500,000.
Next, make sure that your broker has the appropriate approval from regulatory bodies to buy and sell investments. You wouldn’t let someone who isn’t a doctor remove your appendix, right? You should also make sure that your broker is registered to be a broker.
You can do this using the Financial Industry Regulatory Authority (FINRA) BrokerCheck. BrokerCheck tells you whether the brokerage is registered with this important regulatory body and whether the registration is current.
Each state also keeps tabs on brokerages serving customers in its region. State regulators are coordinated by the North American Securities Administrators Association, which provides access to the public.
Lastly, you want to know whether the broker you’re considering has been disciplined recently. You can access this info from FINRA’s BrokerCheck by downloading the broker’s regulatory report and checking the section that spells out disciplinary action. Information is also available from a system maintained by the New York Stock Exchange’s Disciplinary Action database.
And the ultimate watchdog on Wall Street is the U.S. Securities and Exchange Commission, which maintains records on brokers and provides tips to investors looking to check out their brokers. The SEC leaves tracking routine disciplinary actions to FINRA, but does provide information when it pursues legal action against brokers. You can track SEC’s legal actions by using the search function.