SIPC Insurance: What It Is and How It Works | Bankrate (2024)

The collapse of Silicon Valley Bank and Signature Bank in March 2023 caused depositors to reassess whether their assets are safe at certain financial institutions. While the federal government has adopted new programs to shore up confidence in the banking system, investors may be wondering how their money is protected in the unlikely event their brokerage firm fails. Thankfully, that very situation is what the Securities Investor Protection Corporation (SIPC) serves to safeguard against.

The SIPC is a federally mandated, private nonprofit organization. It was created as part of the Securities Investor Protection Act (SIPA) of 1970, which looked to shield investors from brokerages becoming insolvent. Today, SIPC insurance covers investors for up to $500,000 in securities and up to $250,000 in uninvested cash.

While that is what the SIPC does in a nutshell, there is more nuance to how it works. We’ll cover those details here.

What is SIPC insurance coverage and how does it work?

SIPC coverage insures people for up to a limit of $500,000 in cash and securities per account. SIPC protections also include up to $250,000 in cash coverage. The total amount of SIPC coverage is $500,000; thus, if you have $500,000 in securities and $250,000 in cash, that entire amount may not be covered.

However, there are circ*mstances in which investors are covered for more than $500,000. This happens primarily when investors have multiple accounts of different types. For instance, if you have a traditional individual retirement account (IRA) and a Roth IRA at the same brokerage, the SIPC will insure them separately. Thus, you will be insured up to $1 million between the two accounts.

Of course, SIPC insurance only comes into play under circ*mstances in which the SIPC must intervene. This happens when it receives a referral from regulatory agencies such as the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Agency (FINRA). If a broker-dealer fails and customers have lost securities and/or cash, the liquidation process will begin.

During the liquidation process, the SIPC asks the court to appoint a Trustee to liquidate the firm. The Trustee can either be a lawyer with relevant experience or it can be the SIPC itself for smaller cases. In very small cases, the SIPC may deal with customers directly outside of court in a direct payment procedure.

What SIPC insurance protects

SIPC insurance covers specific types of investments as securities. Some examples of securities are:

  • Stocks
  • Bonds
  • Treasury securities
  • Money market mutual funds
  • Certificates of deposit

Each of these securities is covered under what the SIPC calls “separate capacities.” In essence, separate capacities are just different types of investment accounts. Some examples of separate capacities are:

  • Individual accounts
  • Joint accounts
  • Trust accounts
  • Corporate accounts
  • Traditional IRAs and Roth IRAs
  • Accounts held by an executor of an estate
  • Accounts held by a legal guardian

These are some, but not necessarily all, of the types of securities and capacities covered by the SIPC. However, you should always check with your brokerage for further specifics or types of accounts not mentioned here.

What SIPC insurance doesn’t cover

There are a few major types of losses SIPC insurance does not protect against. These include:

  • Losses due to market volatility
  • Losses due to bad investment advice
  • Losses due to security breach, unless the brokerage becomes insolvent

On that last point, note that if the brokerage becomes insolvent due to a hack, the hack itself is irrelevant. If the brokerage becomes insolvent, you may be covered just as you would in any other scenario where a brokerage is forced into liquidation.

In addition to these scenarios, there are specific types of assets that SIPC insurance doesn’t cover. They include:

  • Commodity futures contracts (unless they are held in a special portfolio margining account)
  • Foreign exchange (forex) trades
  • Fixed annuities contracts
  • Investment contracts such as limited partnerships

SIPC vs. FDIC: How they compare

While the SIPC and Federal Deposit Insurance Corporation (FDIC) are similar in terms of how they work, they have different purposes. The SIPC protects investment account owners, while the FDIC protects deposit account owners. In the wake of the collapse of Silicon Valley Bank and Signature Bank, the federal government announced plans to guarantee 100 percent of deposits held at the failed institutions.

