The Securities Investor Protection Corporation (SIPC) is a name given to an organization that compensates investors in case if the firms handling their funds and securities go bankrupt. If an SIPC member goes bankrupt, then the SIPC steps in, it liquidates the firm’s assets and then give compensation to the investors for up to $500,000 US (USD), this compensation is limited to $100,000 US (USD) in cash. It has been claimed by the SIPC that it has successfully restored assets to 99% of investors who have been eligible for SIPC protection.
What does SIPC covers?
Cash and securities such as stocks and bonds are covered by the SIPC covers which are held by a brokerage firm. If financial trouble is experienced by the firm and these assets go missing, efforts will be made by the SIPC to recover them, they usually do this by liquidating the troubled firm with the assistance of a trustee who is appointed by a federal court. Those currencies,commodity futures contracts, investment contracts, or fixed annuity contracts are not covered by SIPC which have not been registered with the United States Securities and Exchange Commission.
Comparison with the Federal Deposit Insurance Corporation (FDIC)
Usually the SIPC is compared to the Federal Deposit Insurance Corporation (FDIC). But actually due to distinctions between the types of finances that they cover, the two organizations are quite different. Clients of failed banks are reimbursed by The FDIC for up to $100,000 US (USD), having the understanding that the depositors have put their funds into the bank in good faith, and that they cannot afford to lose the money.
The SIPC is particularly designed to protect investors from unscrupulous brokers. If someone has been sold a worthless stock or the value of their stock declines, then they will not be protected by the SIPC. The SIPC will provide reimbursement if in case a broker steals funds from a client.
Restore securities to all clients
The SIPC will restore securities to all clients, when a firm fails. Cash funds are distributed to the claimants after liquidation of a firm, although the cap is $100,000 US. After liquidation if the firm still has funds leftover and compensation is complete, then SIPC will distribute the excess funds to individuals who had claims over the funding cap. The guarantee will not be given by SIPC that the restored securities will have the same value that they did before, due to market fluctuation.
Protects investors from unauthorized trades
The investors are also protected by the SIPC from unauthorized trades, although investors must be proactive about proving that a trade was unauthorized. Due to this reason, the investors are encouraged by SIPC encourages to clearly log unauthorized trades on paper and in written communications with their brokerage firm. The account statements should also be frequently checked by the investors and they should immediately register complaints about irregular or unauthorized activity.
Investors should do business with SIPC members Firms
It is important for investors to do business with only those firms that are members of the SIPC. Misleading names or language are used by many investment firms which might lead clients to believe that they are SIPC members, and at their website the SIPC maintains a database of valid members. The SIPC also has a phone hot line on which investors can call in order to determine the member status of a firm. Firms which are included in the members of the SIPC include “member SIPC” on their literature, along with the SIPC logo.
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