What happens to your investments if the brokerage house (etrade) claims bankruptcy?

Question

There is a lot of doom and gloom out there when it comes to the financial industry. What do I do to protect myself? I have my portfolio at etrade and many are saying they might go bankrupt. What happens to the shares I own if that happens? Is any place safe?

Answer 1

I have five accounts with Etrade and am also concerned. My first instinct today was to call Ameritrade and initiate account transfers, but I thought better of it.

If you are within the FDIC limit for cash -- 100k or 250k in IRA's, you are okay and secure.

If you have less than 500k in stocks and mutual funds - you are covered by SIPC. They do not insure you, but make sure that you keep the same shares you had before the bankruptcy. The problem is if the stocks are worth nothing by the time your shares are recovered. Mutual funds are no issue - because you own those outright. It's stocks and ETF's that are more of an issue. These are held basically by the brokerage house and shares would need to be doled out to you by the SIPC.

I am unclear about ETF's, so am going to try to call SIPC tomorrow. I am sure their phones will be off the hook.

You are probably okay, so don't worry to much. Just be sure not to own any Etrade owned funds - just to be safe.

I went ahead and liquidated ETRUX. It's performed below the Russell 2000 since 2005 and needed to be dumped anyway.

I would stay put for now.

Answer 2

To ease your concerns, no broker has the right to access your funds for its own purposes, nor can it commingle your funds with theirs. This is federal law and state law. Secondly, E-Trade took a market hit of 50%, meaning its share value went down, no impact on its financials, that was already taken into account.
A valid reason for leaving them is if you are afraid that service will be disrupted because they may have to cut back costs to stay afloat. Or if you don't trust their judgement for future handling of your account (e g might they get desperate and do something illegal?). Then do it, but in an orderly and rational manner.

Answer 3

Unless you have more than $600,000 in e-trade, the Federal Government guarantees your account, $100,000 in cash and $500,000 in securities, further they carry additional insurance up to $20,000,000 through private insurers.

Also, it does not appear they are going to go bankrupt so don't worry.

Answer 4

The clarification from FDIC on this matter is very clear

Your money which is not considered as deposits(that includes things such as stocks) are NOT covered by FDIC

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