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June 05, 2008

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The safety or non-safety of holding assets through a broker is not, in my view, a function of the broker's solvency or insolvency, but rather, a function of the systems that the broker implements to protect clients from fraud.

Unfortunately, one has no real way of assessing the quality of these systems until a breach actually occurs.

Do you remember how one major brokerage compromised the e-mail addresses of its 6.3 million customers in July 2007? That they did not report it until two months later, and then had the effrontery to suggest that the theft did not involve Social Security data, even though the Social Security data was contained within the very same database? How the matter was so skillfully contained with respect to the media, that it eventually became a non-issue, and most clients just took it on the chin?

While your account is safe from fraud, if you authorize the broker to trade as he sees fit and don't monitor it, don't expect it to cover the losses.

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