SIPCFDIC
Amount of coverageUp to $500,000 per owner, including up to $250,000 in cashUp to $250,000 in cash per customer, per ownership category
What is covered?Stocks, bonds, Treasury securities, money market mutual funds, certificates of depositChecking and savings accounts, money market accounts, certificates of deposit
What is not covered?
  • Losses due to poor investment advice
  • Losses due to market volatility
  • Commodity futures contracts, fixed annuities contracts, forex, investment contracts such as limited partnerships
  • Mutual funds, stocks, bonds, money market mutual funds, Treasury securities, annuities

Is it safe to keep more than $500,000 in a brokerage account?

It is safe in the sense that there are measures in place to help investors recoup their investments before the SIPC steps in. And, indeed, the SIPC will not get involved until the liquidation process starts. In most cases, customers can recover their assets without having to file a claim with the SIPC.

In most cases, the brokerage will liquidate on its own without needing SIPC intervention. In addition, brokerage firms are required to keep customer funds in accounts separate from their own. They must also have a certain amount of liquidity on hand, thus allowing them to cover funds in these cases.

What this means is that even if you have more than $500,000 in one brokerage account, chances are high that you won’t lose any of your money even if the broker is forced into liquidation.

That being said, if the firm refuses or is unable to self-liquidate and the SIPC must step in, you may not be able to claim more than your $500,000 in securities and cash. Therefore, the safest option is to move your money above that $500,000 SIPC coverage threshold to a different type of account, or to a different brokerage altogether. (Here is our list of the best online brokers.)

Investors with multiple accounts at the same broker

If you have multiple accounts at the same brokerage, each separate type of account will be insured up to the $500,000 amount, including $250,000 in cash. The SIPC considers these separate capacities and thereby insures each account independently. But if you have multiple accounts of the same type at the same brokerage (such as two individual accounts), they will not be insured separately.

In other words, if you have an individual account in your name and a joint account with your spouse, both accounts will be covered for the $500,000 amount. That means that between the two accounts, you will have $1 million in coverage, including up to $500,000 in uninvested cash.

Two accounts are not insured separately if they are the same type. Two brokerage accounts in your name would be considered one ownership capacity; thus, the two accounts together are covered for $500,000 in securities, including $250,000 in cash.

On the other hand, if you have two individual accounts at two different brokerages, those accounts would be insured separately.

Bottom line

The SIPC is a federally mandated, private non-profit that insures up to $500,000 in cash and securities per ownership capacity, including up to $250,000 in cash. If you have multiple accounts of a different type with one brokerage, you may be insured for up to $500,000 for each account. Note that multiple accounts of the same type at the same brokerage will not be insured separately.

While SIPC insurance is critically important, you won’t necessarily need to file a claim even if your brokerage is forced into liquidation. These firms often choose to self-liquidate and in doing so transfer funds back to their customers. Also, they are required to keep extra cash on hand to help in these cases.

Nevertheless, SIPC insurance is an important safeguard to have in place so investors can rest easy knowing their money is protected in the event that their broker fails.

Bankrate’s Brian Baker contributed to an update of this story.

SIPC Insurance: What It Is and How It Works | Bankrate (2024)

FAQs

What is SIPC and how does it work? ›

The Securities Investor Protection Corporation (SIPC) protects customers if their brokerage firm fails. Brokerage firm failures are rare. If it happens, SIPC protects the securities and cash in your brokerage account up to $500,000.

How does SIPC insurance work for joint accounts? ›

Are we each protected up to $500,000 by SIPC? No. For purposes of SIPC protection, a joint account is treated as a single customer irrespective of the number of co-owners. For more information, see Investors with Multiple Accounts and SIPC Rule 105.

Is it safe to keep more than $500000 in a brokerage account? ›

They must also have a certain amount of liquidity on hand, thus allowing them to cover funds in these cases. What this means is that even if you have more than $500,000 in one brokerage account, chances are high that you won't lose any of your money even if the broker is forced into liquidation.

What happens if SIPC fails? ›

If the SIPC is unable to arrange the accounts' transfer, the failed firm is liquidated. In that case, the SIPC sends investors either certificates for the stock that was lost or a check for the market value of the shares.

What is an example of SIPC coverage? ›

. If, for example, you have an IRA account in your name and a joint account with your spouse, the SIPC treats them as separate accounts and insures each up to $500,000. (Unlike with FDIC coverage, joint accounts aren't insured to the full amount for each account holder with SIPC insurance.)

