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What is the SIPC?
Mary McMahon
Mary McMahon
The Securities Investor Protection Corporation (SIPC) is an organization that compensates investors if the firms handling their funds and securities go bankrupt. If a member goes bankrupt, the SIPC steps in, liquidates the firm's assets and compensates investors for up to $500,000 US (USD), limited to $100,000 US (USD) in cash. The organization claims that it has successfully restored assets to 99% of investors who were eligible for protection.
The SIPC covers cash and securities such as stocks and bonds which are held by a brokerage firm. If the firm experiences financial trouble and these assets go missing, the organization will make every effort to recover them, usually by liquidating the troubled firm with the assistance of a trustee who is appointed by a federal court. The SIPC does not cover currencies, commodity futures contracts, investment contracts, or fixed annuity contracts which have not been registered with the United States Securities and Exchange Commission.
The organization is often compared to the Federal Deposit Insurance Corporation (FDIC). The two organizations are actually quite different, due to distinctions between the types of finances that the cover. The FDIC reimburses clients of failed banks for up to $100,000 US (USD), with the understanding that the depositors put their funds into the bank in good faith, and that they cannot afford to lose the money. The SIPC is specifically designed to protect investors from unscrupulous brokers. If someone is sold a worthless stock or the value of their stock declines, the organization will not protect them. If a broker steals funds from a client, it will provide reimbursement.
When a firm fails, the SIPC will restore securities to all clients. After liquidation of a firm, cash funds are distributed to the claimants, although the cap is $100,000 US. If the firm still has funds leftover after liquidation and compensation is complete, the excess funds will be distributed to individuals who had claims over the funding cap. The organization cannot guarantee that the restored securities will have the same value that they did before, due to market fluctuation.
The SIPC also protects investors from unauthorized trades, although investors must be proactive about proving that a trade was unauthorized. For this reason, it encourages investors to clearly log unauthorized trades on paper and in written communications with their brokerage firm. Investors should also frequently check their account statements and immediately register complaints about irregular or unauthorized activity.
It is important for investors to do business with firms that are members of the organization. Many investment firms use misleading names or language which might lead clients to believe that they are members, and the SIPC maintains a database of valid members at their website. It also has a phone hot line which investors can call to determine the member status of a firm. Firms which are members include “member SIPC” on their literature, along with the organization's logo.
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
Learn more...
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
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![The SIPC has a hot line that investors can call to determine the status of a firm.]()
By: AllianceThe SIPC has a hot line that investors can call to determine the status of a firm.
Discussion Comments
SIPC is a sham! When Madoff’s victims heard the news and got over their initial shock they were at first comforted by the SIPC seal on their statements. They were victims of fraud and theft who were failed by the SEC but it seemed their SIPC insurance would provide at least partial restitution.
What they have come to realize however is that SIPC is not on their side. SIPC has proven to be an adversarial organization which despite having been created by Congress to protect “mom and pop” investors has been hijacked by private practice bankruptcy attorneys who are directly incentivized to deny claims and to clawback and victimize the victims while “preserving” the meager funds the wall street firms paid to provide insurance in the first place.
The SIPC is a failure and a sham which is entirely beholden to the brokerage industry.
Let’s face it: unless the SEC and SIPC are revamped, nobody has got our backs.
Great......And thanks a lot for such a nice article.....
The sipc protection limits are 500,000/100,000. The 100,000 is for cash. Is a 401k money market consider cash and if so it exceeds 100,000 an considerable amount can part of it be rolled into an another brokerage or bank account from a employers sponsored 401k.
where do reimbursement funds come from?
What is the source of the funds used to reimburse an investor whose broker has gone bankrupt? What guarantees the availability of those funds in the event of multiple broker bankruptcies?
Does SIPC recognize John Doe, John Doe IRA and John Doe Roth IRA as three separate customers? Do each of these three accounts have their own $500,000/$100,000 protection?
Are stocks and bonds held in individual accounts at a NYSE member firm, Such as Bear Stearns safe from he creditors of that company should it go bankrupt?
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