What Is SIPC Insurance and How Does It Work?

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Updated on Thursday, December 31, 2020

When it comes to investment accounts, the Securities Investor Protection Corporation (SIPC) protects your funds. However, SIPC insurance works somewhat differently than the Federal Deposit Insurance Corporation’s (FDIC) guarantee, which protects your covered bank deposits in case the institution goes under and is no longer solvent.

Read on to find more on exactly how and under what circumstances the SIPC protects your investment accounts.

What does SIPC insurance protect you from?

“SIPC is an important part of the overall system of investor protection in the United States,” said Josephine Wang, CEO of the SIPC. “SIPC works to restore investors’ cash and securities when a brokerage firm fails. Without SIPC, customers at financially-troubled brokerage firms might lose their investments forever.”

In the event that the broker holding your retirement funds goes out of business, SIPC insurance covers up to a combined $500,000 worth of cash and securities, such as stocks and bonds, per account. That protection covers up to $250,000 in cash in the account.

In other words, if you have $400,000 in securities and $100,000 in cash in your brokerage account, and you see on the news that your brokerage has gone out of business, you can rest easy so long as it is registered with the SIPC.

In the above scenario, if your brokerage account had $500,000 in securities and $50,000 in cash, you wouldn’t be fully covered because the total value in the account exceeds the SIPC’s $500,000 limit.

For the purposes of the SIPC’s insurance plan, covered securities include:

Some notable investments that SIPC does not cover are:

  • Any investments in foreign currencies
  • Commodity futures (an agreement to buy or sell a certain commodity, such as gold, at a specific time and price in the future).

What types of losses are not covered by the SIPC?

SIPC insurance only makes you whole if your brokerage goes out of business. It does not cover losses that stem from the regular ups and downs of the markets, which are part of the normal risks and rewards of investing. SIPC insurance won’t help you if your wealth manager makes terrible investment decisions, or if the account underperforms.

Unlike the FDIC, which promises to replace every last penny you lose in an insured account should the bank go under up to its $250,000 per account limit, SIPC insurance doesn’t take into account the value of investments when you purchased them. It only reimburses you for the market value of the investments when the brokerage went under — plus the full value of cash accounts up to the $250,000 cap.

So, if you bought 100 shares of Pets.com at $11 a share in February 2000 but your brokerage firm went under in November 2000 when Pets.com was trading at $0.19 a share, guess what? SIPC insurance is only obligated to return 100 shares at the price the stock currently trades for.

How does SIPC insurance compare to FDIC insurance?

When comparing SIPC insurance to FDIC insurance, there are an array of key distinctions between the two to note, including the types of products they actually insure, their coverage limits and more. The table below hashes out the biggest differences between SIPC and FDIC insurance.

SIPC Insurance vs. FDIC Insurance
SIPCFDIC

What does it cover?

Securities and cash related to the purchasing and trading of those securities in an account with an SIPC-registered brokerDeposit accounts of an FDIC bank or financial institutions, such as a checking account, savings account, money market account, etc.
What doesn’t it cover?Does not protect against the decline in value of your securities, if you are sold worthless stocks or other securities and claims against a broker for bad investment advice. Does not protect other financial products or services that a bank may offer, such as stocks, bonds, mutual funds, life insurance policies, annuities or securities.
What are the limits of coverage?$500,000 per account (per separate capacity*), with up to $250,000 for cash$250,000 per account (per ownership capacity/account type)
Does the insurance require customers to opt in?NoNo
*See the section below for a more detailed explanation of “separate capacity.”

What if I have multiple accounts with the same brokerage?

The issue of multiple accounts with the same broker can quickly become confusing. We can’t stress enough that you should consult directly with your brokerage firm or financial institution about how SIPC insurance covers multiple, separate accounts with the same broker.

In general, the SIPC provides you with the maximum amount of coverage for each separate account you have, as long as those accounts are classified as a different type, what is officially termed as “separate capacity.”

Here are some examples of what the SIPC considers a “separate capacity,” which you may recognize as different account types:

  • Individual accounts
  • Joint accounts
  • Corporate accounts
  • Trust accounts created under state law
  • Individual retirement accounts (IRAs)
  • Roth IRAs
  • Accounts held by executors for estates
  • Account held by guardians for a ward or minor

To help clarify this important point, here are a few scenarios where you might have multiple accounts at the same brokerage with SIPC coverage:

  • You have one individual account open in your name: No surprises here, your account is covered up to $500,000.
  • You have two individual accounts open in your name: Because an individual account is one type of “separate capacity,” your $500,000 worth of coverage is spread across both accounts.
  • You have a traditional IRA account and a Roth IRA account: Each of these accounts is treated as a separate capacity, and so each receives the full $500,000 amount of coverage.

What happens if my brokerage goes under?

If the brokerage you hold your investments with goes out of business, rest assured, you have a number of layers of protection in place that should kick in before SIPC insurance has to.

In the case that your brokerage is compliant with FINRA’s regulatory rules, you can expect the failed brokerage to self-liquidate, in which case it should be in the position to return all of its customers’ securities and other assets in a timely fashion. This is because registered brokerage firms are required to meet certain requirements set forth by FINRA, such as keeping customers’ assets in accounts segregated from their own, and meeting net minimum capital requirements.

In the case that the SIPC does need to step in, you can expect to be notified via a letter that the SIPC has begun a liquidation proceeding in court. You should then carefully follow the instructions set forth by the SIPC, and fill out all of the required forms in a timely fashion.

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