Securities Investor Protection Corporation (SIPC)

If your brokerage firm goes out of business and is a member of the Securities Investor Protection Corporation (SIPC), then your cash and securities held by the brokerage firm may be protected up to $500,000, including a $250,000 limit for cash. Some firms obtain private insurance policies to provide protection beyond SIPC limits. When a SIPC member becomes insolvent, SIPC will ask a court to appoint a trustee to supervise the firm’s liquidation and to process investors’ claims.

SIPC covers most types of securities, such as stocks, bonds, and mutual funds. But SIPC does not protect you against losses caused by a decline in the market value of your securities. And it does not provide protection for investment contracts not registered with the SEC.

One of the most frequent – and most difficult – issues a SIPC trustee must resolve when a firm goes out of business involves coverage for unauthorized transactions. To qualify for SIPC coverage on an unauthorized trade, the investor must demonstrate that the trade was, in fact, unauthorized. That’s why it is so important that you send a complaint in writing to your broker as soon as you become aware of an unauthorized transaction. That written complaint may be the only way to prove that you complained to the firm about unauthorized transactions. If you do nothing – or if your broker persuades you to “ratify” the trade or agree to it after the fact – you will have a difficult time proving that you did not authorize the trade. Always read your account statements carefully and complain promptly in writing about unauthorized transactions.

Another coverage problem may occur when investors place their cash or securities in the hands of a non-SIPC member. This sometimes happens when the firm you do business with doesn’t actually execute buy and sell orders but instead uses another firm — known as a “clearing firm” — to process its trades. Always make sure that the brokerage firm and its clearing firm are members of SIPC. Firms are required by law to tell you if they’re not. You can also search SIPC’s Membership Database or contact its Membership Department at the address below to find out whether a firm is a member of SIPC:

Securities Investor Protection Corporation
805 15th Street, NW Suite 800
Washington, D.C. 20005-2207
Tel: (202) 371-8300
Fax: (202) 371-6728

You can also protect yourself by making payments only to firms that are members of SIPC. Never make a check out to a sales representative, and never send checks to an address different from the business address of the brokerage firm or a designated address listed in the prospectus.

For more information about SIPC and the protections it provides, please visit SIPC’s website. You may also want to read FINRA’s Investor Alert entitled If a Brokerage Firm Closes its Doors.

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