The SEC’s Office of Investor Education and Advocacy and the Securities Investor Protection Corporation (SIPC) are issuing two Investor Bulletins to help educate investors about SIPC protection for brokerage accounts. The first Investor Bulletin (“SIPC Basics”) will provide investors with an overview of how SIPC protection works and what it protects, and the second Investor Bulletin (“Filing a SIPC claim”) will provide investors with an overview for how to file a SIPC claim.
What is SIPC protection?
When you open a brokerage account with a SIPC member brokerage firm, SIPC protection helps address your risk of losing your securities and cash held by the firm if it fails or goes out of business. If a SIPC member brokerage firm fails, SIPC protects its customers against the loss of securities and cash deposited with the SIPC member firm for the purchase of securities. SIPC protection advances funds of up to $500,000 per customer (including a $250,000 limit for cash claims) to cover a shortfall in customer property. We will discuss how this protection works in more detail below.
Who are SIPC member brokerage firms?
SIPC member brokerage firms are, with narrow exceptions, all securities broker-dealers registered with the SEC. SIPC members pay annual membership assessments which are used to fund SIPC and its mission.
Most registered brokerage firms which conduct business with the investing public are SIPC members. SIPC member brokerage firms must state that they are SIPC members in their offices and on their webpage and advertisements. The narrow exceptions to SIPC membership include brokerage firms whose exclusive business involves selling specific products, like registered open-end mutual funds or variable annuities. Brokerage firms that are not SIPC members must disclose this fact to customers before or at the time of conducting any securities transactions in a customer’s account.
A SIPC member’s affiliate, including a parent company or subsidiary, is a separate legal entity and not a member of SIPC unless independently registered. Accordingly, customers of a foreign subsidiary of a SIPC member firm are not protected by SIPC if the foreign subsidiary fails.
SIPC members include both introducing brokers and clearing brokers. The different broker roles create an important difference in how SIPC protection might apply. An introducing broker generally is a client-facing brokerage firm which interacts with the customer and takes customer orders. The clearing broker works on the back end, executing customer trades, holding custody of customer property, and issuing statements and confirmations. Because SIPC protects against losses caused by the failure of a brokerage firm to maintain custody of customer accounts, the failure of an introducing broker may not require SIPC protection. Customer property should be safely held by the clearing broker, which will usually locate a new introducing broker to service the accounts.
Who are customers?
In general, you are a customer if you have an investment account with a SIPC-member brokerage firm or have deposited cash with a SIPC-member brokerage firm, for the purpose of purchasing securities. You do not need to be a U.S. citizen to qualify as a customer. SIPC protection of customers with multiple accounts is determined by “separate customer” capacity.
Some of examples of separate capacities include:
- An individual account;
- a joint account;
- a traditional individual retirement account;
- a Roth individual retirement account;
- an account for a trust created under state law;
- an account for a corporation; and
- an account held by a guardian for a minor.
Additional information on separate accounts may be found in SIPC’s Series 100 Rules.
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. Here are some examples to illustrate how SIPC protection limits apply to investors with multiple accounts:
| Example 1: |
Sally has a brokerage account in her name at her brokerage firm.
SIPC Protection Limit Sally has SIPC protection up to $500,000 for her brokerage account. |
| Example 2: |
Tim has two brokerage accounts, each in his name, at the same brokerage firm.
SIPC Protection Limit For purposes of SIPC protection, Tim’s accounts are combined. Tim does not have SIPC protection of $500,000 for each account, but has a total of $500,000 SIPC protection for both accounts. |
| Example 3: |
Tim and Sally are married and they have a joint brokerage account, in addition to the individual brokerage accounts they each have at the brokerage firm.
SIPC Protection Limit This joint brokerage account of Tim and Sally would have SIPC protection of $500,000, in addition to the SIPC protections of $500,000 that Sally and Tim have for their individual brokerage accounts discussed in Examples 1 and 2. |
| Example 4: |
Tim also has a traditional IRA and a Roth IRA at the same brokerage firm.
SIPC Protection Limit In addition to the other SIPC protections in the above examples, each of these IRA accounts would receive up to $500,000 in SIPC protection. |
What is protected?
SIPC works to return “customer property,” generally meaning customer securities and related cash held by a SIPC-member brokerage firm. Protected securities include notes; stocks; Treasuries; bonds; CDs; options on securities; investment company shares such as mutual funds, ETFs, and money market funds; and investment contracts that are registered with the SEC under the Securities Act of 1933.
A brokerage firm may hold your securities as either “customer name securities” – directly registered in your name in a non-negotiable form – or street name securities – owned by you on the brokerage firm’s books and records but registered in the brokerage firm’s name. Both customer name and “street” name securities are protected by SIPC, although, as discussed below, the registration method affects how the securities are returned to you.
Protected securities do not include commodities (such as gold or silver) or futures contracts, unregistered investment contracts, unregistered limited partnerships, fixed annuity contracts, or most types of crypto assets. For additional information on the types of securities SIPC protects, see SIPC’s “What SIPC Protects” webpage (https://www.sipc.org/for-investors/what-sipc-protects).
