SIPC Insurance: How it works and the accounts it covers

While it is not too common for brokerage firms to go under, you have a safety net thanks to the Securities Investor Protection Corporation (SIPC). If the firm where you hold your investments does fail, the SIPC protects up to $500,000 worth of assets in your brokerage account.

What is SIPC insurance?

The SIPC is a nonprofit organization that protects the assets in your brokerage account if your brokerage firm fails. The U.S. Congress created the SIPC under the Securities Investor Protection Act of 1970, aiming to restore public confidence in the securities industry after several tough years left many broker-dealers unable to meet their obligations to their customers. In its 50-plus years of existence, the SIPC has helped an estimated 773,000 investors recover more than $143.8 billion in assets.

How the SIPC works

When a brokerage firm faces financial difficulties that lead to a shortfall of cash or securities in customer accounts, the SIPC steps in to manage the liquidation of the troubled firm. If you hold an account with the affected brokerage firm, you can file a claim with the SIPC, which will assist you in recovering your assets.

When a regulator such as the Securities and Exchange Commission (SEC) determines that a brokerage firm is in financial jeopardy, an official liquidation process occurs in federal bankruptcy courts. The SIPC asks the court to appoint a Trustee to support customers in recuperating their assets. If the struggling firm does not have the capacity to reimburse its customers in full, the SIPC advances its own funds to make up the difference.

What does SIPC insurance cover?

SIPC insurance has you covered provided you hold an account containing securities or cash at a brokerage firm that is a member of the SIPC. Most brokers and dealers operating in the U.S. are legally obligated to be SIPC members, but if you have doubts about the status of a company, you can consult an official list of member firms.

Should your affiliated brokerage firm face a financial catastrophe or insolvency, the SIPC protects the cash and securities in your account – up to a maximum value of $500,000, including $250,000 of cash holdings. However, this protection applies only to cases of brokerage failure – the SIPC does not shelter you from declines in the market value of your investment or insure you against bad or negligent investment advice provided by your brokerage.

The protection from the SIPC covers all the assets you hold in your account that are defined as securities under the Securities Investor Protection Act. This includes stocks, bonds, mutual funds and Treasury securities, among others. In contrast, the SIPC does not cover commodities and futures contracts, foreign exchange trades or fixed annuities contracts that are not registered with the SEC.

The SIPC protects different types of brokerage accounts – from taxable individual and joint accounts to traditional and Roth IRAs to corporate and trust accounts. If an investor has multiple accounts under a “separate capacity” – or different account type – then the SIPC protects each type of account up to the maximum amount. For instance, if you held $500,000 in a taxable account and $500,000 in an IRA, SIPC insurance would cover your entire $1 million in assets.

SIPC insurance vs. FDIC insurance

SIPC insurance is distinct from the protection of your cash deposits provided by the Federal Deposit Insurance Corporation (FDIC). The FDIC covers the cash you hold in your deposit accounts in the event that your banking institution fails, but it provides no protection for investable securities. SIPC insurance applies to brokerages rather than banks and protects many types of investment assets beyond cash.

The bottom line

Given the protection provided by the SIPC, you can rest assured that you won’t be left holding the bag if your brokerage firm folds. In the event of a brokerage failure, the SIPC can help you recover your assets. While knowing that this safeguard is in place may help you sleep easier, it’s always a good idea to talk with a financial advisor to fortify your investment strategy against different types of unforeseen circumstances.

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