The Securities Investor Protection Corporation (SIPC) is a non-profit corporation established in 1970 under the Securities Investor Protection Act (SIPA). Its primary function is to protect customers if their brokerage firm fails, ensuring the security of their cash and securities (stocks, bonds, etc.) held by the broker.
What SIPC Covers
SIPC provides insurance on the cash and securities held in brokerage accounts, safeguarding investors from brokerage firm failures. Importantly, SIPC coverage does not protect against losses due to market fluctuations or individual investment decisions.
Coverage Limits
SIPC provides protection up to a certain limit:
- $500,000 per customer, including up to $250,000 in cash.
How SIPC Works
When a brokerage firm fails, SIPC steps in to return customers’ cash, stocks, and other securities as promptly as possible. This process typically involves:
- Reviewing the brokerage firm’s records to verify customer claims.
- Working with court-appointed trustees to distribute assets.
Historical Context and Importance
The SIPC was founded as a response to several large brokerage firm failures in the 1960s which resulted in significant customer losses. The establishment of SIPC was intended to restore and maintain confidence in the securities markets.
Applicability and Considerations
Conditions of Coverage
- Brokerage Firm Failure: SIPC protection activates when an SIPC-member brokerage firm encounters financial trouble and is forced into liquidation.
- Securities Not Returned: If the broker cannot return the securities or cash held in customer accounts.
Exclusions and Limitations
- Market Risk: SIPC does not cover losses due to a decline in the market value of securities.
- Fraudulent Acts by the Customer: If the customer is complicit in fraud or illegal acts, they may be ineligible for coverage.
Example of SIPC Protection in Action
Imagine an investor has a brokerage account containing $300,000 in stocks and $150,000 in cash, totaling $450,000. If the brokerage firm fails:
- SIPC would ensure the return of all $300,000 in securities (within the $500,000 limit).
- $150,000 in cash would be fully covered (within the $250,000 cash limit).
Comparisons and Related Terms
FDIC vs. SIPC
- FDIC: Federal Deposit Insurance Corporation protects bank deposits.
- SIPC: Protects securities investments at brokerage firms.
Terms and Definitions
- Brokerage Firm: A company that facilitates the buying and selling of securities for clients.
- Liquidation: The process by which a broker-dealer’s assets are sold off to pay creditors and return customer funds.
FAQs
Does SIPC insure mutual funds?
Is every brokerage firm a member of SIPC?
How does SIPC handle claims?
References
Summary
The Securities Investor Protection Corporation (SIPC) plays a vital role in safeguarding investors’ assets in case of brokerage firm failures. Offering insurance coverage up to specified limits, SIPC does not protect against market risk but ensures the return of securities and cash held in brokerage accounts. Knowing the intricacies of SIPC’s coverage helps investors better understand the protections available in the securities marketplace.
