SIPC: Protecting Your Investments - A Comprehensive Guide

The Securities Investor Protection Corporation (SIPC) is a non-profit, member-funded organization that works to protect customers from financial loss when a brokerage firm goes bankruptBankruptcyBankruptcy is the legal status of a human or a non-human entity (a firm or a government agency) that is unable to repay its outstanding debts. The SIPC was created in the United States in 1970 under the Securities Investor Protection Act in order to reduce insecurity among investors and boost investment in the securities market.

The SIPC is a member-funded organization, which means that each member firm contributes to a mutually funded pool that can be used for claims in case any member firm is in financial trouble. SIPC members also need to abide by certain rules in order to sustain membership and remain part of the SIPC.

How Does it Work?

The SIPC protects the customers of all registered brokerage firms in the United States. When a brokerage firm fails or is liquidated and the customers’ assets are in jeopardy, the SIPC steps in by acting as:

1. An entity that organizes how the failed brokerage firms’ assets are distributed to its customers.
2. An insurer that protects each customer for up to $500,000 in missing securitiesMarketable SecuritiesMarketable securities are unrestricted short-term financial instruments that are issued either for equity securities or for debt securities of a publicly listed company. The issuing company creates these instruments for the express purpose of raising funds to further finance business activities and expansion., which includes a $250,000 limit for cash.
3. An intermediary that transfers customers’ assets to another brokerage firm in case of financial failure.

The SIPC supports the growth of brokerage firms in the United States by allowing investors to feel secure about their assets and incentivizing investments.

Important Caveats in the Securities Investor Protection Corporation

1. The brokerage firm must be a member of the SIPC in order for the investor to be protected. A list of SIPC members can be found here.
2. The SIPC offers no protection against the decline in value of assets, i.e., it does not work to reduce the systematic risk or idiosyncratic riskIdiosyncratic RiskIdiosyncratic risk, also sometimes referred to as unsystematic risk, is the inherent risk involved in investing in a specific asset – such as a stock –  the that an investor faces. It only steps in when a member-firm is financially distressed and the customers’ assets go missing, with the purpose of recovery and security for customers.
3. The SIPC only protects certain asset classes. The protected assets include stocks, bonds, notes, debentures, transferable shares, certificates of deposits, put/call/straddle options, and cash up to $25,000. The unprotected assets include commodities, currencies, futures contracts, fixed annuities, hedge funds, investment contracts that are not registered with the U.S. Securities and Exchange Commission. (SEC).

Illustrative Example – The Lehman Brothers Case

The liquidation of Lehman Brothers following the 2008 Global Financial Crisis 2008-2009 Global Financial CrisisThe Global Financial Crisis of 2008-2009 refers to the massive financial crisis the world faced from 2008 to 2009. The financial crisis took its toll on individuals and institutions around the globe, with millions of American being deeply impacted. Financial institutions started to sink, many were absorbed by larger entities, and the US Government was forced to offer bailoutsis one of the most complex, protracted cases in the history of the SIPC. Within days of the firm’s liquidation on September 19, 2008, the SIPC transferred $105 billion in customer property for around 110,000 customers.

By December 2, 2008, 925,000 claim forms had been mailed to customers for filing and recovery purposes, with the final claims’ deadline being June 1, 2009 (customers who file claims later than said date might not recover any assets).

However, the liquidation case is still pending – the most recent update being in 2018, when Lehman Brothers agreed to a final accelerated distribution election, which allows unsecured creditors to cash out and receive an additional 1.48% in recovery.

More Resources

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