The Securities Investor Protection Corporation (SIPC) protects brokerage firm clients against insolvency and unauthorized transactions, with coverage up to $500,000. If a firm goes bankrupt, the SIPC works to return clients’ assets, which can take one to three months. The SIPC does not insure the value of stocks and has exceptions for certain investments. To ensure protection, investors should use an SIPC member-broker and make investments out to the SIPC member-broker.
The Securities Investor Protection Corporation (SIPC) was created in 1970 by the United States Congress to restore the assets of brokerage firm clients who become insolvent. It also protects against unauthorized transactions. The SIPC is a member-funded non-profit corporation. Protects individual client claims up to $100,000 US Dollars (USD) in cash and up to a maximum total of $500,000.00 USD for a combination of cash and securities investments.
If a brokerage firm closes due to bankruptcy, the Securities Investor Protection Corporation typically works to return clients’ cash, securities and shares in the most timely manner possible. Typically, 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 your recovery time.
Often, when recouping investments, the Securities Investor Protection Corporation will simply transfer clients’ securities from a failed brokerage firm to a more creditworthy one. This generally happens when the bankrupt company’s records were in good order. The customer can then decide to stay with the new company or find another one as he sees fit.
It is important to note that the Securities Investor Protection Corporation does not insure the value of stocks and other securities. If the value of a stock falls, an investor cannot recover the lost value, only the stock he owns. This is a key difference between the SIPC and the Federal Deposit Insurance Corporation (FDIC) of the US banking sector. The FDIC insures the value of deposits in the banking system.
There are exceptions to what the Securities Investor Protection Corporation provides protection for. Some of these exceptions include annuities, commodities and futures contracts, and any investments held by the bankrupt brokerage firm’s partners. 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 prospective investor wants to be sure that his securities are protected by the SIPC, he should be sure that the brokerage firm – or any other firm he may use to process transactions – is a member of the SIPC. This is important because brokerage firms sometimes have affiliates, which offer non-SIPC-protected investment products. In addition, any investment controls must always be made out to the SIPC member-broker to ensure the safeguards of the Securities Investor Protection Corporation.
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