The stock market can sometimes be chaotic, leading to portfolio volatility. But while you may be able to tolerate these periodic fluctuations, it would be catastrophic if your broker fails and you simply lose that money forever. Fortunately, this situation is exactly what the Agency for the Protection of Investors in Securities (SIPC) is against.
SIPC is a private non-profit organization with a federal mandate. It was created as part of the Securities Investors Protection Act (SIPA) of 1970, which sought to protect investors from brokerage mediation. Today, SIPC Insurance covers investors up to $ 500,000 in securities and up to $ 250,000 in uninvested money.
While this is the most basic idea in terms of what SIPC does, there are more nuances to how it works. We will cover these details here.
How SIPC coverage works
SIPC coverage provides people with up to $ 500,000 in cash and securities per account. SIPC protection also includes coverage of up to $ 250,000 in cash. The total the amount of coverage is $ 500,000; therefore, if you have $ 500,000 in securities and $ 250,000 in cash, that full amount may not be covered.
However, there are circumstances in which investors are covered by more than 500,000 US dollars. This primarily happens when investors have multiple accounts of different types. For example, if you have traditional individual pension account (IRA) ia Roth IRA at the same brokerage house, SIPC will provide them separately. That way, you’ll be insured for up to a million dollars between two accounts.
Of course, SIPC insurance comes into consideration only under the circumstances in which SIPC must intervene. This happens when it receives a referral from regulatory agencies such as the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Agency (FINRA). If the broker-dealer fails and the buyers lose securities and / or cash, liquidation proceedings will be initiated.
During the liquidation proceedings, the SIPC asks the court to appoint a commissioner to liquidate the firm. The Commissioner may be a lawyer with relevant experience or may be the SIPC himself for minor cases. In very small cases, SIPC may deal with customers directly out of court direct payment procedure.
What does SIPC insurance cover?
SIPC covers certain types of investments as securities. Some examples of securities are:
- Treasury shares
- Money market mutual funds
- Deposit certificates
Each of these securities is covered by what the SIPC calls “separate capacities”. Basically, separate capacities are just different types of investment accounts. Some examples of separate capacities are:
- Individual accounts
- Joint accounts
- Trust accounts
- Company accounts
- Traditional IRA and Roth IRA
- Accounts kept by the executor of the estate
- Accounts maintained by a legal guardian
These are some, but not necessarily all, of the types of securities and capacities covered by the SIPC. However, you should always check with your broker for additional details or account types not mentioned here.
What SIPC insurance does not cover
There are several main types of losses that SIPC insurance does not cover. These include:
- Losses due to market volatility
- Losses due to bad investment advice
- Losses due to security breaches, unless the brokerage company becomes insolvent
In that last place, keep in mind that if brokerage becomes insolvent due to hacking, the hacking itself is irrelevant. If a brokerage house becomes insolvent, you may be covered just like in any other scenario in which the brokerage house is forced into liquidation.
In addition to these scenarios, there are certain types of assets that SIPC does not cover. They contain:
- Forward futures contracts (unless held in a separate marginal portfolio account)
- Forex trading
- Contracts with fixed annuities
- Investment contracts such as limited partnerships
SIPC Vs. FDIC: How they compare
While SIPC and Federal Deposit Insurance Corporation (FDIC) are similar in terms of their work, they have different purposes. SIPC protects investment account holders, while FDIC protects deposit account holders.
|Amount of coverage||Up to $ 500,000 per owner, including up to $ 250,000 in cash||Up to $ 250,000 in cash per customer, per ownership category|
|What is covered?||Shares, bonds, treasury securities, money market mutual funds, certificates of deposit||Check and savings accounts, money market accounts, certificates of deposit|
|What is not covered?||
Is it safe to keep more than $ 500,000 in a brokerage account?
It is safe in the sense that there are measures to help investors recoup their investments before SIPC pillar. Indeed, the SIPC will not be involved until the liquidation process begins. In most cases, buyers can reclaim their property without having to apply to the SIPC.
In most cases, the brokerage house will liquidate itself without the need for SIPC intervention. In addition, brokerages must keep clients’ funds in accounts separate from their accounts. They must also have a certain amount of liquidity, which allows them to cover funds in those cases.
This means that even if you have more than $ 500,000 in one broker account, chances are high that you won’t lose money even if the broker is forced into liquidation.
That said, if a firm refuses or is unable to self-liquidate, and the SIPC has to step in, you may not be able to claim more than its $ 500,000 in securities and cash. Therefore, the safest option is to move money above that $ 500,000 threshold to another type of account or entirely to another brokerage house. (Here is our list the best network brokers.)
Investors with multiple accounts with the same broker
If you have multiple accounts at the same brokerage house, each separate account type will be insured up to $ 500,000, including $ 250,000 in cash. SIPC considers these separate capacities and thus ensures each account independently. But if you have multiple accounts of the same type in the same brokerage house (such as two individual accounts), they will not be insured separately.
In other words, if you have an individual account in your name and a joint account with your spouse, both accounts will be covered for $ 500,000. That means you’ll have $ 1 million in coverage between the two accounts, including up to $ 500,000 of uninvested money.
There are two accounts no insured separately if they are of the same type. Two brokerage accounts in your name would be considered a single property; so the two accounts together are covered for $ 500,000 in securities and include $ 250,000 in cash.
On the other hand, if you have two individual accounts in two different brokerage houses, those accounts would be secured separately.
The bottom line
SIPC is a federal-mandated private nonprofit that provides up to $ 500,000 in cash and equity securities, including up to $ 250,000 in cash. If you have multiple accounts of different types with one brokerage house, you can be insured up to $ 500,000 each account. Note that multiple accounts of the same type with the same brokerage company will not be insured separately.
While SIPC insurance is crucial, you won’t necessarily need to apply even if your brokerage house is forced into liquidation. These companies often opt for self-liquidation and thus return the funds to their customers. Also, they must have extra money available to help in these cases.
Nonetheless, SIPC insurance is an important safeguard so investors can rest assured, knowing that their money will be safe in the event that their broker fails.