Securities Investor Protection Corporation
The Securities Investor Protection Corporation (SIPC) is a federally mandated non-profit
corporationin the United Statesthat protects securities investors from harm if a broker/ dealerdefaults. Investors are not insured for any potential loss while invested in the market.
SIPC was created by the 1970
Securities Investor Protection Act, UnitedStatesCode|15|78aaa " et seq", but it is not a government agency; rather, it is a membership corporation funded by its members.
SIPC serves two primary roles in the event that a broker-dealer fails. First, SIPC acts to organize the distribution of customer cash and securities to investors. Second, to the extent a customer's cash and/or securities are unavailable, SIPC provides insurance coverage up to $500,000 of the customer's net equity balance including up to $100,000 in cash.
* [http://www.sipc.org/ SIPC home page]
* [http://sipc.org/who/notfdic.cfm SIPC is NOT an FDIC for investors]
Important caveats and clarifications. SIPC does not insure the underlying value of the financial asset it protects. For example, an investor buys 100 shares of XYZ company from a brokerage firm and then the firm for whatever reason, files for bankruptcy or merges with another. The 100 shares of XYZ still belong to the investor and should be (see below) recoverable, but if the value of XYZ stock falls SIPC will not make up the difference.
By law, investors' assets and the brokerage's assets must be segregated; they may not be comingled. It would be a civil and/or criminal violation if an investor's assets were used by the brokerage firm. If the firm files for bankruptcy or is merged with another firm, the investor's assets should be recoverable.
Under current law (2008), the limit on SIPC insurance is $500,000 per account but if an investor has more than that in assets, they should still be recoverable, provided that the brokerage firm did not engage in illegal comingling of funds. In other words, the $500,000 limit is to protect against malfeasance; otherwise it would not be hazardous to allow the firm to hold more than that in value.
There are certain assets that are not covered such as annuities. Check the applicable law on the government Website, http://www.sec.gov before investing.
There are ways to help protect assets: investing only with reputable firms, limiting the amount invested with each firm to the SIPC covered limit, opening multiple accounts (individual, joint, IRA, ROTH) with the same firm. The safest investment, guaranteed at 100% by the U.S. government, is U.S. Treasury bonds. Other private insurance plans are only as good as the company issuing the insurance.
Sources: Securities and Exchange Commission Website, telephone inquiry, printed government documents.
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