Is My Money Or Broker Account Safe If E-Trade Fails And Goes Bankrupt?

Published 1/9/08 (Modified 3/9/11)
By MoneyBlueBook

These are uneasy times if you are an E-Trade broker customer or investor. For those who bought and currently own E-Trade stock, these are probably one of the most trying times you've ever faced as share prices have plummeted more than 90% within the last year. Triggered by Citigroup's downgrade in November 2007, many investors and account holders are fearing the worst and some have jumped ship, shifting their assets to another brokerage firm. Just yesterday share prices tanked more than 20% in yet another day of volatile trading in response to further analyst warnings that E-Trade is in dire need of an additional capital infusion to stay in business.

Shareholders are bailing - a grave concern for many current E-Trade brokerage account holders as many fear for the safety and security of their stock investment accounts. E-Trade has released numerous press releases and web based announcements to reassure customers that they have taken drastic steps to shed exposure to the dreaded mortgage backed assets that have been generating so much business losses, and that they currently have the necessary capital liquidity to stay afloat.

If you're an E-Trade account holder, you can sigh in relief as your assets are generally well protected. However, if you're an actual E-Trade stock investor - my condolences, as you may be of luck unless you could somehow successfully demonstrate that you were defrauded.

Escape From E-Trade If You Must, But Your Assets Are Secure

I used to be a long time E-Trade customer but eventually shifted my brokerage and bank account funds to another firm earlier in 2007 for reasons completely unrelated to the recent meltdown. But even if I still currently had cash and security assets managed by E-Trade, I think I would still have the confidence to stay on board. But I do understand why many are bailing out of E-Trade and transferring their funds to another brokerage firm. However financially speaking, investment accounts and financial assets managed by E-Trade or any other major brokerage firm like Fidelity, TD Ameritrade, Scottrade, or Charles Schwab are generally well insured from loss.

Here Is How Your Accounts Would Be Handled If E-Trade Or Any Other Brokerage Firm Failed:

1) Cash Deposits - Bank deposit accounts at E-Trade or any other brokerage bank are insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC). Deposit accounts cover checking, savings, as well as certificate of deposits (CD's). For those E-Trade customers that chose the Extended Insurance Sweep Deposit Account (ESDA) option, cash deposits are covered up to $500,000. View (E-Trade's Asset Protection Statement).

2) Stocks and Bonds - Customers of a failed brokerage firm will recover all of their security assets such as stocks and bonds registered in their name. Afterwards, the broker's leftover assets are divided among the remaining customers. Finally, if there are still insufficient assets to cover the rest, the Securities Investor Protection Corporation (SIPC) kicks in. The SIPC provides coverage for major brokerage firms that are members of the Financial Regulatory Authority (FINRA), formerly known as the National Association of Security Dealers (NASD). The protection covers asset classes like stocks and bonds, but it does not cover derivatives like options or futures. The SIPC allows customers of failed brokerages to recover up to $500,000 per customer (including $100,000 for cash claims).

Thus In the Event Of A Catastrophic Brokerage Failure:

1) Best Case Scenario: Usually the securities and assets of a failed brokerage firm or bank are quickly bought up and seamlessly transferred to another broker dealer without significant business interruption. For example, when Netbank went belly up, ING quickly assumed control without any major problems.

2) Worst Case Scenario: If the failed brokerage firm's record keeping is terrible and it goes into liquidation status, a court appointed trustee will usually referee customer claims to help them get their money and assets back. According to the SIPC, should any major SIPC insured broker like E-Trade go out of business, you can expect to receive your property and assets back within 1-3 months after the broker's records have been verified. The trustee will send you a claim form that you will need to complete and mail back. Thus, it's also in your own best interest to keep accurate personal records as well.

Other E-Trade Specific Safety Nets

1) Additional Brokerage Protection For Trading - E-Trade indicates that it also provides additional insurance protection for its broker customers up to $150 million per brokerage account, underwritten by London insurers, with an aggregate limit of $600 million. This provides at least somewhat reassuring triple insurance protection.

2) Sufficient Existing Capital To Cover Losses - Although there are serious questions surrounding E-Trade's ability to weather the current financial storm with its existing cash and capital reserves, E-Trade's former CEO Mitch Caplan categorically denied a few months ago that the mega brokerage firm was headed towards bankruptcy. So there you have it - whether E-trade can stay in business is anyone's guess, but if you are a brokerage customer, your assets should be safe and secure so long as you are within the insurance protection limits.