There are many agencies and organizations in America that exist to protect consumers, including consumers on the investing markets. One of those organizations is the Securities Investor Protection Corporation (SIPC). The SIPC is a nonprofit, member-funded organization that helps clients of broker-dealers get their cash and assets back if the firm they are using liquidates or shuts down. It is technically not a government agency and regulating broker-dealers is not part of its mission. If you are working with a broker-dealer, make sure you know what protections the SIPC could offer you if things were to go sideways.
What Is the SIPC?
The Securities Investor Protection Act (SIPA) established the Securities Investor Protection Corporation (SIPC) in 1970. The federal legislation created the SIPC, but it is not a federal agency. It is a member-funded nonprofit corporation. All brokers and dealers registered under the Securities Exchange Act of 1934 are subject to the SIPC, as are all members of securities exchanges and most members of the Financial Industry Regulatory Authority (FINRA), part of which was previously known as the National Association of Securities Dealers (NASD).
The purpose of the SIPC is not to police broker-dealers. It has no actual jurisdiction to regulate or levy penalties against broker-dealers that don’t stick to the letter of the law. Instead, the SIPC works with the clients of broker-dealers that go broke, come into financial trouble or lose client assets. Getting securities and funds back to the investors in a quick and orderly fashion is the main goal of the SIPC in these situations.
The Securities Investor Protection Corporation leadership consists of a board of directors as well as several officers and committees. The president of the United States often nominates SIPC directors.
How Does the SIPC Work?
One big way the Securities Investor Protection Corporation works to protect customers of broker-dealers that go bankrupt or fall on difficult financial times is by safeguarding against the loss of cash and securities (such as stocks and bonds). The SIPC works to facilitate the restoration of any cash and securities that still exist within the customers’ accounts. If your broker-dealer is a member of the SIPC, then the SIPC will protect your investments at up to $500,000, including up to $250,000 for cash.
Another main role of the SIPC is as overseer of the liquidation of member brokerage firms. Under the Securities Investor Protection Act (SIPA) and similarly to a U.S. bankruptcy case, a liquidation is managed in federal bankruptcy court. Once a liquidation proceeding has begun, the SIPC appoints a trustee to oversee how the firm liquidates and works through the claims made by investors.
The SIPC is similar to the Federal Deposit Insurance Corporation, which provides protection to bank customers. But there are differences, namely that the SIPC does not provide protection for the value of any security. In addition, the FDIC can help customers of banks that are still solvent, while the SIPC only protects customers of broker-dealers that have become insolvent.
How Does the SIPC Impact Me?
In a perfect world, you’ll never have to interact with the Securities Investor Protection Corporation. The only reason it would become relevant to you is if your broker-dealer were to become insolvent. This, of course, is something that no investor wants.
You should consider the SIPC, though, when you start to build your investing plan. More specifically, you should make sure that any broker-dealer you work with is a member of the SIPC. If for some reason the broker-dealer you use is not a member, you won’t have SIPC protection if your broker-dealer were to become insolvent.
Think of it in the same way you would go about choosing a bank. You would likely avoid a bank that wasn’t a member of the FDIC so that on the off chance something were to happen and the bank were to fail, you would have your assets insured. Treat broker-dealers the same way and make sure you find one that is a member of the SIPC.
Working with a financial advisor can help. They may be a broker-dealer themselves. Even if they are not a member of the Securities Investor Protection Corporation, they can help you make sure you are using a broker-dealer who is a member so that you are secure.
The Bottom Line
The Securities Investor Protection Corporation is a non-profit corporation that protects clients of broker-dealers. The SIPC protects investors using a broker-dealer that are members of the SIPC at up to $500,000 (with a $250,000 cap for cash) if the broker-dealer becomes insolvent. If you are working with a broker-dealer, make sure you are using one who is an SIPC member. That way, its services can protect you if something goes wrong.
- Fee structure matters when choosing an advisor. Fee-based advisors, unlike fee-only advisors, may also act as broker-dealers. This creates some potential conflicts of interest.
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