When it comes to investing, it's important to know how your brokerage and investment accounts are protected. Fortunately, there is a system in place to help safeguard your assets in the event that your brokerage firm encounters financial difficulties.
That system is called the Securities Investor Protection Corporation, or SIPC. Established under the Securities Investor Protection Act of 1970, SIPC is a nonprofit corporation that serves as a backstop for investors who may be at risk of losing their investments due to a brokerage firm's financial problems.
How much protection does SIPC provide?
Generally, SIPC covers up to $500,000 of securities and cash for each customer, with a $250,000 limit on the cash component. However, this amount may be higher for individuals with multiple accounts, depending on the account types and whether they are individual accounts or jointly held.
For example, a traditional IRA, a Roth IRA, and an individual brokerage account would each qualify for a $500,000 limit at the same firm for a total of $1,500,000 of protection. The same would apply to a separate joint account or a trust account. However, if you had two individual brokerage accounts at the same firm, you would receive only up to $500,000 in total protection.
Do all brokerage customers receive protection?
It's also worth noting that SIPC protection is only available if the brokerage firm fails and is a member of SIPC. Most brokerage firms are required to be members, but it's always a good idea to check. If your brokerage firm is a member, you can find out by visiting SIPC's website (they have a searchable list of members) or contacting the firm directly.
It's also important to understand that SIPC coverage is not the securities world equivalent of the Federal Deposit Insurance Corporation. SIPC's primary focus is on restoring customer cash and securities left in the hands of bankrupt or otherwise financially troubled brokerage firms.
What types of investments are covered?
In addition to cash, SIPC covers a variety of investments, including stocks, bonds, mutual funds, and other company shares and registered securities. However, there are some investments that SIPC does not cover, such as unregistered investment contracts, unregistered limited partnerships, fixed annuity contracts, currency, and interest in gold, silver or other commodity futures contracts or commodity options.
If your brokerage firm does encounter financial difficulties, SIPC will quickly seek to transfer your accounts to a healthy firm so that you can get immediate access to your investments. If account transfers are not possible, or money is still missing, you can file a claim with SIPC for what you are owed.
Overall, while investing always comes with some degree of risk, knowing how your brokerage and investment accounts are protected can give you peace of mind as you navigate the markets.