Are Your Investments Insured? Understanding the SIPC
If your brokerage house goes under, you can probably recover some or all of your money — eventually
You’re probably aware of the Federal Deposit Insurance Corporation (FDIC), a government agency that guarantees your savings at member banks up to a specific limit per account. But what about your (usually) larger balances in investment accounts? What happens if a brokerage firm goes under while holding your money?
Here’s where the Securities Investor Protection Corporation (SIPC) comes in. If a broker-dealer, or a seller of investments, goes bankrupt, the SIPC exists to recover as much of your money as possible.
People confuse the FDIC and the SIPC, not just because the acronyms are so similar but also because they both react to the same kind of event: the unexpected liquidation of a financial institution. The similarities end there, though. The FDIC is an independent federal agency, while the SIPC (created by a federal law in 1970) is run as a non-profit corporation with a narrow mandate — to recover investor assets when a brokerage that is a member of the SIPC goes out of business.
You can think of the FDIC as an insurance provider and the SIPC as a legally empowered advocate. FDIC coverage means that the federal government has got your back for up to $250,000 per account for any reason a member bank might fail. Almost no banks operate without FDIC backing. The government created the FDIC in 1933 to encourage Americans to trust banks with their money. In 1970, Congress recognized that an increasing number of retail investors sought similar reassurance as to the safety of their investments, and it created the SIPC.
The SIPC was never intended to offer — and does not offer — blanket insurance-style coverage of invested assets, nor does it investigate fraud or seek restitution if investments lose value. If a brokerage becomes insolvent, assets (including cash) usually remain invested and intact but out of reach to investors. It’s the job of the SIPC to recover the money — up to $500,000 in investments and cash or $250,000 in cash only for each investor. The process takes weeks or months, according to SIPC.
It works like this: Investors who did business with the failed firm over the previous 12 months are contacted. A trustee is appointed to review the books of the broker-dealer and, once a court approves, contacts the clients. After that, it’s up to each client to file claims seeking return of their investments or cash.
If the total claims add up to less than $250,000, the SIPC can return money directly without court intervention. In the case of larger amounts, the SIPC asks the court to empower a trustee, usually a lawyer with experience in bankruptcy and securities law, to liquidate the firm and help the court complete distribution of assets to investors.
In addition, some firms — and particularly those whose clients have large portfolio balances — can elect to carry additional insurance, called “excess SIPC” coverage. Your brokerage should provide details about how much, if any, excess coverage they carry and the name of the insurer. If the firm goes under, SIPC recommends investors contact the carrier directly for specifics.