SIPC and the Securities Investor Protection Act (SIPA)

SIPC is the customer-protection backstop that sits behind every other rule in this unit:

• Net capital, customer protection, hypothecation, lending, and recordkeeping aim to prevent firm failures from harming customers
• SIPC stands behind those rules to protect customers when failures happen anyway
• The other rules in this unit (net capital, customer protection, FOCUS reporting, early-warning notification, lost-securities reporting, the FINRA early-warning notification, and the fidelity-bond requirement) reduce the frequency and severity of SIPC events
• SIPC handles the residual

SIPC Membership: Mandatory for Most BDs

Every broker-dealer registered under the Exchange Act must be a SIPC member, with limited exceptions:

SIPA establishes SIPC as a non-profit corporation funded by member assessments. SIPC is not a federal agency; it is a private corporation chartered by federal statute, with its membership and assessment structure prescribed by SIPA.

Funding

SIPC is funded by annual assessments on member firms. The assessment formula is set by SIPC's board and reflects the firm's revenues. Larger firms pay larger assessments; smaller firms pay smaller assessments. The accumulated fund is used to pay customer claims when a member firm fails.

Exam Tip: Gotchas

• SIPC is a NON-PROFIT, MEMBER-FUNDED corporation, not a federal agency. The exam may probe whether SIPC is "an SEC subsidiary" or "an FDIC equivalent"; SIPC is its own entity, established by SIPA, funded by member firms, supervised by the SEC.

Coverage Limits per Customer per Capacity

SIPC coverage applies per "separate customer" per "separate capacity":

• $500,000 total per separate customer per separate capacity
• Includes a $250,000 sub-limit for cash claims

What "Separate Capacity" Means

A single customer can hold accounts at the same BD in multiple separate capacities, each entitled to its own $500,000 / $250,000 coverage:

A customer with an individual account, a joint account (with spouse), and an IRA at the same firm has three separate $500,000 / $250,000 coverages, not one combined limit. The capacity-by-capacity application can substantially expand coverage for diversified retail customers.

What "Separate Customer" Means

For joint accounts, each joint owner is a separate customer for SIPC purposes. A customer with two joint accounts at the same firm (one with spouse, one with sibling) is two separate "customer / capacity" combinations for the spouse-joint and sibling-joint, each with its own coverage.

Exam Tip: Gotchas

• Each separate capacity gets a fresh $500K / $250K limit. A customer with an individual account, a joint account, and an IRA at the same broker-dealer has 3 separate $500K coverages, not one combined $500K. The exam tests this expansion of coverage frequently.
• The $250,000 cash sub-limit is WITHIN the $500,000 total. It is not added to it. A customer with $300,000 of securities and $300,000 of cash has $500,000 total covered ($300K securities + $250K cash sub-limit), with $50K of cash uncovered.

What SIPC Covers

SIPC covers the disappearance of customer property when the BD fails:

The coverage applies when the firm fails and customer assets cannot be returned, typically because of misappropriation, fraud, or operational failure that left customer assets unaccounted for.

What SIPC Does NOT Cover

The list of exclusions matters as much as the inclusions:

Exam Tip: Gotchas

• SIPC is NOT the same as FDIC. SIPC does not protect against decline in value, only against the DISAPPEARANCE of the securities or cash due to the broker-dealer's failure. A customer whose Tesla stock drops 90% has no SIPC claim; a customer whose broker-dealer goes under and cannot deliver the Tesla stock does have a SIPC claim.
• SIPC does NOT cover commodity futures, foreign exchange, or fixed annuities. A customer with a futures position at a BD-FCM has commodity-customer protection under different rules (CFTC / NFA), not SIPC. The exam may probe edge cases; the futures and FX exclusions are testable.

Liquidation Process

When SIPC determines a member is in financial trouble, it may apply to a federal court for the appointment of a trustee to liquidate the firm under SIPA's trustee-liquidation framework.

Trustee Powers

The trustee:

• Takes control of the firm's books, records, and customer assets
• Identifies customer property and matches it to customer claims
• Returns customer property to customers where possible (transferring accounts to another BD)
• Uses SIPC funds to cover the gap when customer property is not fully recoverable, up to the coverage limits

The 90-Day Liquidation Window (Conceptually)

Most SIPC liquidations target completion of customer-property distribution within roughly 90 days of the trustee's appointment. The actual timeline varies based on firm complexity.

SIPC Advances

SIPA's advances framework allows SIPC to fund the trustee's cash advances to cover customer claims. The advances are how SIPC's $500K / $250K coverage gets to the customer in practice: the trustee determines the claim, and SIPC funds the difference between the firm's recoverable customer property and the customer's claim, up to the coverage limit.

Prohibited Acts

SIPA's prohibited-acts framework imposes liability for:

• False SIPC representations (e.g., a non-member firm telling customers it is SIPC-protected)
• Interfering with the liquidation process
• Other prohibited acts that frustrate SIPA's customer-protection purpose

Exam Tip: Gotchas

• The trustee is appointed by a FEDERAL COURT on application by SIPC. SIPC does not appoint the trustee directly; it applies to court for the appointment. The exam may probe the procedural steps; SIPC initiates, court approves and appoints, trustee executes.

Excess SIPC Insurance

Many firms purchase excess SIPC insurance from private insurers (commonly Lloyd's of London) to cover claims above the $500,000 / $250,000 SIPC limits. Excess SIPC:

• Is private insurance, not SIPC itself
• Sits on top of statutory SIPC coverage
• Covers larger customer accounts that exceed the SIPC limits

Excess SIPC is a competitive feature firms market to high-net-worth customers. A customer with $5 million at a firm with excess SIPC coverage of $50 million per customer has substantially more protection than the $500K SIPC alone provides.

Exam Tip: Gotchas

• Excess SIPC is PRIVATE INSURANCE, not part of SIPC. A firm marketing "excess SIPC" coverage is using a private insurance policy to supplement statutory SIPC. The exam may probe whether excess SIPC is "more SIPC"; it is not, it is a separate private layer.