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What Is Securities Investor Protection Corporation (SIPC)?

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by Beatrice Mastropietro · 6 min read
What Is Securities Investor Protection Corporation (SIPC)?
Photo: SIPC

Many are unaware of the Securities Investor Protection Corporation (SIPC) or what it accomplishes. This guide will explain who SIPC protects, how it operates, and why it is crucial to your investment portfolio.

Investing in securities is becoming popular all over the world. You need to be careful because sometimes a company can go bankrupt or do something terrible. It’s important to know that if you invest with a Member Brokerage Company, your investment is subject to protection against the Securities Investor Protection Corporation (SIPC). The SIPC also works as a well-respected financial organization.

The Securities Investor Protection Corporation ensures the safety of stockholders and securities customers if a broker/dealer fails.

The Corporation originally appeared in 1970 as part of the reforms of the Commission on Stock Exchange Practices, known as the “Pierce Commission”. President Lyndon B. Johnson convened the Pierce Commission after volatile stock prices from 1969-1970 caused Americans to worry more about investor protection.

When you buy stocks, bonds, or mutual funds registered with the US Securities and Exchange Commission (SEC), you will be provided a transaction statement showing where your securities are stored. This is done so that someone else can take over if a difficulty arises, such as the market manufacturer disappearing or leaving the business for a reason. As a result, as an investor, you don’t have to be concerned about it.

History and Leadership of Securities Investor Protection Corporation

In 1970, Congress enacted the federal securities laws creating an agency to protect investors in stock certificates and other securities. The new institution was the SIPC. Created by Title II of the Wall Street Reform Act of 1970, Congress had decided that a new form of protection should be available. It would not insulate brokers from their negligence but provide direct assistance to investors who had purchased common stocks issued by brokerage firms registered with the Commission. This resulted in a different approach. Instead of relying upon state law remedies and restrictions on broker behavior, it mandated that member firms purchase private insurance with assessments those firms pay.

SIPC is the largest brokerage coverage group in the world. It offers industry-specific solutions and unparalleled customer service for its clients. Josephine Wang has been president and CEO since 2019, while Kenneth J Caputo assists as general counsel and secretary. Charles Glover serves as Vice President of Finance.

SIPC Insurance

SIPC insurance protects your cash and securities in case a brokerage firm or its clearing broker holding them goes out of business. It also covers most cash and securities you stored at other financial institutions if they go bankrupt.

As of August 2021, there are about 4200 broker-dealer firms that SIPC registered. These include securities, commodity futures, options brokers, bank and savings associations, trust companies, credit unions, investment bankers, as well as issuers of asset-backed securities.

SIPC only protects custody. Therefore, SIPC will try to help clients reclaim stock and cash in their brokerage accounts.

SIPC protects cash in a brokerage account, whether it is money deposited to purchase securities or from shares that have been sold. The protection does not extend to cash connected with commodities transactions. A customer’s cash deposit is safe even if the funds originate in another country, as long as they are converted into U.S. dollars when deposited at a mutual fund company and subsequently transferred to a broker-dealer, regardless of denomination, before converting them into US dollars.

SIPC Insurance Limits

Although SIPC insurance limits are flexible, they nonetheless rely on the value of cash and securities a brokerage firm holds. Therefore, in periods when the market drops precipitously, a customer may discover that their policy limits will not cover all losses.

Brokering companies involved in the Securities Investor Protection Corporation (SIPC) must insure at least up to specific sums of cash and securities. In particular, cash equity claims are up to $500,000 for each client, and there is a $250,000 limit for each individual or organization. Future security claims are up to $500,000 per client, with a $500,000 maximum from any single account.

There are several other limitations to consider:

  • Market risk not covered. SIPC is not a market risk security net. SIPC may not be able to recoup for you when markets shift if you lose money in your investing or trading account. With SIPC, however, a trustee will control any money uncollectible in his duty if your broker is bankrupt or becomes unable to refund your money.
  • Dollar limitations. Members are subject to maximum protection of $500,000. For example, if you have 2,000 ABC shares worth roughly $400,000 or less and $100,000 in cash transferred into the account, you will be protected up to this limit. SIPC will cover you for a total of $500,000 if you have a brokerage account under your name and an identical account in the same business, which many potential investors fail to understand.
  • Protected investments. SIPC only covers a select number of investment types. Investments it does cover include banknotes, stocks, and bonds. You should check the printout first to see what types are registered before investing in assets, such as partnerships or annuity contracts that aren’t covered.

SIPC Membership

SIPC membership relies on several requirements. Firstly, a financial institution with no less than $1,000,000 in paid-in capital can apply for membership. This may be a bank, insurance company, savings and loan association, or trust company that provides only trust or fiduciary services and engages solely in activities permitted for such institutions under applicable law.

A bank holding company, as defined in Section 2(a) of the Bank Holding Company Act, which owns 100% of a state member bank, as defined in Section 3(h)(2) of the Federal Deposit Insurance Act, may apply for SIPC Membership on behalf of its state member bank. The holding company must file a separate membership application.

SIPC vs FDIC

Both Securities Investor Protection Corporation (SIPC) and Federal Deposit Insurance Corporation (FDIC) are government entities that safeguard investors. The SIPC and the FDIC both safeguard investors. The difference is that they work differently for similar goals.

In broad strokes, the FDIC is an independent federal agency that protects losses in deposit accounts, while the SIPC is a nonprofit membership corporation that protects clients of broker-dealers that are members of the SIPC. Besides, SIPC protects stocks, bonds, CDs, treasury securities, mutual funds, and money market mutual funds, while FDIC covers deposit accounts like checking and savings, CDs, and money market accounts. Furthermore, both the FDIC and SIPC also adhere to different coverage limits. The SIPC covers up to $500,000 per customer, while the FDIC protects up to $250,000.

Conclusion

Broker-dealers should cover the amount of security with SIPC to provide safety for investments. If these companies are facing a threat of financial difficulty and do not have enough funds to repay insurance, $500,000 worth of safety will be provided.

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FAQ

What is SIPC?

The Securities Investor Protection Corporation is a nonprofit organization that ensures the safety of stockholders and securities customers if a broker/dealer fails.

What is the purpose of SIPC?

SIPC aims to protect investor’s money in the case, the firms they had invested in goes bankrupt.

What protection does the Securities Investor Protection Corporation SIPC provide to investors?

SIPC insurance protects your cash and securities in case a brokerage firm or its clearing broker holding them goes out of business. It also covers most cash and securities you stored at other financial institutions if they go bankrupt.

Who is required to register with SIPC?

The SIPC covers securities brokers and dealers as well as most members of the NASD.

Is SIPC regulated by SEC?

SIPC is the subject of regulation by the Securities and Exchange Commission.

How is SIPC different from FDIC?

Both Securities Investor Protection Corporation (SIPC) and Federal Deposit Insurance Corporation (FDIC) are government entities that safeguard investors. The SIPC and the FDIC both safeguard investors. The difference is that they work differently for similar goals.

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