SIPC Insurance and the Securities Investor Protection Corporation
What is the SIPC?
The Securities Investor Protection Corporation is an organization that was started in 1970 by Congress. It is a non-profit corporation that works to recover funds for investors if their brokerages fail.
This is a membership corporation that is funded by its member broker-dealers and was formed after the passage of the Securities Investor Protection Act of 1970. Through its SIPC insurance program, it has recovered billions of dollars for investors since its creation.
What does the SIPC do? What does SIPC insurance cover?
The Securities Investor Protection Corporation provides limited coverage to investors for their brokerage accounts if their firms become insolvent. The insurance offers protection to investors if their firms conduct unauthorized trades or commits thefts from their securities accounts. It also oversees liquidations.
Firms that sell stocks or bonds are required to be members of the Securities Investor Protection Corporation. Ones that only offer special products such as mutual funds or variable annuities are not members of the organization.
SIPC vs. FDIC
Since its creation by Congress in 1970, the Securities Investor Protection Corporation has advanced $2.8 billion in order to recover $138.7 billion for investors. The passage of the Dodd-Frank Act increased the protection of funds in an investor’s account to $250,000 and provided the organization with a line of credit to the Treasury of up to $2.5 billion.
While the SIPC insurance gives you limited protection of the assets in your brokerage accounts, FDIC insurance protects the money that you hold in your deposit accounts at banks that are insured by the FDIC. The FDIC currently provides FDIC insurance at 5,408 banks and financial institutions across the U.S.
History of the SIPC and its relationships with other organizations
The Securities Exchange Act of 1934 created the Securities and Exchange Commission and gave it broad authority over the securities industry. It regulates, registers, and oversees brokerage firms and others that are involved in the industry. It has the power to discipline firms and securities brokers that violate its regulations.
The Securities Investor Protection Act of 1970 created the Securities Investor Protection Corporation. If a member-broker firm fails, the corporation arranges for the funds to be transferred to a new firm. If it cannot transfer the funds, it will liquidate the firm. Investors will either be sent stock certificates or checks for the shares’ market values.
The U.S. Securities and Exchange Commission or SEC has a couple of important rules for broker-dealer firms. Under Rule 15c3-1, brokerages are required to have a minimum amount of capital available. This rule is called the net capital rule. The customer protection rule is Rule 15c3-3. Under this rule, the firms are required to keep their clients’ assets in accounts that are separate from the firms’ own accounts.
The Financial Industry Regulatory Authority or FINRA is another important non-profit organization for investors. This organization writes and administers rules related to the activities of registered broker-dealer firms and registered brokers in the U.S.
The Financial Industry Regulatory Authority investigates firms for rule compliance. It also promotes transparency in the markets and education for investors. Investors can perform a FINRA broker check on the agency’s website. The FINRA broker check allows you to check the broker that you are considering making certain that they are compliant and do not have a disciplinary record.
SIPC vs. FINRA
To make it easier to understand how these two organizations relate to each other, this chart might help.
|Who is covered||Investors||Regulates brokerage firms and brokers|
|Scope of coverage||Covers losses sustained by investors when their firms fail or when misconduct has occurred.||Regulates firms and exchange markets that participate in the New York Stock Exchange.|
|Amount of coverage||Covers up to $500,000 per investor in assets, including up to $250,000 in cash.||Does not insure your money or investments in any way.|
|What is not covered||The integrity of the firms.||Investor assets at the firms.|
SIPC vs. FDIC
It is also important to understand the SIPC compared to FDIC. Here is a chart that can help you to understand the differences.
|Who is covered||Investors||People with money in deposit accounts at banks with FDIC insurance.|
|Scope of coverage||Covers losses sustained by investors when their firms fail or when misconduct has occurred.||Covers losses sustained by people with deposit accounts when their banks fail.|
|Amount of coverage||Covers up to $500,000 per investor in assets, including up to $250,000 in cash.||Covers up to $250,000 in cash on deposit at a bank that is insured by the FDIC.|
|What is not covered||The integrity of the firms.||Other financial products that a bank might offer.|
SIPC insurance coverage applies to current Securities Investor Protection Corporation members. In some cases, it will also apply to former members. Nearly all securities brokers and broker-dealers are registered with both the Securities and Exchange Commission or SEC and the Securities Investor Protection Corporation. Unregistered broker-dealers are mandated to disclose that they are not registered to their customers.
Members of the Securities Investor Protection Corporation must display an official sign that shows their membership in the organization. The insurance coverage for former members ends 180 days after the firms lose their SEC registration. Normally, the SEC will not terminate a broker-dealer’s registration if the agency knows that the broker-dealer owes cash or securities to its customers.
What does the SIPC cover?
