The Securities Investor Protection Corporation (SIPC) was created in 1970 by the U.S. Congress to restore the assets of customers of brokerage firms that become insolvent. It also protects against unauthorized transactions. The SIPC is a member-funded, non-profit corporation. It protects individual customer's claims for up to $100,000 US Dollars (USD) in cash, and to a maximum total of $500,000.00 USD for a combination of cash and security investments.
If a brokerage firm closes because of bankruptcy, the Securities Investor Protection Corporation typically works to return clients’ cash, securities, and stocks in as timely manner as possible. Generally, the time it takes for an investor to recover his or her funds is between one and three months. Inaccurate record keeping, however, or fraud on the part of the brokerage firm, can lengthen recovery time.
Often, when recovering investments, the Securities Investor Protection Corporation will simply transfer clients’ securities from a failed brokerage firm to a more solvent one. This generally happens when the failed firm’s records were in good order. The customer can then decide to stay with the new firm or find another as he or she sees fit.
It is important to note that the Securities Investor Protection Corporation does not insure the value of the stocks and other securities. If the value of a stock goes down, an investor cannot recover lost value, only the stock owned. This is a primary difference between the SIPC and the U.S. banking industry’s Federal Deposit Insurance Corporation (FDIC). The FDIC does insure the value of deposits in the banking system.
There are exceptions as to what the Securities Investor Protection Corporation provides protection for. Some of these exceptions include annuities, commodity and futures contracts, and any investments held by partners in the failed brokerage firm. The SIPC also does not cover contracts not registered with the Securities and Exchange Commission (SEC), or fraudulent investments a client may have been misled into making.
If a potential investor wishes to be certain that his or her securities are protected by the SIPC, he or she should be sure that the brokerage firm — or any other firm they may utilize to process transactions — is a member of the SIPC. This is important because brokerage firms sometimes have company affiliates, which offer investment products that are not protected by the SIPC. Also, any investment checks should always be made out to the SIPC member-broker to ensure the safeguards of the Securities Investor Protection Corporation.