Jan 18, 2024

Financial planning

What is the SIPC? Securities Investor Protection Corporation

What is the SIPC
What is the SIPC

Emily Luk

CPA, CFA - CEO and Cofounder of Plenty

The Securities Investor Protection Corporation (SIPC) is a nonprofit membership organization that insures customer accounts if brokerage firms fail. It’s a central part of how investors are protected in the US.

How does SIPC coverage work?

SIPC protects investor accounts by up to $500,000 in securities for each failing broker, including a $250,000 cash limit per account. If a broker liquidates, SIPC transfers or sells its accounts’ assets to substitute firms. And typically refunds investors within months. This prevents holdings and cash from disappearing if companies abruptly close down.

To date, the SIPC has helped recover $141.8 billion in assets for an estimated 773,000 investors. This includes $105.7 billion recovered and distributed for more than 111,000 former Lehman Brothers customers as well as helping Madoff ponzi scheme victims recover more than $13 billion. 

You can also think of SIPC insurance for investment accounts as the equivalent of FDIC insurance for bank accounts. They operate differently, but their purposes are the same–to keep your money safe.

What is not covered by SIPC insurance?

It’s also important to know what SIPC doesn't cover. It doesn't protect your investments if the broker dealer isn't part of SIPC. Nor does it shield you from market losses or promises of how well an investment will do. 

This is because losses in the ever-changing world of investing are normal. If a company goes out of business, however, SIPC steps in to replace missing stocks and securities if possible.

SIPC also doesn't protect commodity futures contracts, foreign exchange trades, fixed annuity contracts, or certain investment contracts that are not registered with the U.S. Securities and Exchange Commission. If you hold cash linked to commodity or currency trades, SIPC won't cover that either. 

Why is SIPC’s mission important?

SIPC’s mission is important because even diligent brokers can fail, especially during financial crises. Without this type of insurance coverage, investors would be at risk of losing all the money and investments in their accounts if their broker suddenly went out of business. 

Thankfully, SIPC helps eliminate this type of worst-case scenario through insured payouts if a member brokerage shuts down. And this in turn preserves market confidence.

Who are the members of SIPC?

Over 3,500 brokerage firms are SIPC members including Plenty’s brokerage services provider Atomic Brokerage LLC and our clearing and custody services provider BNY Mellon / Pershing.

Other SIPC members you may recognize include Charles Schwab, Fidelity, and Morgan Stanley. You can also check SIPC’s online member list anytime to see which brokerages offer investor protection.

Is SIPC membership required?

Yes, today all registered broker-dealers are required to be members of SIPC with only a few exceptions. 

SIPC members are charged an assessment rate, which is currently 0.0015 of Net Operating Revenues (as of December 2023). Think of these assessments as membership dues, which are then used to fund SIPC’s protection reserves and its mission.

SIPC’s history and why it matters

The SIPC has a long history and has been around for over 50 years. It was created under a federal law known as the Securities Investor Protection Act in 1970. It’s not actually a part of the US government though, nor does the SIPC have any control over how its members are regulated.

The main reason why SIPC was formed is because a large number of brokers collapsed between 1968-1970. Hundreds of broker-dealers were acquired, merged, or went bankrupt because of a significant “paperwork crunch.” 

Why did this happen? During this time period, there was way more trading volume than most brokers could handle operationally. Without enough bandwidth to process and settle so much trading activity, many trades were not completed properly and failed. These errors ended up being quite costly and caused many brokerages to go out of business. Needless to say, countless investors lost a lot of money too.

Congress needed a way to restore the public’s confidence in the US securities markets. So the SIPC was formed as a way to protect investors from any other broker-dealer collapses going forward. 

Recent policy changes by the SIPC

In response to recent major broker failures like Lehman Brothers, SIPC strengthened its coverage and responsiveness–now processing claims faster while expanding protections for more asset types. 

This modernization and larger umbrella preserves market faith and helps SIPC to better address future crises or instability.

The SIPC Is There For The Investor

To recap, SIPC insurance protects investors from company risks beyond their individual control such as broker-dealer collapse, like how FDIC insurance protects depositors from bank collapse. 

It acts as a safety net to ensure that investors are protected from worst-case scenarios and helps maintain consumer confidence in the securities markets.

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Emily Luk

CPA, CFA - CEO and Cofounder of Plenty

Emily is the ceo and cofounder of Plenty. Started by a husband and wife team, Plenty is a wealth platform built for modern couples to invest and plan towards their future, together. Previously, she was VP of Strategy and Operations at Even (acquired by Walmart/One) and a founding team member of Stripe's Growth and Finance & Strategy teams. She began her career as a VC, and was one of the youngest nationally to complete her CPA, CA and CFA designations.


Financial planning

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