The Securities Investor Protection Corporation (SIPC, sometimes pronounced /ˈsɪpɨk/) is a federally mandated non-profit corporation in the United States that protects securities investors from financial harm if a broker-dealer company fails. Investors are not insured for any potential loss while invested in the securities market.
The United States Congress created SIPC in 1970 through the Securities Investor Protection Act (15 U.S.C. 78aaa-lll).[1]
SIPC it is not a government agency; rather, it is a membership corporation funded by its members.[citation needed]
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.
As interpreted, the Act protects customers whose securities were misappropriated, never purchased, or stolen. However, it has not covered sales practice claims against broker-dealers that do not involve misappropriation or conversion (e.g., fraudulent sales practices, unsuitable investments, failure to execute sell orders).
While customers are protected for cash and most types of securities, such as notes, stocks, bonds, and certificates of deposit, other items, such as commodity or futures contracts, are not covered. Investment contracts, certificates of interest or participations in profit-sharing agreements, and oil, gas, or mineral royalties or leases are not covered unless registered with the Securities and Exchange Commission.
"SIPC is led by 7 directors, some appointed by the President of the United States, and others by the member firms. It employs a staff of only 29, and does not advertise job openings on its website. In 2007, total employee compensation and benefits were a generous $5.8 million." [2]
Caveats and clarifications
The scope of SIPC coverage can be confusing. For example, although unauthorized trades are covered, the failure to execute a trade is not.
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.
See also
External links
References
- ^ http://www.sipc.org/pdf/SIPA.pdf
- ^ http://financecareers.about.com/od/regulatorsandexchanges/a/SIPC.htm
