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What Investment Losses Are Covered by the SIPC?

by Laura Adams

Have you ever wondered what would happen if the brokerage company you use to invest went out of business and disappeared with your money? You’ll be glad to know that the SIPC or Securities Investor Protection Corporation is a system that helps keep U.S. investors safe in the event their brokerage has financial trouble or tries to pull a fast one.

What is the SIPC?

The SIPC is a nonprofit corporation created by Congress. Since its creation in 1970 through the end of 2009, it’s helped an estimated 763,000 investors recover $108 billion in assets! To do this, they disperse funds from a reserve account that’s funded by SIPC member brokers. The SIPC works to return a certain amount of cash, stocks, bonds, and other securities to investors when their brokerage firm closes and still owes them money.

The SIPC is not like the FDIC

Protect Your Investments

Protect Your Investments

It’s important to understand that the SIPC does not work like the FDIC, or Federal Deposit Insurance Corporation. The FDIC covers a certain amount of money that you put in a bank account, such as a checking, savings, certificate of deposit (CD), or a retirement account. Unlike the SIPC, the FDIC doesn’t cover any invested funds. (For more information about FDIC insurance, be sure to read chapter three–called Choosing the Best Banking Accounts–of my new book, Money Girl’s Smart Moves To Grow Rich.)

What Investments Are Not Covered by the SIPC?

The SIPC helps investors when their money is stolen or put at risk if their brokerage goes out of business—but they don’t bail investors out of bad investments. There simply is no guarantee against loss or fraud in the investment marketplace and some investments are not eligible for SIPC protection. These include investments that are not registered with the Securities and Exchange Commission (SEC), such as commodity futures and fixed annuity contracts.

Who Offers SIPC Protection?

Brokerages that are members of the SIPC are the only ones that can offer this protection to their customers. You know you’re dealing with an SIPC member broker when you see the words “Member Securities Investor Protection Corporation” or “Member SIPC” or the logo on their literature, signs, or website. You can also go to the SIPC website at sipc.org to search their member database for specific firms.

SIPC Claim Process

If your brokerage firm and money disappear, the brokerage will be put into liquidation, and you will receive a claim form from the court-appointed trustee. There are strict time limits for filing claims, so be sure to adhere to any deadlines you receive with a bankruptcy notice. If an SIPC claim form is received after the deadline set by the bankruptcy court, there is a second deadline you can meet. Federal law allows submission of claim forms for six months from the date of the public bankruptcy notice. However, these late claims won’t be processed as quickly and may not result in full reimbursement.

If your broker is in trouble it’s possible that your account could be transferred to another brokerage firm before you’re even aware there’s a problem. In the event of a transfer, it’s still recommended that you file an SIPC claim form. This can protect your rights in the event of any reporting errors that could occur during the transfer of your money.

If a failed brokerage’s records are fraudulent or money was transferred inaccurately, you would need to be able to prove the accounting error. So it’s a good idea to keep copies of your trade confirmations and the most recent monthly or quarterly account statement.

How Much Money Does the SIPC Cover?

The SIPC goal is to replace the actual securities owned by each customer. They purchase the securities in the open market. So the investments may have increased or decreased in value when they’re returned to each customer.

If there isn’t enough money in customer accounts to satisfy all claims, the SIPC reserve funds are used to make up the difference. The maximum amount that the SIPC will pay out of reserve per customer is $500,000. This includes a $250,000 maximum for cash claims.

I hope you never have any problems with your brokerage. But it’s good to know that the SIPC has returned investments to 99% of those eligible for its protection when investors got stuck holding a bag of worms instead of their money.


Published or updated March 8, 2011.
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{ 4 comments… read them below or add one }

1 Hank

Is the return 99% and not 100% because of the coverage limits? Is that lost 1% due to having too much money with one brokerage firm and not having it spread out? Thanks…

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2 Mike Piper

I’m not sure the limits have anything to do with it actually. Assuming it’s the figure from the SIPC website, it talks about “eligible” amounts. I suspect that amounts above the limits would not be included as “eligible.”

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3 Laura Adams

@Hank Yes, if the lost funds can’t be recovered from the brokerage, the SIPC dips into their reserves. But they will only pay out $500,000 per customer. So, the take-away is that having more than $500,000 with any one brokerage could add additional risk to your portfolio.

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4 fredct

While true, be aware that many brokerages purchase additional insurance from private insurers, so that customers don’t feel like they have to be concerned about exceeding the $500K limit.

For example:
http://personal.fidelity.com/global/search/inquira/resultsindex.shtml?question=sipc%20insurance

https://personal.vanguard.com/us/whatweoffer/stocksbondscds/accountprotection

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