The Securities Investor Protection Corporation (SIPC)

The Securities Investor Protection Corporation (SIPC) is a non-profit corporation that protects securities investors from financial harm if the brokerage firm that handles their investments fails. The SIPC is made up of brokers and dealers that are registered with the U.S Securities and Exchange Commission (SEC). Although it was created though federal legislation, it is privately funded through financial assessments on its members. The SIPC helps investors by securing their cash, stocks and other securities from failed brokerage firms and returning these securities to the investors as soon as possible. However, there are limits to how much the SIPC can recoup and under what circumstances it can recoup that.

How SIPC Protection Works

Most investors hold their stocks, bonds, mutual funds and other securities through their brokerage accounts. If they have investment cash funds, chances are pretty good that they are held in a similar manner. This means that the brokerage firm owns those securities until the investor decides to sell or transfer them. If the brokerage firm goes bankrupt, the investors' assets are liquidated. Without the SIPC's intervention, those securities would be gone for good, leaving the investors with sizable financial loss.

The SIPC was created to prevent that. When the brokerage firm goes bankrupt, the SIPC will step in. It will also step in if the investors' funds inexplicably go missing from their accounts. Each investor must file a claim explaining what securities and other investment assets the firm had. The SIPC will try to recover all the securities that were registered in each investor's name. If the SIPC cannot find all of the investor's securities, it will buy replacement securities on the open market. Since they will be purchased at market rates, the replacement securities may either lose or gain value. The SIPC cannot spend more than $500,000 per investor.

If the brokerage firm held any of the investors' investment funds, the SIPC will take all of the firm's customer assets and divide them in proportion to investors' claims. If those funds are not enough, the SIPC will use its own funds to cover the difference. However, it cannot give more than $100,000 of its funds to any one investor. Furthermore, if cannot recover securities if the securities were worthless to begin with (even if the investors were misled into believing otherwise).

Finally, the SIPC will try to transfer the investors' accounts to another brokerage firm. The investors can either stay with that firm or move their accounts to firms of their choosing.

The investors' investments are usually returned no later than three months after the brokerage firm's bankruptcy. However, if the brokerage firm's records are inaccurate, several more months may pass before the SIPC sorts them out and returns the investments. This is especially true if the firm was involved in fraud.

Who Is Not Eligible for SIPC Protection

While most investors can qualify for SIPC protection, the SIPC will not use its own funds to help investors who fall in one of the following groups:

  • Officers of the firm--all officers, as well as general partners and the director.
  • Beneficial owners--investors who owed 5 percent or more of any equity security of the firm.
  • Limited partners-- limited partners who have 5 percent or more in the net assets or net profits of the firm.
  • Other controlling influences--any other individuals that have a substancial influence over the management and/or policies of the firm.
  • Brokers and dealers--so long as they act for themselves rather than on behalf of their customers.
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