Safety plays a big role where we put our money. We know the FDIC protects our bank accounts from bank failures, but does anything protect our brokerage accounts? The SIPC insurance coverage is there to protects investors when their brokerage firm fails, assuming the broker is a SIPC member.
What is the SIPC?
The SIPC, Securities Investor Protection Corporation, is a non government, non-profit, membership corporation created in 1970 by Congress. When a brokerage firm fails, the SIPC insurance is there to help return your cash and securities that are held by the firm.
This may sound like FDIC insurance, but it’s very different. Unlike the FDIC, the SIPC coverage does not protect investors from a loss in value. So, if that stock you bought two weeks ago drops in price, you’re not protected. That falls under the inherent market risks.
What the SIPC Covers
SIPC coverage falls under two distinct areas, unauthorized trading and insolvent or bankrupt brokerage firms.
If you notice any unauthorized trades in your account, the SIPC will cover you for any losses. But you must prove that those trades were, in fact, unauthorized. The SIPC recommends immediately sending a written notification to your broker. The written complaint may be the only proof you have any unauthorized trades.
The other role the SIPC plays is to protect investors when a brokerage firm fails. If this does happen, the SIPC insurance steps in, appoints a trustee to liquidate the firm, and protect its customers. The first step will be to return any securities that are registered in the customer’s name. If theft or other illegal activity was involved, the liquidated assets will be used to replace remaining customer assets, with the SIPC providing more funding if necessary.
The SIPC insurance covers most types of securities including stocks, bonds, mutual funds, and notes. If you have 100 shares of XYZ in a brokerage account and the firm goes bankrupt, the SIPC will return 100 XYZ shares to you.
The SIPC doesn’t cover every investment. It is limited to SEC registered securities. Any unregistered contracts, unregistered limited partnerships, fixed annuity contracts, currency, precious metals or commodity futures and options contracts are not covered by the SIPC insurance.
SIPC Coverage Limits
The SIPC coverage does have its limits. Currently those limits fall at $500,000 including a maximum of $250,000 for cash, per customer.
If you have multiple accounts, each may be covered separately, as long as the account is held in a different capacity by the customer. Basically, you can have a taxable brokerage account and a Roth IRA and both will be covered separately by the SIPC. Other accounts considered separate are: trusts, jointly held accounts, and traditional IRAs. Accounts held by you are considered separate from accounts held by your spouse unless it’s a jointly held account.
The best way to protect yourself is to look for the Member SIPC on the broker’s website, ads, signs, etc. While the discount brokers we recommend are all SIPC members, it’s not required by law. If you’re not sure if your broker has SIPC coverage in place, you can always check the SIPC member database.
If you do have to file a claim, file it in a timely manner. There are deadlines to meet or you’re out of luck. The court appointed trustee will send a notice to customers with a 30-60 day filing deadline. If you miss that deadline, but file within six months your claim may be delayed and reduced. Anything after six months won’t be considered.
Lastly, double-check your transactions and keep good records. The SIPC will rely on your brokerage firm’s records when dealing out claims. You’ll need proof to have anything corrected, if there are errors with those records.