When an investor has securities and cash at a troubled firm that is a member of the Securities Investor Protection Corporation, the organization offers protection in the event of insolvency of the firm. It does not protect investors from losses caused by market fluctuations, bad investment advice, or other types of losses.
Instead, it steps in to transfer funds to a new brokerage or to liquidate them and issue stock certificates or checks for the market value of the assets when a firm fails. The following types of securities are covered:
- Transferable shares
- Collateral trust certificates
- Evidence of indebtedness
- Security futures
- Other investment company shares
- Other registered securities
The coverage is limited to $500,000 per customer, which includes up to $250,000 in cash. Protection for investors with multiple securities accounts at the same firm is determined by separate capacity. For example, if an investor has two taxable brokerage accounts in his or her name, he or she will have a maximum protection of $500,000. If an investor has a taxable account in his or her name and a separate joint account with his or her spouse, the investor will be protected up to $500,000 for the individual account and another $500,000 for the joint account.
Investments are not protected by the organization if the firm is not a member. Protection is not provided for coverage of market losses or promises of the performance of an investment. The Securities Investor Protection Corporation does not cover the following types of investments:
- Commodities or futures
- Commodity options
- Unregistered investment contracts
- Unregistered limited partnerships
- Fixed annuity contracts
- Interests in silver and gold
Protection coverage for investors
SIPC insurance protection covers unauthorized transactions. There is limited protection against unauthorized trading in your securities accounts. In order to qualify for this coverage, you must prove that the trade was not authorized. The SIPC coverage extends for investors at member-brokerages that are bankrupt or insolvent. The non-profit corporation must return customer property when a brokerage firm becomes insolvent.
The corporation plays different roles when a firm that goes insolvent is either an introducing or clearing firm. An introducing firm employs the broker who takes the customer’s order and executes it. If an introducing firm liquidates, the customer’s assets remain with the clearing firm.
A clearing firm, or clearing house, warrants that the delivery of transactions is made in an efficient manner. The clearing firm will retain the customer’s cash and securities and is responsible for statements. If a clearing firm is insolvent or is unable to return the customer’s property, the SIPC returns the customer’s cash and securities to him or her.
When a member firm is liquidated, the court will appoint a trustee for the broker-dealer that is going through the liquidation process. The trustee is overseen by the SIPC. The trustee must work to return securities and cash to the customers in a timely manner or to transfer some accounts to a different firm.
Once a liquidation is started, the firm’s office is closed. The trustee will take control of the brokerage firm’s records and books. Organizing the records and books of an organization is a lengthy process that can be expected to take from weeks to months.
Protection for investors
Investors should take steps to protect themselves. They can start by completing a FINRA broker check before choosing a securities broker or firm. In addition to the FINRA broker check, the agency also offers a number of resources to help people with important financial decisions. Using the resources to education yourself will give you more confidence and greater knowledge regarding your rights as an investor.
You should take the time to check to see if your brokerage firm is a member of the Securities Investor Protection Corporation. The corporation has a list of members on its website. You can also call the membership department at 202-371-8300. The SIPC also has numerous resources on its website to answer questions regarding fraud and scope of coverage.
When you open a brokerage account with a securities broker or firm, keep and read every document that you are sent. Brokerage firms are required to send account and transaction statements. It is important to review these statements to make certain that they are accurate when you receive them. Save your trade confirmations for every transaction that you complete, so that you have comprehensive records.
Only pay funds to the SIPC member. You should not make payments to an individual if you want your money to be deposited in a securities account. If you see trades that you did not authorize, report them in writing. Send your report by certified, return-receipt mail and send copies to FINRA. Report any problems or suspicions that you have to FINRA.
As an investor, there are many things that you should look for when selecting a brokerage firm. It is worth the effort and the time it takes to research when trusting a firm with your money. It is those firms that add an extra layer of protection to ensure its client with confidence in their choice.
Open a free SIPC-insured investment account at M1
At M1 Finance, you can open a free SIPC-insured investment account. Since we are a member of the SIPC, securities in accounts are protected up to $500,000. M1 Finance’s clearing firm has also purchased supplemental insurance to protect our customers in the event that the SIPC limits are exhausted. SIPC insurance does not protect against losses in the market value of securities.
You can trust M1 Finance. It is a broker-dealer that strictly adheres to the rules established by FINRA in order to protect its customers and their accounts. You can customize your own portfolio so that it meets your needs or select one of 80 investment portfolios that were created by experts and that have been tailored to different durations to invest, levels of risk tolerance, and financial objectives.
M1 Finance offers a hybrid between a robo-advisor and a traditional brokerage offering investors the best of both. Investors are able to open several different types of accounts, including individual accounts, retirement accounts, joint accounts, and trust accounts.
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