What happens to securities if broker becomes bankrupt

[Ken_SF]

I am wondering how safe securities are if held by a broker with SIPC insurance should the broker go bankrupt.

For sake of example say I own T-Bills in a brokerage account. I realize the securities (in this case T-Bills) are backed up by the government but is the government going to make me whole or the broker whole? Would I have to rely on SIPC insurance to become whole or would the securities eschew to me independent of the bankruptcy?

It can be argued that the assets were purchased by the broker and I have an interest in a broker's account, not the actual securities. In that case if the broker goes belly up my claim is against the value in the account not the securities owned by the account, much like a bank that is taken over by the FDIC.

When a broker holds t-bills is it like a bank holding assets in a safe deposit box, where the contents are mine, or is it like money held in a bank, the money is the bank's and my claim is against the bank's overall assets?

Thanks in advance.

[aquaswim47]

As long as they are protected by SIPC, $500,000. Now if you happen to own stock in the broker, you'll lose everything. Depositor, lose nothing below $500K. Stockholder, lose your entire investment.

Think of the broker as the custodian. If the custodian goes bankrupt and is protected by SIPC, you are protected for $100,000 in cash and up to $500,000 in securities. If you own stock in that entity, than nothing is protected. It's that the securities in the company that become worthless. The custodian has a trust responsibility, thus to be responsible, it should at least have $500,000 in coverage.

[Ken_SF]

So that means you are better off holding securities yourself. In the case of T-Bills, I'd rather have the full faith and credit of the government behind me than an insurance company made up of many brokerages, right?

In our current environment I think its prudent to be wary of undercapitalized insurance carriers.

[HappyT90]

Some brokers offer "excess SIPC" coverage. For example, for Firstrade, on top of the $500,000 that the SIPC guarantees to cover, Customer Asset Protection Company (CAPCO), a licensed New York insurer, provides the remaining unlimited account protection. However, like you said, people have their doubts about undercapitalized insurance. Here's an old article: If Your Brokerage Goes Broke.

[Ken_SF]

Excellent response. Thank you. I also found this article from Time Magazine. I guess there is no such thing as security.

When the Broker Goes Broke - TIME