As a financial planner, I get a lot of concerned questions from my clients regarding their investments.
One recently asked me “What exactly happens if the brokerage firm I'm custodied with goes out of business?”
This is a great question because many people don’t know that their investments have protection in the first place, or they’re misinformed about what the protection actually covers.
Keep reading and I’ll help you understand what coverage your investments get from the SIPC or Securities Investor Protection Corporation. You’ll find out exactly what the SIPC does and does not do for investors.
What is the Securities Investor Protection Corporation (SIPC)?
The SIPC is a nonprofit corporation created by Congress in 1970. Their job is to return securities—like stocks and bonds, as well as cash—up to a certain amount, to investors when their brokerage firm closes and owes them money. As of December 2010, the SIPC says they’ve helped an estimated 739,000 investors recover over $109 billion in lost assets.
Not all investments are eligible for SIPC protection. These include investments like commodity futures and fixed annuity contracts that are not registered with the Securities and Exchange Commission (SEC).
The SIPC Is Not Like the FDIC
The SIPC is often compared to the FDIC (Federal Deposit Insurance Corporation) bank insurance—but they’re not related in any way. The SIPC helps investors when their money is stolen or put at risk if their brokerage goes out of business—but they don’t insure invested funds. In other words, the SIPC doesn’t bail investors out of bad investments.
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Who Offers SIPC Protection?
The SIPC is funded by member brokers and you’ve probably seen the SIPC logo on brokerage websites and literature. To find out if your brokerage firm is an SIPC member visit sipc.org and search the member database. Or you can call the SIPC Membership Department at (202) 372-8300.
How to File an SIPC Claim
So what happens if your money disappears from an SIPC member broker? You’ll typically receive an SIPC claim form from the court-appointed trustee who’s in charge of liquidating the firm’s assets. By the way, there are strict time limits for filing claims, so be sure to adhere to any deadlines you receive.
If your broker is in trouble it's possible that your account could be transferred to another brokerage firm before you even know there's a problem. In the event of a transfer, it’s still recommended that you file an SIPC claim form. That can protect your rights in the event of reporting errors that could occur during the transfer of your money.
How SIPC Claims are Paid
The goal of the SIPC is to replace the actual securities you lost. Since they have to purchase those securities in the open market, your investments may have increased or decreased in value by the time the SIPC returns them to you.
If there isn't enough money in liquidated customer brokerage accounts to satisfy all claims, the SIPC has a huge reserve fund that kicks in to make up the difference.
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.
How to Stay Safe from Investment Fraud
It's good to know that the SIPC has returned investments to 99% of the investors eligible for its protection. But I’d prefer that you never get into a situation where you need SIPC protection! Here are several resources where you can learn how to stay safe from shady brokers and investment fraud:
- Securities and Exchange Commission – sec.gov and investor.gov
- FINRA (Financial Industry Regulatory Authority) – finra.org
- National Fraud Information Center – fraud.org
- Investor Protection Trust – investorprotection.org
- Securities Industry and Financial Markets Association – sifma.org