The Securities Investor Protection Corporation – SIPC

There are several ways to hold your investments (for more information, read all about investment holding methods). Most ordinary investors own their stocks, bonds, mutual funds, and other securities through their brokerage accounts. The result is that the firm itself technically owns the stock and holds it on behalf of their clients. If and when a brokerage firm goes bankrupt, without protection from the SIPC, the clients would lose all of their assets and be wiped out despite the businesses they held, companies such as Coca-Cola or Berkshire Hathaway, being perfectly fine. Stock certificates, on the other hand, can be lost in addition to being a hassle to register, put in a safe deposit box, turn back in upon sale, and re-register to the new owner. Knowing this, the government created the Securities Investor Protection Corporation – the SIPC for short – in 1970 through Securities Investors Protection Act. It is not an agency of the Federal government, but instead a member institution where each of the financial institutions that are a part of it pay in to the system.

The SIPC does not protect investors against losses from their investments. All it does is replace many of the investments held in their account if their broker or financial institution goes bankrupt. That’s it. If you owned 500 shares of General Electric prior to a bankruptcy, all you’re going to get is 500 shares of General Electric in a new brokerage account at the institution of your choice after the bankruptcy is sorted out by the SIPC staff. It’s that simple. In the meantime, GE might be up, it might be down, or it might have gone nowhere.

It’s important to understand what the SIPC does not cover. According to the official web site, “SIPC does not cover individuals who are sold worthless stocks and other securities. SIPC helps individuals whose money, stocks and other securities are stolen by a broker or put at risk when a brokerage fails for other reasons,” They also go on to say:

When SIPC gets involved. When a brokerage firm fails owing customers cash and securities that are missing from customer accounts, SIPC usually asks a federal court to appoint a trustee to liquidate the firm and protect its customers. With smaller brokerage firm failures, SIPC sometimes deals directly with customers.

Investors eligible for SIPC help. SIPC aids most customers of failed brokerage firms when assets are missing from customer accounts. (A list of ineligible investors may be found in the fourth question in the next section of this brochure).

Investments protected by SIPC. The cash and securities – such as stocks and bonds – held by a customer at a financially troubled brokerage firm are protected by SIPC. Among the investments that are ineligible for SIPC protection are commodity futures contracts and currency, as well investment contracts (such as limited partnerships) that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.

Terms of SIPC help. Customers of a failed brokerage firm get back all securities (such as stocks and bonds) that already are registered in their name or are in the process of being registered. After this first step, the firm’s remaining customer assets are then divided on a pro rata basis with funds shared in proportion to the size of claims. If sufficient funds are not available in the firm’s customer accounts to satisfy claims within these limits, the reserve funds of SIPC are used to supplement the distribution, up to a ceiling of $500,000 per customer, including a maximum of $100,000 for cash claims. Additional funds may be available to satisfy the remainder of customer claims after the cost of liquidating the brokerage firm is taken into account.

How account transfers work. In a failed brokerage firm with accurate records, the court-appointed trustee and SIPC may arrange to have some or all customer accounts transferred to another brokerage firm. Customers whose accounts are transferred are notified promptly and then have the option of staying at the new firm or moving to another brokerage of their choosing.

How claims are valued. Typically, when SIPC asks a court to put a troubled brokerage firm in liquidation, the financial worth of a customer’s account is calculated as of the “filing date.” Wherever possible, the actual stocks and other securities owned by a customer are returned to him or her. To accomplish this, SIPC’s reserve funds will be used, if necessary, to purchase replacement securities (such as stocks) in the open market. It is always possible that market changes or fraud at the failed brokerage firm (or elsewhere) will result in the returned securities having lost some – or even all – of their value. In other cases, the securities may have increased in value.

How Long Will It Take to Get Your Investments Back?

The SIPC goes on to say, “Most customers can expect to receive their property in one to three months. When the records of the brokerage firm are accurate, deliveries of some securities and cash to customers may begin shortly after the trustee receives the completed claim forms from customers, or even earlier if the trustee can transfer customer accounts to another broker-dealer. Delays of several months usually arise when the failed brokerage firm’s records are not accurate. It also is not uncommon for delays to take place when the troubled brokerage firm or its principals were involved in fraud.”

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