Civil, criminal, and judicial remedies all answer the same question: what happens after someone breaks the law. SIPC answers a different one. It covers what happens when a brokerage firm simply fails and customer assets are missing, whether or not anyone is ever charged with anything.
What SIPC Is
The Securities Investor Protection Corporation (SIPC) was created by Congress under the Securities Investor Protection Act of 1970.
- A non-profit membership corporation, funded by assessments on its member firms
- Not a government agency, despite being created by Congress
- Not the FDIC for brokerage accounts, and not insurance against losing money on investments
- Most registered broker-dealers must be SIPC members
- Investment advisers are not SIPC members, because SIPC covers brokerage accounts, not advisory relationships
Think of it this way: SIPC is a locksmith, not a bodyguard for your portfolio's value. If the vault is broken open and your shares are gone, SIPC works to restore them. If your shares simply fell in value while sitting safely in the vault, there is nothing missing for SIPC to restore.
When SIPC Protection Applies
Two things must both be true:
- A member brokerage firm fails financially, and
- Customer assets are missing from accounts
SIPC then initiates a liquidation proceeding, and a court-appointed trustee manages the recovery and distribution of customer property. Non-U.S. citizens with accounts at a member firm receive the same protection as U.S. residents.
Exam Tip: Gotchas
- Both conditions are required. A solvent firm means no SIPC coverage, no matter what else went wrong in the account.
- SIPC protects the firm's custody function only. It answers "are your assets still there," never "were they a good idea."
Coverage Limits
| Coverage | Maximum |
|---|---|
| Total protection per customer | $500,000 |
| Cash sublimit, counted inside the $500,000 | $250,000 |
The cash sublimit is half the total limit, and it sits inside the total rather than on top of it. A customer with $500,000 in securities and $250,000 in cash is not covered for $750,000.
Separate capacity is what multiplies the limit, not the number of accounts:
- Accounts held in the same capacity are combined and share one $500,000 limit
- Accounts held in a different capacity get their own $500,000 limit
- An individual account and a joint account are different capacities
So a customer with three individual accounts at the same failed firm has one $500,000 limit across all three. That same customer's joint account is a separate capacity and carries its own $500,000.
Exam Tip: Gotchas
- The limit is per customer, per capacity, not per account. Opening more accounts in the same capacity adds no coverage.
- The $250,000 is a sublimit, not a second bucket. Cash and securities together still cap at $500,000.
What SIPC Protects
- Securities held by the failed member firm: stocks, bonds, notes, debentures, Treasury securities, mutual funds, and money market funds
- Certificates of deposit held in the brokerage account, which are protected as securities
- Cash held in the account for buying or selling securities, in U.S. or foreign currency
What SIPC Does Not Protect
| Not covered | Why |
|---|---|
| Decline in value of your securities | Nothing is missing; the assets are still there, just worth less |
| Worthless stock you were sold | The share is present in the account, so there is nothing to replace |
| Bad investment advice | Advice is not a custody failure |
| Commodity futures contracts | Not securities (narrow exception for certain portfolio margin accounts) |
| Foreign exchange trades | Not securities |
| Fixed annuity contracts | Not registered with the SEC |
| Unregistered investment contracts | Must be SEC-registered to qualify |
| Crypto and digital assets | Not registered with the SEC |
Exam Tip: Gotchas
- SIPC does not cover market losses. A stock falling from $100 to $10 at a healthy firm gets nothing, because the shares are still in the account.
- Scenarios often blend a market loss with a firm failure. Ask what is missing, not what was lost.
- Firm failure is the trigger, not wrongdoing. When a failed firm's customer assets are gone, SIPC works to restore them up to the limits regardless of why they went missing; when the firm is solvent, SIPC does nothing regardless of how badly the customer was treated.
SIPC vs. FDIC
| Feature | SIPC | FDIC |
|---|---|---|
| Protects | Brokerage accounts | Bank deposits |
| Limit | $500,000 ($250,000 cash sublimit) | $250,000 per depositor |
| Covers market losses | No | Not applicable (deposits do not fluctuate) |
| Type of organization | Non-profit corporation | Federal government agency |
| Funded by | Member assessments | Bank-paid premiums |
| Trigger | Broker-dealer firm failure | Bank failure |
Exam Tip: Gotchas
- FDIC insures the value of a deposit; SIPC restores missing assets. If a failed firm held $50,000 of your stock and it is worth $30,000 on the day the firm collapses, SIPC returns the stock at its current value. It does not make up the $20,000.
- Both use the number $250,000, for different things: it is the FDIC's whole limit per depositor, but only SIPC's cash sublimit inside a larger $500,000.