SIPC insurance

Brokerage firms are required to provide SIPC insurance to all customers. The Securities Investor Protection Corporation (SIPC) is an industry-funded nonprofit organization that provides insurance to brokerage customers if a broker-dealer goes bankrupt. If a brokerage firm becomes insolvent, SIPC works to help customers receive the securities and cash that should be in their accounts.

Broker-dealers hold (have custody of) customers’ assets, so issues can arise if the firm fails. For example, the firm might not have properly tracked customer positions, or some assets might be missing by the time the firm enters bankruptcy. SIPC insurance is designed to address these kinds of shortfalls.

SIPC insurance covers brokerage customers up to $500,000 of securities and cash per registration, but no more than $250,000 in cash. If a customer has a margin account, only the customer’s equity is covered. That means any amount the customer owes the broker-dealer must be subtracted from the customer’s assets before SIPC coverage is applied. If a customer’s claim exceeds SIPC limits, the customer becomes a general creditor of the broker-dealer.

A separate SIPC coverage limit applies to each separate registration. In general, you get a new coverage limit when a different owner is involved. For example, if you have an individual account and a joint account with your spouse, those are two separate registrations, so you have two separate SIPC coverages. However, if you have an individual cash account and an individual margin account, both accounts are under the same individual registration, so SIPC provides only one coverage for the two accounts.

When a customer opens an account, the broker-dealer must provide confirmation of SIPC coverage. The broker-dealer must also provide annual confirmations of SIPC coverage to each customer.

SIPC insurance covers broker-dealer failure only; it does not cover market risk. If an investor loses money because an investment declines in value, SIPC insurance does not cover those losses.