SIPC Insurance Explained

With the recent high profile bank “failures,” they’re really just liquidity crises that forced the FDIC and Fed to intervene, you might be wondering if your investments are safe. In a nutshell, your investments are protected by the Securities Investor Protection Corporation (SIPC) up to $500,000. The coverage is such that you get what you would’ve lost, not money. So if you had shares of stock, you’d get the same number of shares in that same company or mutual fund.

What Is Protected?

Cash and securities are covered with some exceptions. Commodity futures contracts and currency, that is foreign currency, aren’t covered. Investment contracts, like limited partnerships, and fixed annuities that aren’t registered with the SEC under the Securities Act of 1933 are not covered. If you’re just in stocks and mutual funds, you’ll be OK.

What Happens In Failure?

What will happen is what often happens when banks fail, your assets are simply transferred to another brokerage or dealer and it has no effect to you. In the worst case, the brokerage you’re working with has bad records and you have to file a claim to retrieve your assets.

Sometimes brokerages will buy additional insurance to supplement SIPC. For example, TradeKing has up to $25M of protection in addition to the SIPC coverage: “Through its clearing firm, TradeKing provides an additional $25 million of coverage per client (including $900,000 for claims of cash) through a third-party insurance company with an aggregate clearing firm limit of $100 million to pay amounts in addition to those returned in a SIPC liquidation. This brings the total protection per client to $25.5 million with a limitation of $1 million on claims for cash balances for each client (as defined by SIPC rules). This coverage does not include transactions or trading losses or declines in the value of securities.”