Definition
The Securities Investor Protection Corporation (SIPC) is a nonprofit entity established under the Securities Investor Protection Act (SIPA) of 1970. It offers limited protection to customers of broker-dealers that are members of SIPC, ensuring the recovery of cash and securities in their brokerage accounts if the broker-dealer fails financially. SIPC does not safeguard against market losses or fraudulent investment schemes.
Examples
-
Brokerage Firm Failure: If a brokerage firm declared bankruptcy, SIPC would step in to help recover the cash and securities held in the brokerage accounts, up to specified limits.
-
Mismanagement: In a situation where a brokerage mishandles client assets, leading to a shortfall in a client’s account, SIPC would intervene to recover the losses within its protection limits.
Frequently Asked Questions (FAQs)
What is the coverage limit for SIPC?
SIPC protects up to $500,000 per customer, which includes a maximum of $250,000 for cash.
Does SIPC cover investment losses?
No, SIPC does not cover declines in the value of securities or fraudulent investment schemes.
Who is eligible for SIPC protection?
Any customer who has an account with a SIPC member brokerage firm is eligible for SIPC protection, including individuals, partnerships, and corporations.
How does SIPC differ from FDIC insurance?
FDIC insurance covers deposits in banks (up to $250,000 per depositor, per insured bank), whereas SIPC covers cash and securities in brokerage accounts.
What happens if a brokerage firm fails?
If a SIPC-member brokerage firm fails, SIPC steps in to return the customer’s cash and securities as quickly as possible, up to the protection limits.
Are all investment firms required to be SIPC members?
Most registered broker-dealers are required to be SIPC members, but some firms, such as those involved solely in the sale of mutual funds, may not be members.
How can I check if my brokerage firm is a SIPC member?
You can verify SIPC membership by checking the SIPC website or contacting the brokerage firm directly.
Has SIPC ever failed to protect investors?
To date, SIPC has successfully returned assets to virtually all eligible customers of failed brokerage firms.
If I have multiple accounts, does SIPC coverage apply separately to each account?
SIPC coverage is based per customer name. Accounts with the same name at the same brokerage firm are grouped together for coverage purposes.
What isn’t covered by SIPC?
SIPC does not cover commodity futures contracts, fixed annuities, or municipal securities. It also does not cover any securities that are not registered with the SEC.
Related Terms
- Broker-Dealer: A financial intermediary that buys and sells securities on behalf of clients and for its own account.
- Securities Investor Protection Act (SIPA): The federal law that created SIPC, establishing guidelines and procedures to protect customers from the failure of brokerage firms.
- Customer: A person or entity with a brokerage account eligible for SIPC protection.
- FDIC (Federal Deposit Insurance Corporation): An independent agency that insures deposits in U.S. banks and savings institutions up to $250,000 per depositor, per insured bank.
Online References
- SIPC Official Website
- SEC: Securities Investor Protection Corporation
- Investopedia: SIPC - Securities Investor Protection Corporation
Suggested Books for Further Studies
- “The Investor’s Guide to Technical Analysis: Predicting Price Action in the Markets” by Charles D. Kirkpatrick II and Julie Dahlquist
- “Understanding Options 2E” by Michael Sincere
- “The Intelligent Investor: The Definitive Book on Value Investing” by Benjamin Graham
- “Security Analysis: Sixth Edition” by Benjamin Graham and David Dodd
Fundamentals of SIPC: Financial Protection Basics Quiz
Thank you for exploring the fundamentals of the Securities Investor Protection Corporation (SIPC). Continue deepening your understanding of financial protections and securities markets!
