Reimbursement for Unauthorized Activity by Discount Brokers: Guaranteed or Just an Empty Promise?

All the major discount broker-dealers offer some form of investor protection against unauthorized activity in customer brokerage accounts.  These guarantees protect against theft by cyber criminals and hackers, who might gain access to thousands or even millions of accounts in a single security breach.  They protect against employees of a broker-dealer who might gain access or trade in customer accounts.  These guarantees are also broad enough to protect against one-off criminals who might gain access through phishing or other online identity theft scams, and even rogue family members, such as the the ex-husband or ex-wife who might know enough personal information to gain unauthorized access.

What do these guarantees actually say and how do they compare to one another?  Let's take a look at the key language (for actual terms and conditions follow the link and check your account agreement):

TD Ameritrade -- Asset Protection Guarantee

If you lose cash or securities from your account due to unauthorized activity, we'll reimburse you for the cash or shares of securities you lost. We're promising you this protection, which adds to the provisions that already govern your account, if unauthorized activity ever occurs and we determine it was through no fault of your own.  Of course, unauthorized activity does not include actions or transactions undertaken by or at the request of you, your investment advisors or family members, or anyone else whom you have allowed access to your account or to your account information for any purpose, such as trading securities, writing checks or making withdrawals or transfers.

Fidelity -- Customer Protection Guarantee

Fidelity will reimburse your Fidelity account if we conclude that there was unauthorized activity resulting in a loss and that the activity occurred through no fault of your own. We will also need to ensure that the activity was not initiated by you (the account owner) or by someone you allowed to access your account.

E*Trade -- Complete Protection Guarantee

E*TRADE Securities will restore to your account cash and/or shares of securities equal to the amount of cash and/or shares of securities in your account at the time of any unauthorized activity. "Loss" does not include any tax consequences. Any unauthorized trades will be reversed and positions will be reinstated.

Schwab -- Security Guarantee

We want you to have the highest level of confidence when you do business with Schwab. So we offer you this simple guarantee: Schwab will cover 100% of any losses in any of your Schwab accounts due to unauthorized activity.

Conclusion

Any investor who suspects that his or her account has been compromised by unauthorized activity should immediately report the breach to the broker-dealer, protect the account from any further unauthorized activity, and consider involving law enforcement.  Investors should also seek broker-dealer reimbursement under any available guarantee against unauthorized activity.  There have been reports of broker-dealers honoring their investor guarantees, but there have also been FINRA arbitrations filed where broker-dealers have rejected legitimate requests by investors for reimbursement under a guarantee.  Arbitrators will (after considering the facts and circumstances) hold broker-dealers accountable for not standing behind their guarantees.  

FINRA and other regulators should consider auditing broker-dealers' guarantee programs.  How many claims are reported?  How are they investigated?  How long do investigations take (is reimbursement reasonably prompt)? How many claims are approved and, if approved, how much reimbursement is actually provided (compared against the amount sought)?  For what reasons are claims denied or only partially allowed?  Are these unauthorized activity guarantees empty promises, honored only in the breach, or are broker-dealers providing the robust level of protection they would have investors believe?  At this point no one except the broker-dealers themselves know.