Created through the Securities [1] Investor Protection Act in 1970, the Securities investor Protection Corporation [2] (SIPC [3]) became ultra popular since 2007 as investors begin to worry about the stability of their investment firm and thus their assets [4].
What is SIPC
The SIPC is a non-profit [5] corporation in the US that protects investors from losing its assets in the case that the invesment firm fails. The SIPC’s job is to return the securities and cash in investment accounts to its rightful owner, but it does not insure investors in the case that the invesments have lost value.
It is important to note that the SIPC is not a government entity. Instead, it is made up of its members (all of which are investment firms, broker-dealers that it insures). The members then fund the corporation to insure its customers (us) in cases of bankruptcy [6].
How SIPC Works in the Cases of Bankruptcy
When a firm goes into bankruptcy, SIPC usually asks the federal court to appoint a trustee to liquidate the firm. This trustee, with the help of SIPC will organize and distribute the cash and securities back to the customers. In the cases where securities or cash are missing from the customer account, the SIPC will step in and buy the missing securities in the open market (up to $500,000 per customer) including the return of up to $100,000 in cash. Note that the limits are only in cases where funds are missing. There are many cases where a failed firm have perfectly accurate and legal records, so SIPC does not need to pay a penny.
Funding of the SIPC
According to a hearing in January of 2009, the SIPC stated that it currently has $1.7 billion in assets to cover potential bankruptcies as well as $1 billion line of credit with the United States Treasury.
The president and CEO of SIPC (Stephen P. Harbeck) alerted us in the same hearing that the $1 billion line of credit may need to be refined with Congress in wake of the events of the failures of Lehman Brokers and Madoff as the amount has not changed since it was established in 1970.
Not Everything is Protected by SIPC
While SIPC covers a great deal, not everything is fully protected in cases of failure. Annuities, currencies and commodity [7] futures [8] contracts [9], as well investment contracts are a few that are not covered. Basically, everything that are not registered with the U.S. Securities and Exchange Commission [10] under the Securities Act of 1933 won’t be covered if your broker-deal fails. Therefore, it is important to know that your investments are safe when the stability of the firm you deal with are in doubt.