Why no one should use brokerage accounts? ›

If the value of your investments drops too far, you might struggle to repay the money you owe the brokerage. Should your account be sent to collections, it could damage your credit score. You can avoid this risk by opening a cash account, which doesn't involve borrowing money.

What are the disadvantages of a joint brokerage account? ›

However, potential disadvantages to consider include conflict over investment decisions, legal issues in the event of a death or divorce, and personal financial risks that may arise from transactions made by any of the joint account holders.

Is SIPC insurance per account or person? ›

SIPC protection of customers with multiple accounts is determined by "separate capacity." Each separate capacity is protected up to $500,000 for securities and cash (including a $250,000 limit for cash only). Accounts held in the same capacity are combined for purposes of the SIPC protection limits.

Is my money safe in a brokerage account? ›

Cash and securities in a brokerage account are insured by the Securities Investor Protection Corporation (SIPC). The insurance provided by SIPC covers only the custodial function of a brokerage: It replaces or refunds a customer's cash and assets if a brokerage firm goes bankrupt.

What brokerage do most millionaires use? ›

Best Brokers for High Net Worth Individuals
  • Charles Schwab - Best for high net worth investors.
  • Merrill Edge - Best rewards program.
  • Fidelity - Best overall online broker.
  • Interactive Brokers - Great overall, best for professionals.
  • E*TRADE - Best web-based platform.
Mar 28, 2024

What happens to my money if Charles Schwab goes out of business? ›

And the SIPC protections are activated in the rare event that a broker-dealer fails and client assets are missing. In that situation, SIPC provides up to $500,000 worth of protection against any of those missing assets, including $250,000 in cash against uninvested cash balances.

Where do billionaires keep their money? ›

Common types of securities include bonds, stocks and funds (mutual and exchange-traded). Funds and stocks are the bread-and-butter of investment portfolios. Billionaires use these investments to ensure their money grows steadily.

What does SIPC not cover? ›

SIPC protects stocks, bonds, Treasury securities, certificates of deposit, mutual funds, money market mutual funds and certain other investments as "securities." SIPC does not protect commodity futures contracts (unless held in a special portfolio margining account), or foreign exchange trades, or investment contracts ...

Has SIPC insurance ever been used? ›

Although not every investor or transaction is protected by SIPC, no fewer than 99 percent of persons who are eligible get their investments back with the help of SIPC.

How does SIPC pay out? ›

Once you sign and return to the Trustee the required documentation, your claim will be satisfied by the payment of cash or delivery of securities to you, up to at least the SIPC limits.

How much does SIPC cover per account? ›

SIPC protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash.

Is SIPC coverage per account or per person? ›

SIPC protection of customers with multiple accounts is determined by "separate capacity." Each separate capacity is protected up to $500,000 for securities and cash (including a $250,000 limit for cash only). Accounts held in the same capacity are combined for purposes of the SIPC protection limits.

Is SIPC protection per account or per person? ›

Each separate capacity is treated as a unique customer and protected up to $500,000 for securities and cash (including a $250,000 limit for cash only). Accounts held in the same capacity are combined for purposes of the SIPC protection limits.

Is SIPC insurance as good as FDIC? ›

Unlike the FDIC, SIPC does not provide blanket coverage. Instead, SIPC protects customers of SIPC-member broker-dealers if the firm fails financially.

References

Top Articles
Latest Posts
Article information

Author: Horacio Brakus JD

Last Updated:

Views: 5861

Rating: 4 / 5 (71 voted)

Reviews: 94% of readers found this page helpful

Author information

Name: Horacio Brakus JD

Birthday: 1999-08-21

Address: Apt. 524 43384 Minnie Prairie, South Edda, MA 62804

Phone: +5931039998219

Job: Sales Strategist

Hobby: Sculling, Kitesurfing, Orienteering, Painting, Computer programming, Creative writing, Scuba diving

Introduction: My name is Horacio Brakus JD, I am a lively, splendid, jolly, vivacious, vast, cheerful, agreeable person who loves writing and wants to share my knowledge and understanding with you.