Securities Investor Protection Corporation (SIPC)

Beyond the enforcement remedies under the Uniform Securities Act (USA), there is one more layer of investor protection you need to know: SIPC. While the USA provides remedies for violations of securities laws, SIPC protects investors when a brokerage firm itself fails.

What SIPC Is

• A non-profit membership corporation created by Congress under the Securities Investor Protection Act of 1970 (SIPA)
• SIPC is not a government agency; it is a private, non-profit organization
• SIPC's mission: restore customers' securities and cash when a member brokerage firm fails financially and assets are missing from customer accounts

SIPC Membership

• Most registered broker-dealers are required to be SIPC members
• Membership is funded by assessments on member broker-dealer firms
• Investment advisers are NOT SIPC members; SIPC covers brokerage accounts, not advisory relationships

Coverage Limits

• Total protection per customer: $500,000
• Cash sub-limit (within the $500,000): $250,000
• Securities portion: up to $500,000 (total limit minus cash)

Think of it this way: The $500,000 is the overall ceiling, and cash gets its own smaller ceiling of $250,000 within that. If you had $300,000 in stocks and $250,000 in cash at a failed firm, SIPC would cover $300,000 in stocks but only $200,000 of the cash (to stay within the $500,000 total).

• Coverage is per customer (per "separate capacity"), not per account
• A customer with multiple accounts at the same firm in the same capacity receives one $500,000 limit total
• Joint accounts are treated as a separate customer from individual accounts
• Non-U.S. citizens with accounts at SIPC member firms receive the same protection as U.S. residents

What SIPC Protects

Securities held by a failed member firm:

• Stocks, bonds, notes, debentures
• Treasury securities
• Certificates of deposit (CDs)
• Mutual funds and money market mutual funds
• Other registered investment contracts

Cash held in the account for purchasing or selling securities (in U.S. or foreign currency)

What SIPC Does NOT Protect

• Commodity futures contracts: not securities (except in special portfolio margining accounts)
• Foreign exchange (forex) trades: not securities
• Fixed annuity contracts: insurance products, not securities
• Unregistered investment contracts: must be registered securities
• Unregistered digital/crypto assets: not registered with the SEC
• Market losses (decline in value): SIPC restores missing assets, not lost value
• Bad investment advice: SIPC covers firm failure, not unsuitable recommendations
• Losses from fraud: SIPC is not chartered to combat fraud

Exam Tip: Gotchas

SIPC does not protect against investment losses. If a stock drops from $100 to $10 while held at a solvent broker-dealer, SIPC provides no coverage. SIPC only activates when the firm fails and customer assets are missing. The exam frequently presents scenarios mixing market loss with firm failure.

When SIPC Protection Applies

The process activates when:

1. A member brokerage firm fails financially (becomes insolvent or unable to meet obligations)
2. Customer assets are missing from accounts at the failed firm
3. SIPC initiates a liquidation proceeding in federal court
4. A court-appointed trustee manages the recovery and distribution of customer property
5. SIPC works to return customers' securities and cash as quickly as possible

SIPC vs. Federal Deposit Insurance Corporation (FDIC)

This is one of the most commonly tested comparisons:

Exam Tip: Gotchas

FDIC insures the value of deposits. SIPC restores missing assets. If your broker-dealer fails and your $50,000 in stock is worth $30,000 at the time of failure, SIPC returns $30,000 in stock (current value), not $50,000. SIPC does not make up for market losses.