SIPC insurance

Brokerage firms are required to provide SIPC insurance to all customers. The Securities Investor Protection Corporation (SIPC) is an industry-funded non-profit organization that provides insurance to brokerage firm customers in the event of a broker-dealer’s bankruptcy. If a brokerage firm becomes insolvent, SIPC works to ensure their customers receive the assets in their accounts.

Broker-dealers maintain custody of their customer’s assets, so problems could arise if the firm goes bankrupt. What if the company didn’t properly keep track of its customers’ assets? Or what if the firm simply lost them on the way to bankruptcy? That’s what SIPC insurance is for.

SIPC insurance covers brokerage firm customers up to $500,000 of securities and cash per registration, but no more than $250,000 in cash. When a customer has a margin account, only their equity is covered. Meaning, any money owed to the broker-dealer must first be deducted from the customer’s assets prior to applying for SIPC coverage. If a customer exceeds the limits of SIPC insurance, they become general creditors of the broker-dealer.

A new coverage is provided for each separate registration. Essentially, a new coverage is obtained when a new owner is involved. For example, if you own an individual account, plus a joint account with your spouse, you have two separate SIPC coverages. However, if you own an individual cash account and an individual margin account, both are under individual registration. SIPC provides only one coverage for the two accounts.

When a customer opens an account, they must be provided with confirmation of SIPC coverage. Additionally, the broker-dealer must provide ongoing annual confirmations of SIPC coverage to each customer.

SIPC insurance only covers broker-dealer failure and does not cover market risk. If an investor makes a bad investment decision, SIPC insurance does not cover their losses.