What is the SIPC (Securities Investor Protection Corporation)?

The SIPC, or Securities Investor Protection Corporation, exists to protect your investments held in brokerage firms in the event that the brokerage firm experiences bankruptcy or other financial troubles. SIPC is a nonprofit membership organization, and will protect the customers of its member brokerage firms that experience financial difficulties.

That means if you own cash and securities in a brokerage account, and the investment company goes belly-up, the SIPC will restore your funds to you to a limit—as long as your investment company was a member of the SIPC.

How did the SIPC come about?

While it’s not a government agency, the SIPC was established by the federal government in 1970 to help promote public confidence in the U.S. securities markets. As a nonprofit organization, SIPC relies on the membership of brokerage firms to fulfill its obligations to their customers in the case of a firm failure.

From its inception through 2018, SIPC returned $2.9 billion to 773,000 investors. With the help of the SIPC, 99 percent of eligible individuals have been able to get their investments back after brokerage firm failures.

What about federal deposit insurance?

When you deposit money into a bank account, that deposit is insured (up to $250,000) by the Federal Deposit Insurance Corporation. But when you contribute to an account that invests your money in mutual funds, ETFs (exchange-traded funds), stocks, bonds or other investments, those funds are not covered by the FDIC. That’s because they are investments rather than deposits.

By nature, investments carry risk—that’s why they offer the potential for you to earn high returns. But because of that risk, the federal government can’t guarantee your principal deposit.

That’s where the SIPC comes in. It’s not a federal agency, so it doesn’t represent the government covering for bad investments. But it does provide limited protection for investors when their brokerage firms fail.

So what does the SIPC cover?

If you have investments in a brokerage firm and the firm fails, you’ll be covered up to $500,000. The total $500,000 can include up to $250,000 in protection for cash in your account to buy securities (for instance, stocks or bonds).

Yet that protection comes with conditions. First, your brokerage firm must be a SIPC member. Also, you must have securities at your brokerage firm and cash at your brokerage firm to buy securities.

But if your investment firm is not a SIPC member, your investments are not protected. Also, the SIPC does not protect against market losses, promises of investment performance, commodities or futures contracts (a legal agreement to buy or sell a commodity or asset at a specific price and time in the future).

If your covered brokerage accounts included more than $500,000, you may be able to get more back. It depends on whether the firm’s holdings are completely gone or if there is some remaining customer property. SIPC protection covers up to $500,000, but if the brokerage firm still has customer funds available after paying the covered amounts, the remaining funds will be distributed among customers, depending on their claim amounts.

How can I be sure my investments are covered?

If you have investments in a brokerage account, check the firm’s website or your account statement. It should include a fine-print sentence stating that the firm is a member of the SIPC. As long as the firm you’re using is a SIPC member, your investments should be protected.

More than 3,500 securities brokerage firms are members of the SIPC—and most U.S. brokers are required to be members. If you’re still not sure whether your brokerage firm is a member, check the member list.

What should I do if my brokerage firm goes bankrupt?

Brokerage firm failures are rare. But if it does happen to a firm where you have investments, you’ll have to file a claim with the SIPC, similar to filing an insurance claim for your home or car.

Claim forms will be mailed to each customer who had an account with the failing firm during the previous year, and they will also be available online. The SIPC will set a deadline for filing claims for the failing institution, and you must file by that deadline or you may forfeit any coverage.

You can file a claim electronically or by mail. In completing your claim form, you’ll need to describe the cash and securities that your brokerage firm owes you and if possible, provide supporting documents. That might include copies of brokerage statements and trade confirmations. You should also include any correspondence you had with the brokerage firm.

Once you’ve filed a claim, you’ll have to wait for the SIPC’s Trustee to review your claim and your brokerage accounts. After your claim has been reviewed, the Trustee will send you a letter explaining its recommendation for how to handle your account. If you don’t agree with the recommendation, you’ll have 30 days to submit a written objection. If you do agree with the recommendation, you’ll need to sign and return some required documents. After the SIPC receives your signed documents, it will pay you cash or deliver securities to you, up to at least the SIPC limits.

When possible, the SIPC tries to provide investors with the securities they owned before the firm’s failure. This allows you to be back in the same position you would have been in if the brokerage firm had never failed.

How long will it take?

It varies. If the brokerage firm’s records are in shambles, it could take several months for the SIPC to get it all sorted out. If the firm’s liquidation is really complex, it could also take a while. Sometimes, a brokerage firm fails because its principals were committing fraud—which can also lead to delays in getting your money back.

But if your brokerage firm’s records are clean and there was no fraud, you may receive your funds (or some of them) a month to a few months after completing your claim form.

And that’s peace of mind for any investor.