SIPC insurance coverage protects client’s of a brokerage firm against losses related to the bankruptcy of the firm or fraud by the brokerage firm or its employees. SIPC stands for Securities Investor Protection Corporation. It does not cover money lost due to market fluctuations, commodity futures, fixed annuity contracts, identity theft or any other third party fraud. All stock and bond brokers are required to have SIPC insurance coverage for their clients.
If the SIPC intervenes, customers of a brokerage firm that fails will recover all the stocks and bonds that are being, or have already been, registered in their name. However, in most cases securities are not held in the customer’s name but in the name of the firm (alsor referred to as “the street name”. This is where SIPC insurance coverage comes into play.
Outstanding claims after assets registered in client’s names, are compensated on a pro rata basis with any remaining customer assets of the firm. The SIPC will use its own funds to allow for the distribution of compensation to an upper limit of $500,000 per customer, of which a maximum of $250,000 may be used to meet cash claims, if there is not enough money in the firm’s customer accounts.
Formed by the United States Congress, SIPC has its own funds of $1.7 billion dollars and various credit lines including one of up to $1 billion extended by the U.S. Treasury. It may arrange for customer accounts to be transferred to another brokerage form if records in the failed brokerage firm are accurate. Otherwise, the official statement from the SIPC is that “most customers can expect to receive their property in one to three months”. Inaccurate records or incidents for fraud relating to the brokerage firm may mean additional delay.
SIPC insurance coverage does not function in the same way as FDIC (Federal Deposit Insurance Corporation) insurance. The FDIC insures savings deposits against loss with “the full faith and credit of the United States Government” and covers all investors for savings products and savings-like products issued by an FDIC-insured institution, up to a certain limit. However, SIPC’s guarantee is primarily based on replacing missing stocks and bonds where possible, rather than paying out cash. The reasoning is that stocks and bonds will vary in price with the market, and that market gains or losses are normal occurrences in this kind of higher risk investment. SIPC insurance coverage does not therefore compensate investors for losses sustained simply because their investments decreased in value.
For the definition and explanation of other bond related terms, visit the Learn Bonds Glossary where you can find the meaning of many other terms.