Luis Pazos 
As a financial planner, I often get worried questions from my clients about their investments. Recently, one asked me what happens if their brokerage firm goes out of business. This is an excellent question because many people aren’t aware their investments have protection, or they’re confused about what’s actually covered.
So let’s break it down and understand the protection your investments get from the SIPC, or Securities Investor Protection Corporation, and what it does (and doesn’t do) for investors.
The SIPC is a nonprofit organization created by Congress in 1970. Its job is to return securities—like stocks and bonds—as well as cash to investors when their brokerage firm goes under. As of March 2023, the SIPC has helped approximately 773,000 investors recover over $141.8 billion in lost assets. However, not all investments are eligible for SIPC protection, such as commodity futures and fixed annuity contracts not registered with the SEC.
It’s important to note that the SIPC is not like the FDIC. While the SIPC helps when money is stolen or at risk due to a brokerage’s failure, it doesn’t insure invested funds or bail out bad investments. Unlike the FDIC, which is a government agency, the SIPC is funded by member firms and has $3.9 billion in assets, compared to the FDIC’s $128.2 billion (as of March 2023). However, brokerage firms operate differently from banks as they only hold your securities.
To check if your firm is covered under SIPC, look for the SIPC logo on their website and literature. You can also verify membership on sipc.org or call the SIPC Membership Department at (202) 372-8300.
The SIPC doesn’t cover every loss. It excludes foreign currency, precious metals, and commodity futures contracts. It also replaces shares, not their dollar values. If your brokerage fails and you have a margin loan, SIPC will attempt to transfer the debt and collateral to another broker. However, if no one takes on the loan, you’ll need to pay it off yourself.
If your funds vanish from an SIPC member broker, you’ll receive a claim form from the court-appointed trustee handling the firm’s liquidation. There are strict deadlines for filing claims, so be prompt. Your account might be transferred to another firm before you’re even aware of the issue, but you should still file a claim to protect against possible errors.
The SIPC aims to replace the securities you’ve lost, but the market value may vary when they are returned. If liquidated funds don’t cover all claims, the SIPC uses a reserve fund. The maximum SIPC payout per customer is $500,000, including a $250,000 cap for cash claims. Most people get their funds back within one to three months, though fraud cases might take longer.
If your brokerage fails, you can file a claim with the SIPC. Some larger brokerage firms offer “excess of SIPC” insurance to cover losses beyond SIPC limits. These policies only kick in when liquidation payouts fall short, and such claims are extremely rare.
To avoid needing SIPC protection, it’s crucial to stay informed about investment fraud. Resources like the SEC, FINRA, the National Fraud Information Center, Investor Protection Trust, and the Securities Industry and Financial Markets Association can help.
In summary, the SIPC plays a crucial role in protecting your investments, ensuring you get back your securities and cash when your brokerage fails. It’s not the same as FDIC insurance, and understanding its coverage limits is essential. Larger firms may offer additional protection through “excess of SIPC” insurance. Staying vigilant about fraud is always important.
