E-Trade Financial took a huge hit to their stock price today (50% haircut!) on word that they will be taking huge write downs because of their investment in securities backed by home loans. In fact, a Citi Investment Research analyst covering E-Trade downgraded it to a Sell from a Hold, adding that theres a 15% chance E-Trade would go bankrupt. So what happens and what can you do if your brokerage goes bankrupt?

First off, you only have any protection if your brokerage has SIPC insurance. SIPC stands for U.S. Securities Investor Protection Corporation and its a federally chartered private corporation insuring shareholders against a stock-broker going bankrupt. Its similar (but not exactly like) to FDIC and NCUA insurance for deposit accounts but covers against bankruptcy and not issues like fraud. If your brokerage is a member of the National Association of Security Dealers (NASD) FINRA (Financial Industry Regulatory Authority), then you will have SIPC insurance because the FINRA requires it. I personally would never use a brokerage that wasnt in the FINRA because theres simply no reason for it. The SIPC will cover you for $100,000 cash and $500,000 total (stocks and bonds, not futures, options, currency, etc.) but the brokerage itself may have supplemental insurance that goes beyond that.

So, what do you do? If your brokerage is liquidated, the court-appointed trustee will send you a claim form to fill out and send back. The turn around time is estimated at one to three months according to the SIPC website and thats if you qualify (most do, there are some exceptions on that) and do it within the deadlines. Lastly, make sure you have good records with your statements so you can get your stuff back in a timely fashion. Its not unheard of for a brokerage to have bad records so having your own helps the process.

Now with ETrade specifically, they claim to have SIPC coverage and you can confirm this by searching for E*TRADE Securities LLC in the SIPC lookup database. The search is very fickle, you have to type the whole name or it wont find it (Etrade, Etrade financial, etc. all give no result).

Unless Im missing something, it sounds like those folks who have investments through ETrade are covered by the SIPC. Those investing in ETrade are a different matter whew, 50% is hard to take.