In recent years, certain securities have been issued and/or transferred using blockchain or distributed ledger technology, i.e., a crypto asset security. At this time, many of the crypto asset securities that have been issued may be investment contracts and very few of them are registered in compliance with the federal securities laws. As noted above, under SIPA an investment contract must be registered with the Commission under the Securities Act of 1933 in order to be a protected security, regardless of whether it is a crypto asset security.
Cash held in the account for the purpose of purchasing securities is also protected. Cash placed in the account solely for the purpose of earning interest, however, is not protected. Investments in currency, such as foreign exchange trading positions, also are not protected.
What SIPC Does Not Protect
SIPC protection works to restore to customers the cash and securities that were in their brokerage account when the SIPC-member brokerage firm failed. SIPC protection:
- does not protect you against the decline in value of your securities
- does not protect you against non-custody related fraud or misrepresentations such as being sold worthless stock or other securities. (SIPC protection may apply to the fraudulent transfer of your securities)
- does not protect against losses due to a broker's bad investment advice or recommendations for inappropriate investments, or for claims that a broker you authorized to buy or sell securities in your account did so in a way that was inconsistent with your overall investment objectives.
- does not provide protection for claims of churning – that your broker engaged in excessive trading to generate commissions.
- does not protect assets held outside of a SIPC-member brokerage firm, even if such assets are reported on an account statement
Brokerage firms may offer you different options for managing cash in your account. SIPC provides protection for two common cash management options: either simply leaving the cash in your brokerage account to invest it or placing it in a money market fund (which qualifies as a security for SIPC protection purposes). Another option offered by some brokerage firms is a bank sweep program. In a bank sweep program, your brokerage firm automatically transfers (or “sweeps”) unused cash from your brokerage account into a bank account. There, the cash is protected under banking laws and may be insured within limits by the Federal Deposit Insurance Corporation (FDIC). Since cash in a bank sweep program is held outside of the brokerage firm, SIPC would not protect these funds if your brokerage firm fails.
How do I obtain SIPC protection?
You become eligible to receive SIPC protection simply by becoming a securities customer of a SIPC member brokerage firm. You do not need to pay additional fees for SIPC protection.
What should I do to protect myself?
Outside of the liquidation of a SIPC member, SIPC cannot intervene to satisfy claims or offer protection when a brokerage firm is still viable. SIPC is not a regulator, and it has no authority to investigate active brokerage firms and does not have access to account records. Accordingly, you should be vigilant and take steps when investing through a brokerage firm to protect yourself and maximize your protection should your brokerage firm be liquidated.
First, you should verify that you have invested with a SIPC member brokerage firm. You can find a list of SIPC members on SIPC’s website (https://www.sipc.org/list-of-members/), and you can research registered brokerage firms using BrokerCheck, a service provided by FINRA (https://brokercheck.finra.org/). You should further ensure that all deposits or transfers are directed to the SIPC member (or a SIPC-member clearing broker) and not to an individual representative or affiliate.
You should carefully review your account statements and trade confirmations. Any discrepancies should be brought promptly to the brokerage firm’s attention in writing. Of particular importance, you should submit a written complaint to your introducing brokerage firm if you notice any unauthorized trading. The failure to file a complaint about an unauthorized trade may result in the trade being “ratified” – meaning that you are deemed to have accepted and authorized the trade. If you have any complaint about your account, you should first contact the brokerage firm and see if it can resolve the complaint. If not, you should contact the SEC, FINRA, or your state securities regulator, documenting any complaints.
Additional Resources
Investor Bulletin: SIPC Protection (Part 2: Filing a SIPC Claim) (https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-102)
SIPC Brochure: How SIPC Protects You (https://www.sipc.org/media/brochures/HowSIPCProtectsYou-English-Web.pdf)
SIPC Brochure: The Investor’s Guide to Brokerage Firm Liquidations (https://www.sipc.org/media/brochures/Liquidations-Web.pdf)
Investor.gov Glossary: Securities Investor Protection Corporation (https://www.investor.gov/introduction-investing/investing-basics/glossary/securities-investor-protection-corporation-sipc)
FINRA Investor Alert: If a Brokerage Firm Closes Its Doors (https://www.finra.org/investors/insights/if-brokerage-firm-closes-its-doors)
FINRA: Your Rights Under SIPC Protection (https://www.finra.org/investors/need-help/your-rights-under-sipc-protection)
FDIC: Understanding Deposit Insurance (https://www.fdic.gov/resources/deposit-insurance/understanding-deposit-insurance/index.html)
For more information regarding SIPC, please visit SIPC’s website (www.sipc.org). If you have any questions regarding SIPC and the protection that it provides, you can email SIPC at [email protected].
Visit the SEC’s website for individual investors, Investor.gov.
Call OIEA at 1-800-732-0330, ask a question using this online form, or email us at [email protected].
This Investor Alert represents the views of the staff of the Office of Investor Education and Advocacy. It is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”). The Commission has neither approved nor disapproved its content. This Alert, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.
