Securities Investor Protection Corporation (SIPC) [CapiPedia]

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====== Securities Investor Protection Corporation (SIPC) ======
The Securities Investor Protection Corporation (SIPC) is a U.S. federally mandated, non-profit, member-funded corporation that protects investors' assets at member [[brokerage firm]]s. Think of it as a safety net, but for your investment account. If your brokerage goes bankrupt or faces financial failure, SIPC steps in to help you get your [[securities]] (like stocks and bonds) and cash back. It was created under the Securities Investor Protection Act of 1970 to restore investor confidence in the U.S. capital markets. However, it's crucial to understand its limits. SIPC is //not// the same as the [[FDIC]] for banks, and it does //not// protect you against the risk of your investments losing value in the market. Its sole purpose is to protect you from the loss of your assets if your broker-dealer fails. It ensures the "stuff" in your account is returned to you, not that the "stuff" is worth what you paid for it.
===== How SIPC Works =====
==== The Safety Net in Action ====
When a brokerage firm closes due to bankruptcy or other financial difficulties and customer assets are missing, SIPC initiates a liquidation proceeding. A [[trustee]] is appointed by a federal court to oversee the process. The trustee's primary job is to get your property back to you. The first step is usually to transfer your account exactly as it is to another solvent brokerage firm. This is the ideal and most common outcome. If that's not possible, the trustee will liquidate the firm's assets to pay back customers. If there's still a shortfall, SIPC's protection fund is used to cover the difference, up to its specified limits. The entire process is designed to be as seamless as possible for the investor, shielding them from the messy details of a firm's collapse.
==== Coverage Limits: What's Protected? ====
SIPC protection is quite specific. It provides coverage for each customer up to a maximum of **$500,000**. This total includes a special sub-limit for cash.
  * **Total Protection:** Up to $500,000 per customer for missing securities and cash.
  * **Cash Limit:** Within that $500,000 total, there is a **$250,000 limit** on claims for uninvested cash held in your brokerage account.
For example, if you have $300,000 in stocks and $200,000 in cash in your account when your broker fails, you are fully covered. Your $500,000 in assets are all protected. However, if you have $100,000 in stocks and $400,000 in cash, you would receive the $100,000 for your stocks plus the maximum cash coverage of $250,000, for a total of $350,000. The remaining $150,000 in cash would be an unsecured claim against the failed brokerage's estate.
===== Crucial Distinctions: What SIPC Does NOT Cover =====
Understanding what SIPC //doesn't// cover is just as important as knowing what it does. It's not a get-out-of-jail-free card for bad investments. SIPC will **not** reimburse you for:
  * **Market Losses:** If your stocks decline in value, that's your investment risk. SIPC doesn't insure against poor [[investment decisions]] or a bear market.
  * **Worthless Securities:** If you buy a stock and the company goes bankrupt, SIPC protection does not apply. The security is worthless, but it wasn't lost due to broker failure.
  * **Certain Financial Products:** Investments that are not defined as "securities" under the law, such as [[commodities]] contracts, [[futures contracts]], fixed [[annuity]] contracts, and most types of cryptocurrency are generally not covered.
  * **Fraudulent Schemes:** While SIPC may step in if a legitimate firm is run by a fraudster (like in the Madoff case), it doesn't cover losses from investments that were never legitimate securities in the first place (e.g., unregistered securities sold in a Ponzi scheme).
  * **Accounts at Non-SIPC Firms:** Protection only applies to member brokerage firms, which includes virtually all U.S. broker-dealers registered with the [[SEC]].
===== SIPC vs. FDIC: A Common Mix-Up =====
Don't confuse SIPC with its banking cousin, the [[Federal Deposit Insurance Corporation (FDIC)]]. They serve different purposes for different types of accounts.
  * **FDIC:** Insures cash deposits (checking, savings accounts, CDs) held at insured banks. It protects your cash, up to $250,000 per depositor, if the //bank// fails. It guarantees the value of your cash.
  * **SIPC:** Protects a customer's securities and cash held at a //brokerage firm//. It ensures the //return// of your assets if the brokerage fails, not their market value.
An easy way to remember: **FDIC protects savers; SIPC protects investors.**
===== A Value Investor's Perspective =====
For a [[value investor]], SIPC is a critical, yet often invisible, part of the financial infrastructure. Its existence provides immense peace of mind. It allows you to focus your energy on what truly matters: performing rigorous [[fundamental analysis]] on businesses and exercising the patience to buy them at a discount to their [[intrinsic value]]. You can conduct your [[due diligence]] on companies without the added worry that your carefully chosen assets might vanish if your broker has a financial crisis.
However, a prudent investor never relies entirely on a safety net. SIPC protects you from the //failure of your broker//, not from the //failure of your investment thesis//. It’s a backstop for institutional failure, not a substitute for sound judgment. Before opening an account, always confirm that your brokerage firm is a SIPC member (most are, and they are proud to display the SIPC logo). This simple check ensures that this foundational layer of protection is in place, freeing you to pursue the art of intelligent investing.