What happens if your broker goes bankrupt?
First, brokerage firms are required to maintain enough assets to cover customer accounts.
If they go bankrupt and for some reason (negligence or misappropriation) do not have enough funds to cover customer assets then:
The SIPC (Securities Investor Corporation) steps in. First, you will receive a pro-rata share of all client assets recovered in the broker liquidation. If you have not been made whole, the SIPC will add up to $500,000 to make you whole.
To illustrate a SIPC liquidation:
*Assume a firm fails, resulting in $5 billion of client claims on assets.
*Assume a recovery rate of assets in liquidation of 90 percent or $4.5 billion.
*Assume a client with an account of $5 million.
In a customer proceeding, the client would receive $4.5 million from recovered assets and $500,000 from SIPC. The loss on a $5 million client account would be zero.
If you have still not been made whole, many brokers have excess SIPC coverage, up to $600 million per firm. (Although some major brokers have over 1 trillion dollars in customer assets)
I wonder what the recovery rate of assets in a major liquidation would be?