SIPC Insurance Coverage: What Happens if Your Broker Fails?

If you’ve read this site for any period of time, you’re most likely familiar with FDIC insurance, which protects your deposits in the event of a bank failure. But what if when a brokerage fails? What happens to your investments? The good news is that you’re covered — to a point — by the SIPC.

What is the SIPC?

The Securities Investor Protector Corporation (SIPC) is a non-profit, non-government, membership corporation that is funded by its members. The role of the SIPC is to return funds and/or securities to investors if the broker hold those assets fails. The SIPC also provides protection against unauthorized trading in a customer’s account.

What does the SIPC cover?

In general terms, the SIPC covers notes, stocks, bonds, mutual funds, and other registered securities. It’s important to keep in mind that the SIPC does not protect investors against market risk. Thus, if you make a bad investment decision and lose a ton of money, you’re on your own.

SIPC coverage is limited to $500k per customer, including up to $100k in cash. Note, however, that investor assets cannot legally be co-mingled with brokerage assets. Thus, as long as no laws were broken, all of your assets should be recoverable. In other words, the $500k limit really only applies in the worst case scenario of illegal co-mingling of assets.

How quickly does the SIPC act?

Most investors receive their investments back within 1-3 months after their broker fails. It is important to note here that the SIPC covers your investments themselves, not their value per se. In other words, if you owned 100 shares of stock that were worth $50/share when your broker failed, but which fell to $30/share by the time the SIPC acted, you will get your 100 shares back at current market value.

How can I protect myself?

The first step in protecting yourself is to be sure that your broker is a member of the SIPC. Look for “Member SIPC” or similar language on their signs, ads, etc. Note that all of the entries on my list of the best online brokers are SIPC members, as are most other “mainstream” brokers (i.e., those that you’ve heard of). When in doubt, check the SIPC database.

It’s also important to file your claims in a timely manner. There are a couple of deadlines to be aware of. First, the court-appointed trustee will send out a notice and claim forms with a 30-60 day deadline filing your claim. If you miss that date, but file within six months, your claim may be delayed and/or reduced. After six months, no claims can be filed.

Finally, be sure to keep good records. While the SIPC will take over the broker’s records, it’s possible that there will be errors. Keep track of all transaction confirmations, as well as your latest monthly or quarterly statement. If there’s an error and you can’t substantiate it, the SIPC and/or the new trustee will assume that the broker’s records are correct.

8 Responses to “SIPC Insurance Coverage: What Happens if Your Broker Fails?”

  1. Carol Montalbo Fryman

    What defines a “customer”. I have approx. $ 2 mil, but it is split among three accounts. Two IRA ‘s and a grantor trust( me being the grantor. DoI have $1.5 million in coverage, or only $500,000

  2. Anonymous

    Schwab has insurance from Lloyd’s of London in addition to SIPC but that insurance seems to be limited to $600 million for the whole company.

    The reputability of your mutual funds is irrelevant. This is about Schwab mishandling your funds, perhaps illegally co-mingling them with their own. Pretty unlikely.

  3. Anonymous

    Does Schwab have higher limits of coverage? My IRA is over the limit, but all of it is in reputable mutual funds. They currently hold none of my stocks, but I am thinking of switching these (non-IRA) to their brokerage side. These are well under the SPIC limit.
    Am I OK since the mutual fund families have my assets?

  4. Anonymous

    It seems SIPC currently covers up to $250,000 in cash. See below the statement from SPIC web site:

    Terms of SIPC help.
    Customers of a failed brokerage firm get back all securities (such as stocks and bonds) that already are registered in their name or are in the process of being registered. After this first step, the firm’s remaining customer assets are then divided on a pro rata basis with funds shared in proportion to the size of claims. If sufficient funds are not available in the firm’s customer accounts to satisfy claims within these limits, the reserve funds of SIPC are used to supplement the distribution, up to a ceiling of $500,000 per customer, including a maximum of $250,000 for cash claims. Additional funds may be available to satisfy the remainder of customer claims after the cost of liquidating the brokerage firm is taken into account.

  5. Anonymous

    When Madoff’s victims heard the news and got over their initial shock they were at first comforted by the SIPC seal on their statements. They were victims of fraud and theft who were failed by the SEC but it seemed their SIPC insurance would provide at least partial restitution.
    What they have come to realize however is that SIPC is not on their side. SIPC has proven to be an adversarial organization which despite having been created by Congress to protect “mom and pop” investors has been hijacked by private practice bankruptcy attornies who are directly incentivized to deny claims and to clawback and revictimize the victims while “preserving” the meager funds the wall street firms paid to provide insurance in the first place. SIPC is a sham and a fraud entirely beholden to the brokerage industry.

    Let’s face it: unless the SEC and SIPC are revamped NOBODY has got our backs.

  6. Anonymous

    Good points to make. Investors should note that many brokerages voluntarily purchase additional insurance above and beyond the minimum required. Needless to say, those may be better choices if you’re unsure about your firm.

    As B7 stated, reputation means everything – stick with the better names.

  7. Anonymous

    Great post! The risks of the brokerage going bankrupt is often totally ignored.

    There are other brokerage related risks as well. What happens if your account disappears? Or your deposit? Or a certain trade? What happens if someone transfers all the money out of your account?

    It’s important to use a brokerage with a great rep. That might be the best way to mitigate these risks…

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