Is your brokerage account safe?
Can you clarify what SIPC does? I called my brokerage firm to inquire about the security of my investment account, which is not covered by the FDIC. They told me not to worry because my securities and cash are covered by SIPC. What does SIPC do if my brokerage firm goes bankrupt?
The Securities Investor Protection Corp. (SIPC) helps protect account holders if a brokerage firm goes bankrupt. It is an important safety net that can help you worry less about the stability of your brokerage firm. But there are key differences between how SIPC and the Federal Deposit Insurance Corp. offer protection, and remember that while SIPC can come to the rescue in the event of bankruptcy or fraud, it does not protect you from market losses.
Congress created the SIPC in 1970, and almost all brokerage firms registered with the Securities and Exchange Commission are required to be members. It covers stocks, bonds, and other assets held in a brokerage firm that is experiencing financial difficulties (the FDIC, on the other hand, covers bank deposits).
Investors, however, have another layer of protection against failing brokerages even before SIPC needs to step in, as the SEC has strict rules on separating company money from investments. client. Even if a broker goes bankrupt, investors’ money must remain intact.
“Even if a company is in very serious trouble, it can either merge with another brokerage firm or sell part of its business,” says Stephen Harbeck, president and CEO of SIPC. “We only step in when a company has depleted its capital and embezzled clients’ securities.” SIPC didn’t need to get involved, for example, when Bear Stearns was taken over by JPMorgan Chase in March.
If a brokerage firm goes bankrupt, the SIPC first tries to transfer investors’ securities to another firm. If that doesn’t work, it tries to rebuild investors’ portfolios, even buying new stocks or bonds to make up for the missing stocks. Whenever possible, “we give you exactly what was in your account, and if we have to buy it, we will,” says Harbeck. If investments are not available, SIPC will give you money based on their value at the time of brokerage failure.
SIPC first returns your share of the broker’s remaining assets, then uses its own funds (up to $500,000 per account, including a $100,000 cash limit) to buy the same number of shares you owned originally. This $500,000 limit only applies to the maximum amount that SIPC will spend to make up for missing titles; not the total amount of money you can recover. If many client assets remain intact within the brokerage, you can recover far more than this SIPC limit, which is a key difference between how SIPC protects brokerage clients and how the FDIC covers bank deposits.
In the rare event that an investor’s losses exceed SIPC limits, the difference is usually covered by brokers’ supplementary insurance – often provided by Lloyds of London or a new company called CAPCO, the Customer Asset Protection Company, which provides excess SIPC coverage to 15 major brokerage firms, such as Goldman Sachs, Morgan Stanley, Raymond James and Wachovia Securities.
However, it is extremely unusual for investors to max out their SIPC coverage. In SIPC’s history, only 349 people have not received the full value of their accounts from them pro-rated to company assets plus SIPC coverage, says Harbeck, who explains that most of those cases happened. products before 1978, when the maximum SIPC could advance was $50,000, rather than the current limit of $500,000. “With current protective limits and tougher regulations protecting client assets from being used in the brokerage’s business, that’s pretty rare,” he says.
Although your assets should be protected if your brokerage fails, you may lose access to your money for a period of time. If SIPC takes over, it usually takes between a week and two or three months to take control of your account, or longer if the brokerage firm has kept shoddy documentation or has been involved in fraud. SIPC does not protect against market losses while your account is in limbo.
For more information on how SIPC works and to make sure your brokerage firm is a member, visit the SIPC website.
For more information on how the FDIC works, see Is My Bank Safe? Also see the Deposit Insurance section of the FDIC website.