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Protection offered by the Securities Investor Protection Corporation

Understand what the SIPC does and does not do for investors.

By
Laura Adams, MBA
October 8, 2008
Episode #091

With the recent shake up in the financial markets, we’ve been hearing more about the SIPC, or Securities Investor Protection Corporation. In today’s episode I'm going to discuss this system that helps protect U.S. investors. 

What Does the SIPC Protect?

The SIPC is a nonprofit corporation that was created by Congress in 1970. The SIPC works to return cash, stocks, bonds, and other securities to investors within limits when their brokerage firm closes and still owes them money. Some investments are not eligible for SIPC protection. These include investments such as commodity futures and fixed annuity contracts because they're not registered with the Securities and Exchange Commission (SEC).

The SIPC is not like the FDIC

It’s important to understand that the SIPC does not work like the FDIC, or Federal Deposit Insurance Corporation. If you're unfamiliar with FDIC insurance, it’s a topic that I recently discussed. Please go back and listen to shows 85 and 86 if you want more details.

The SIPC is very different from the FDIC because it does not insure invested funds. The SIPC helps investors when their money is stolen or put at risk if their brokerage goes out of business. They don't bail out investors from bad investments. There simply is no guarantee against losses or fraud in the investment marketplace.

However, since its creation to December of 2007, the SIPC has helped an estimated 625,000 investors recover $15.7 billion in assets! To do this, they disperse funds from a reserve account of over $1 billion that's funded by member brokers.

Who Offers SIPC Protection?

So only brokerages who are members of the SIPC can offer this protection to their customers. You know you’re dealing with an SIPC member broker when you see the words “Member Securities Investor Protection Corporation” or “Member SIPC” or the logo on their literature, signs, or website. You can also go to the SIPC website at sipc.org to search their member database for specific firms.

SIPC Claim Process

So what happens in the terrible event that your brokerage firm and money disappear? If the brokerage is put into liquidation, you will receive a claim form from the court-appointed trustee.

There are strict time limits for filing claims, so be sure to adhere to any deadlines you receive with a bankruptcy notice. If an SIPC claim form is received after the deadline set by the bankruptcy court, there is a second deadline you can meet. Federal law allows submission of claim forms for six months from the date of the public bankruptcy notice. However, these late claims won’t be processed as quickly and may not result in full reimbursement.

If your broker is in trouble it's possible that your account could be transferred to another brokerage firm before you're even aware there's a problem. In the event of a transfer, it’s still recommended that you file an SIPC claim form. This can protect your rights in the event of any reporting errors that could occur during the transfer of your money.

If a failed brokerage’s records are fraudulent or money was transferred inaccurately you would need to be able to prove the accounting error. So it's a good idea to keep copies of your trade confirmations and the most recent monthly or quarterly account statement.

How Claims are Fulfilled

The SIPC goal is to replace the actual securities owned by each customer. They purchase the securities in the open market. So the investments may have increased or decreased in value when they’re returned to each customer.

If there isn't enough money in customer accounts to satisfy all claims, the SIPC reserve funds are used to make up the difference. The maximum amount that the SIPC will pay out of reserve per customer is $500,000. This includes a $100,000 maximum for cash claims.

Once a claim is received, most customers can expect to get their funds back within one to three months. If fraud is involved and the firm’s financial records are deemed to be inaccurate, it may take longer to sort out the bad books. For more details on the SIPC claim process, I’ll include a link in the show notes.

Be aware that the SIPC does not protect the funds of any customer who is largely affiliated in the ownership of a closed brokerage. This would include general partners, officers, majority owners, or directors, for example.

I hope you never have to file a claim. But it's good to know that the SIPC has returned investments to 99% of those eligible for its protection.

Administrative

I have a book to give away to the next person to submit a review of the show in iTunes. Just send an email to money@quickanddirtytips.com with your iTunes user name so I can confirm your review. Then I'll send you The Informed Investor by Frank Armstrong, III. His book is a hype-free guide to constructing a sound financial portfolio. I'm glad you're listening.

Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.

Image courtesy of Shutterstock

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