January 5, 2011

Securities Investor Protection Corporation, SIPC

The Securities Investor Protection Corporation, or SIPC, is an insurance program for investment accounts.  The SIPC is kinda similar to the FDIC in that it is created by the government in order to help protect individual peoples finances.   The SIPC is however very different than the FDIC in how it functions.   The SIPC insures investment accounts like stock brokerage accounts but theres lots of limitations and details about the insurance..   It doesn't guarantee the performance of your investments, but it just protects your ownership of your investments in case the brokerage firm that holds them goes under.

SIPC covers cash and securities held in a brokerage firm.   If a brokerage firm were to fail financially then SIPC will step in to help salvage the assets and ensure that individual investors don't lose their assets.
 The SIPC insures up to $500,000 in assets including $250,000 in cash per individual.    

The SIPC helps recover missing assets.    If a brokerage fails and during its bankruptcy some of the assets are lost or otherwise missing then that is what the SIPC helps recover.

What the SIPC doesn't do
It does NOT protect your stocks or other investments from loss of value due to market losses.  So for example if you bought Blockbuster stock before they went bankrupt then that is your problem and the SIPC won't help.  The SIPC does NOT protect you if you are sold worthless investments.  SIPC does NOT protect futures contracts, currency,  investments in limited partnership or unregistered annuities.    When they say they don't cover currency I believe that means people who are dealing in trading foreign currencies.

SIPC doesn't really protect you from fraud in general.  If you buy 10,000 shares in SuperGoodStock company from TonySoprano Brokerage, LLC firm and then find out when you try to sell your shares that SuperGoodStock is fictional and not worth the paper its written on and TonySoprano Brokerage's phone # is disconnected and their offices are vacant with a for lease sign then I don't think the SIPC can help you there.  

How it works

First if a brokerage fails the SIPC will step in to help sort things out.    You will get back ALL the equity assets that are registered in your name.   After that the brokerage firms remaining assets are pooled and then divided up to pay off all customer claims.  If there is a short fall of the assets then the SIPC will help make sure you get at least $500,000 of your assets including up to $250,000 of cash assets.

The $500,000 limit does not mean that you automatically lose anything over $500,000 that you have in a brokerage.   For example if you have $2 million in assets that are all in mutual funds registered in your name then you should get all $2m in those assets back since they are legally registered in your name.  If you have $2 million in cash then you may only get $250,000 back since that is the limit of cash the SIPC insures.   Cash is cash so it might get 'lost' during  the bankruptcy of a brokerage.

Making sure a brokerage is insured

You definitely want to only work with brokerage firms that are covered by SIPC.    You can look up members of SIPC at the SIPC website via their member database.

Disclaimer:  I'm not an expert on this stuff and I'm only interpreting what I read on SIPC.org and other websites.  If your brokerage firm goes bankrupt then you're best off contacting SIPC to file a claim and find out exactly what you may or may not be covered for.

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