What Is SIPC And How Does It Work?

April 09, 2019

You may have seen the acronym SIPC associated with your investment accounts and wondered what it means. Particularly, you may wonder what it means for YOU, especially if we have another market meltdown like the one that claimed firms like Lehman Brothers and Bear Stearns.

SIPC stands for Securities Investor Protection Corporation. It was set up to help protect investors in the case of a brokerage firm failure, much like FDIC covers cash you have on deposit with banks and credit unions up to the federal limit. Here is what you need to know.

When does SIPC come into play? 

Any time a brokerage firm fails (aka goes out of business) and/or assets are missing from customer accounts because of theft or unauthorized trading, the SIPC may be called in to restore missing assets and cash.

Are there limits on SIPC protection? 

Yes – the SIPC will replace up to $500,000 worth of certain securities including up to $250,000 worth of cash. If you have multiple accounts under “separate capacity,” then each type of account is insured up to the $500,000/$250,000 limit. 

Separate capacity means accounts with different registration types such as individual, joint, corporate, IRA, Roth IRA, trust, etc. So for example, if you have one account at a brokerage firm in your name alone (individual), one held in your name as a Traditional IRA, and another as a joint account with your spouse, they would all be insured up to the maximum limit.

Not cumulative

Keep in mind that the above example might offer up to $1.5 million in protection, but if one account had $1 million, the second $50,000 and the other had $250,000, you’re only protected up to $500,000 in the bigger account, so you’d be restored a total of $800,000.

What does SIPC NOT cover?

It’s important to understand this part – there is a lot of misunderstanding out there among investors that may provide a false sense of protection. While it’s unlikely that any of the large, well-known brokerage firms will go out of business, if you start to get into more complicated instruments or work with more specialized investment managers, you need to know what protections you have and don’t have so you can know where to be diligent in your research. Here’s what SIPC does not cover:

  • Losses in account value due to stock or bond market fluctuations.
  • Losses that are not part of the overall failure of the brokerage firm.
  • Disputes between the brokerage firm and the customer.
  • Losses of commodities and futures (exceptions apply).
  • Failures of non-SIPC member firms.

How do you avoid firms at risk of financial distress? 

One of the best ways to avoid needing to learn firsthand how SIPC works is to avoid firms at risk. Visit FINRA’s investor checklist for specific steps you can take to protect yourself.

What to do if you hold investments at a failing firm

If a firm you are working with is being liquidated and the SIPC steps in, you should receive notice within 12 months to file a claim form. This notice may come through the mail or you may also have access to file a claim online. If you do not receive a claim form, visit www.sipc.org or contact the SIPC at [email protected] or (202) 371-8300. A deadline will be set for claims, so it’s important to take care of this as soon as possible to ensure you’ll recover as much as possible.