If a bank goes under, federal deposit insurance makes sure that, up to certain limits, depositors get their money back. It doesn't matter if the bank lent all its deposits to emu farmers in Alaska or if the bank's president packed up all the cash in a steamer trunk and headed for Brazil--the depositors are covered.

If a stock brokerage goes under, there is also an insurance system that makes sure investors get their securities back. But as a growing number of disappointed investors have been learning, this coverage is much narrower, and the rules for recovering much less obvious.

Lawyers and others involved in trying to recover assets from failed brokerages say that all too often investors equate the ubiquitous Securities Investor Protection Corp. (SIPC) logo with the Federal Deposit Insurance Corp. (FDIC) logo they see at banks.

Their advice: Don't.

The SIPC is designed to make sure that if a brokerage fails, investors get back any securities held in their name by the brokerage, as well as any cash in their account up to $100,000. This means that if a brokerage goes into bankruptcy, the SIPC makes sure that securities are returned to investors promptly if they have been lost or improperly "converted" (traded for something else).

It does not mean that investors are insured against ordinary market losses, nor does it mean they are protected against market manipulation, phony valuation and many other kinds of fraud. This is in contrast to bank depositors, who are made whole even if the bank misappropriated the customer's money.

"We do something very, very narrow, and I think we do it very well," SIPC General Counsel Stephen P. Harbeck said last week.

The SIPC grew out of the brokerage industry's troubles in the late 1960s. A number of prominent Wall Street firms collapsed during those years, and some others came close, and investors began to worry that their securities might be lost or tied up for a long time if their brokerage failed. They wanted a mechanism to ensure that this would not happen.

The SIPC was created by Congress to deal with that issue. It is a private, nonprofit corporation supported by premiums paid by brokerages and broker-dealers. It has large reserves--its assets topped $1 billion at the end of last year--and each year pays off claims of thousands of investors.

When a brokerage fails, the bankruptcy court appoints a trustee who goes over the company's records to determine each customer's holdings. The trustee also tries to locate all the customer property that is still under the firm's control.

Securities held in the customer's name are returned to the customer. Cash and securities held in the firm's name are distributed to customers on a pro rata basis, and if there is a shortfall the SIPC will fill the gap, up to certain limits.

As the stock market soars and more small investors become involved in it, especially through online trading, critics are calling for expansion of the SIPC's coverage.

A lawyer group called the Public Investors Arbitration Bar Association, backed by several state securities commissioners, has begun meeting with members of Congress and Capitol Hill staff members, seeking either congressional hearings or a General Accounting Office study of the SIPC to highlight its shortcomings and propose improvements.

The SIPC opposes the ideas put forth so far, arguing that its current mission is quite clear-cut--"mechanical" is the term Harbeck used--and can be carried out with the corporation's current staff of 29. Involving the SIPC in fraud investigations would require many more extensive probes and subjective judgments, and that could be done only with a much larger staff, Harbeck said.

But the current law as administered by the SIPC sometimes leads to strange, if not perverse, results, said Mark E. Maddox, president of the Public Investors Arbitration Bar Association.

For example, although investors may be covered by the SIPC if a failed brokerage sold their securities improperly, a failure by the brokerage to carry out a "sell" order is not covered.

Thus, if an investor realizes that a stock may be about to tank and orders his shares sold, he is stuck with the loss if the brokerage ignores his order and goes out of business. Investors can sue the brokerage, of course, but often there is little left to pay such claims.

Maddox and others have tried to get the courts to rule that a failure to sell is a "conversion" covered by the SIPC. The SIPC argues that it is not, and the courts have backed it.

If the security the brokerage fails to sell is something such as General Electric stock, there's typically little harm done. But if it is stock in a "micro-cap" firm, failure to sell can turn profits into losses, sometimes total losses.

Also, the remedy offered by the SIPC is often to restore the securities at the value they were when the brokerage failed, and again with micro-caps, that may not be helpful.

Maddox said one of his clients in the failure of Stratton Oakmont Inc., shut down by regulators on fraud charges, was deemed to have a valid claim, but when the SIPC did the math it came out this way: if the client would cut the SIPC a check for $7,500, it would cut the client a check for $86.

The explanation, Maddox said, is that Stratton Oakmont improperly sold the client's shares of "Stratton Schlock Stock A" and bought shares for him of "Stratton Schlock Stock B." But the firm was unable to buy enough of B, so it had $7,500 left over, which it sent to the client.

When the client discovered what had happened, Stratton was out of business. The SIPC's offer was simply to undo the improper trade: If the client would return his shares in B plus the $7,500, the SIPC would then refund him the value of his shares of A, by then $86.

Maddox argues that the SIPC should have refunded the value of his accounts before the unauthorized trade was done.

The SIPC's system of valuing securities as of the close of business on the bankruptcy filing date "may be fair in some cases, but not in the case of brokers who have stolen the proceeds of legitimate holdings and replaced them with worthless securities, Maddox said. "A more equitable way of determining customer net equity should take these circumstances into consideration."

Maddox's campaign is attracting some interest on Capitol Hill. "We want to look at this some more," said one Republican Senate staffer. "But we want to be careful we don't over-insure people," he said, noting that during the savings and loan crisis, confidence in deposit insurance led depositors to pour money into troubled institutions.

"You don't want to make it attractive to do business with crooks," he said.

As long as the law remains as it is, investors should be very cautious about doing business with unfamiliar brokerages.

And in all cases, make sure the brokerage provides paper records of all your transactions along with regular statements. Keep these documents. If you are ever forced to prove to the SIPC that you owned certain stocks or bonds, these written records are the best evidence you can have.