The Securities Investor Protection Corporation (SIPC) protects clients of insolvent brokerage firms and unauthorized transactions, but does not insure the value of stocks. It covers individual client claims up to $100,000 in cash and $500,000 for a combination of cash and security investments. Recovery time for investors is usually between one and three months, but can be longer due to inaccurate record keeping or fraud. SIPC does not protect annuities, commodity and futures contracts, or fraudulent investments. Investors should ensure their brokerage company is a member of SIPC to ensure protection.
The Securities Investor Protection Corporation (SIPC) was created in 1970 by the United States Congress to restore the assets of clients of brokerage firms that became insolvent. It also protects against unauthorized transactions. The SIPC is a non-profit corporation financed by its members. Protects individual client claims for up to $100,000 United States Dollars (USD) in cash, and up to a maximum total of $500,000.00 USD for a combination of cash and security investments.
If a brokerage firm closes due to bankruptcy, the Securities Investor Protection Corporation typically works to return clients’ cash, securities and stock in the most timely manner possible. Generally, the time it takes for an investor to recover their funds is between one and three months. However, inaccurate record keeping or fraud by the brokerage firm can lengthen the recovery time.
Often, when investments recover, the Securities Investor Protection Corporation simply transfers client securities from a failed brokerage firm to a more creditworthy one. This usually occurs when the failed company’s records were in good standing. The client can decide to stay with the new company or look for another as they see fit.
It is important to note that Securities Investor Protection Corporation does not insure the value of stocks and other securities. If the value of a stock goes down, an investor cannot recover the lost value, only the stock he owns. This is a major difference between the SIPC and the Federal Deposit Insurance Corporation (FDIC) of the US banking industry. The FDIC insures the value of deposits in the banking system.
There are exceptions as to what the Securities Investor Protection Corporation protects. Some of these exceptions include annuities, commodity and futures contracts, and any investments held by partners in the failed brokerage firm. The SIPC also does not cover contracts not registered with the Securities and Exchange Commission (SEC), or fraudulent investments that a client may have been misled.
If a potential investor wants to make sure that their securities are protected by SIPC, they should make sure that the brokerage company, or any other company they may use to process transactions, is a member of SIPC. This is important because brokerage firms sometimes have corporate affiliates, which offer investment products that are not protected by SIPC. Additionally, any investment verification should always be made to the SIPC member broker to ensure Securities Investor Protection Corporation guarantees.
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