The Securities Investor Protection Corporation, or SIPC, is a federally-mandated financial regulation agency tasked with providing investor protection and indemnification in the event that broker-dealers, which handle their assets fail. The SIPC was created by a Congressional financial regulation act in 1970 and operates under the auspices of this investor protection law. However, unlike other government financial regulation agencies, the SIPC is not funded by the government but rather through fees levied upon its member brokerage institutions. The governing board of the agency is a mix of Presidential appointees as well as industry-picked directors to represent a broad base of financial regulation perspectives and interests.
SIPC Coverage
While often compared to the similarly-structured financial regulation agency Federal Deposit Insurance Corporation, or FDIC, which insures deposits in the event of a bank failure, the SIPC is actually much stricter in what it will cover. The financial regulation agency does not provide investor protection against market risks and does not ensure principal protection. It also does not cover risks such as identity theft or fraud perpetrated by a third-party. In the event of insolvency of a broker or certain types of fraud committed by the broker, the SIPC first steps in to provide investor protection of any assets that can be recovered. After assets are distributed to the proper owners and if there are still losses, the agency will make investors whole up to $500,000 in equity assets which includes up to $250,000 in cash.
The SIPC provides investor protection primarily for stocks and bonds held in brokerage accounts. Among the things for which there is NO investor protections from the agency are:
- Certain types of annuity contracts
- Currency-based trades or assets
- Private contracts
- Commodity futures or options
SIPC Members
Due to the wide variety of financial institutions, it can sometimes be confusing to determine whether or not a particular one is a member of the SIPC financial regulation agency. Most brokerage firms will advertise their membership to highlight investor protection to draw new business. However, there have often been cases of certain institutions or firms claiming SIPC membership when they do not have this investor protection. The SIPC maintains a database of member institutions on its website so investors can check whether or not their institution is part of this financial regulation system.
