Securities Investor Protection Corporation Act of 1970 (SIPC)

Last updated Dec 10, 2022 Edit Source

• Regulations

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The Securities Investor Protection Corporation is a government-sponsored corporation that provides protection to customers, in the event of a Broker-Dealer failure

All Broker-Dealers are required to be SIPC members and pay annual dues to SIPC’s investment fund to cover losses due to broker-dealer failure. If they fail to pay, they may not transact business until it’s paid

All SIPC member firms must display the SIPC sign in the lobby of the firm’s offices.

SIPC protects customers of a brokerage firm in the same way the FDIC protects customers of banks, covering customer losses that result from broker-dealer failure, not for market losses.

Most broker-dealers carry additional private insurance to cover larger accounts, but SIPC is the industry-funded insurance required by all broker-dealers.

SIPC covers customers up to $500k per separate customer.

Of the $500k, only up to $250k in cash is covered

Figures might be outdated

Please check with a latest-edition textbook to see if these figures have been updated.

If a customer has a joint account, that joint account is considered a “separate customer” from their individual accounts.

If an account has in excess of $250k in cash, the individual would not be covered for any amount exceeding $250k in cash, and would be come a general creditor for the rest.

SIPC does not consider a margin account & cash account as separate customers.

Exception

SIPC does not offer coverage for commodities contracts

All Broker-Dealers are required to maintain a certain level of net capital, to ensure they’re financially solvent

The capital requirement is contingent upon the type of business the broker-dealer conducts. The larger and more complex the firm’s business is, the greater the net capital requirement

Should a firm fall below its net capital requirement, it’s deemed insolvent, and SIPC will petition in court to have a trustee appointed to liquidate the firm and protect the customers.

The trustee must be a disinterested party, and once the trustee is appointed, the firm may not conduct business or try to conceal any assets.