The Securities Investor Protection Corporation (SIPC) is an organization that compensates investors if the firms handling their funds and securities go bankrupt. If a member goes bankrupt, the SIPC steps in, liquidates the firm's assets and compensates investors for up to $500,000 US (USD), limited to $100,000 US (USD) in cash. The organization claims that it has successfully restored assets to 99% of investors who were eligible for protection.
The SIPC covers cash and securities such as stocks and bonds which are held by a brokerage firm. If the firm experiences financial trouble and these assets go missing, the organization will make every effort to recover them, usually by liquidating the troubled firm with the assistance of a trustee who is appointed by a federal court. The SIPC does not cover currencies, commodity futures contracts, investment contracts, or fixed annuity contracts which have not been registered with the United States Securities and Exchange Commission.
The organization is often compared to the Federal Deposit Insurance Corporation (FDIC). The two organizations are actually quite different, due to distinctions between the types of finances that the cover. The FDIC reimburses clients of failed banks for up to $100,000 US (USD), with the understanding that the depositors put their funds into the bank in good faith, and that they cannot afford to lose the money. The SIPC is specifically designed to protect investors from unscrupulous brokers. If someone is sold a worthless stock or the value of their stock declines, the organization will not protect them. If a broker steals funds from a client, it will provide reimbursement.
When a firm fails, the SIPC will restore securities to all clients. After liquidation of a firm, cash funds are distributed to the claimants, although the cap is $100,000 US. If the firm still has funds leftover after liquidation and compensation is complete, the excess funds will be distributed to individuals who had claims over the funding cap. The organization cannot guarantee that the restored securities will have the same value that they did before, due to market fluctuation.
The SIPC also protects investors from unauthorized trades, although investors must be proactive about proving that a trade was unauthorized. For this reason, it encourages investors to clearly log unauthorized trades on paper and in written communications with their brokerage firm. Investors should also frequently check their account statements and immediately register complaints about irregular or unauthorized activity.
It is important for investors to do business with firms that are members of the organization. Many investment firms use misleading names or language which might lead clients to believe that they are members, and the SIPC maintains a database of valid members at their website. It also has a phone hot line which investors can call to determine the member status of a firm. Firms which are members include “member SIPC” on their literature, along with the organization's logo.