As an investor, you may have heard about SIPC coverage but need some clarification on what exactly it is and how it works. The good news is it's not as confusing at it may seem. And it is actually really important to understand what SIPC is and how the protection it offers on your quest to greater wealth.
First of all, SIPC stands for Securities Investor Protection Corporation. You've probably seen their name or logo in many places such as broker websites and on your account statements.
The Securities Investor Protection Corporation (SIPC) is a nonprofit membership organization that provides insurance coverage on customer accounts, specifically at brokerage firms, in the event of insolvency.
The History Of The SIPC
The SIPC has a long 50+ year history. It was brought about through the 1970's Securities Investor Protection Act by Congress to strengthen market stability after mass brokerage closures took place between 1968-1970. These years were fraught with immense trading volume that strained and broke down most brokerage's settlement infrastructure.
Widespread defaults and losses not only triggered bankruptcy at many brokerage firms, they also undermined investors' faith in the capital markets. Not only did many broker-dealers shut down, the stock market tanked as well. By formalizing protections, SIPC aimed to prevent further investor harm and restore confidence for any future recurrences.
SIPC's purpose and mission is a core component of investor protections in the United States financial system. In essence, SIPC was created and designed as a critical safeguard for investors' brokerage accounts.
Why? We all know that unforeseen circumstances happen all the time. Even the most meticulous brokerages can collapse suddenly when we least expect them to.
Many brokerages have in fact gone under. I still distinctly remember when Lehman Brothers went down because I knew many people who worked there, including one of my close friends at the time. It was a scary time period that I'll never forget. Thankfully, the SIPC was able to recover and distribute roughly $106 billion for 111,000+ former Lehman Brothers customers
Prior to the creation of SIPC, investors faced complete losses of all the capital and assets they held at failed institutions. Can you imagine if there was no SIPC and you had an investment account at Lehman Brothers? You would have lost years upon years of savings and investments overnight. Talk about utter devastation and financial destruction. You'd probably never want to invest or trust a broker ever again.
Fortunately, investors' brokerage accounts are now required to be insured through SIPC today.
Members Of The SIPC
Currently, there are more than 3,500 brokerage firms who are members of the SIPC. This includes the 5 major houses – Vanguard Group, Charles Schwab, Fidelity Investments, JPMorgan Chase, and Merrill Lynch/Bank of America – as well as thousands of others.
Registration is required for all licensed broker-dealers, except in a few rare exceptions. And all members must pay assessment fees based on a percentage of their operating profits. These funds are put toward the SIPC's operations and protection reserves.
SIPC Coverage And Claims
Under SIPC's umbrella, investors are insured up to $500,000, including a $250,000 cap on cash holdings, per securities account. If you hold more than one account that falls under SIPC's “separate capacities,” you can qualify for more than $500,000 in coverage. Similarly, if you're married your coverage will also increase.
For example, if you hold two accounts with separate capacities – a traditional IRA and a Roth IRA – SIPC insures those separately. This means you'll have $1 million in coverage for the two accounts, $500,000 for the traditional IRA + $500,000 for the Roth IRA.
The SIPC's list of separate capacities includes:
- Individual account
- Joint account
- Corporation account
- Trust account
- Individual retirement account
- Roth individual retirement account
- Estate executor account
- Custodial account for a ward or minor
As a second example, let's say a married couple has 3 brokerage accounts – two individual accounts and one joint account. They will have a combined $1.5 million in SIPC protection. The math is $500,000 x 2 for each individual account plus an additional $500,000 for their joint account.
Since it's creation, the SIPC has helped recover roughly $142 billion for over 770,000 investors. That's serious protection and hopefully helps you better appreciate the importance of their insurance coverage as an investor.
If you ever happen to need to file a claim, the good news is SIPC is working faster than ever. Each liquidation proceeding is different. But, there are instances when they can restore investors' access to their accounts within three weeks. More complex cases could take many months. However, investors can usually regain access to at least a portion of their assets within one to three months.
The ideal number of banking relationships you should probably have is three. This way, you're hedged in case one bank goes down and your finances are protected.
How To File An SIPC Claim
SIPC's guidance for filing claims is to:
- Compile broker account records. Gather as many monthly or quarterly account statements, trade confirmations, and purchase or sales agreements as possible.
- Request a claim form. If you don't receive on in the mail, contact the Trustee of the liquidation proceeding or SIPC by email (email@example.com) or phone (202-371-8300).
- Complete the claim form. Fill out your claim form in its entirety, submit photocopies of all attachments and retain the originals, send everything in by certified mail, and keep a copy of the claim form for your records. Be sure to submit everything by the deadline, which is usually 6 months from the date the notice of the proceeding is published.
Take Control Of Your Finances The Easy Way
In summary, the SIPC sustains the vibrancy and trust that underlies the US capital markets. Their institution-focused interventions continue safeguarding individuals against corporate actions that are beyond personal control.
Before you open any investment account, confirm the broker is a member of SIPC. You can also check the SIPC's list of members on their website.
It's also important to then track your investments to make sure you're comfortable with your positions. I highly recommend signing up forEmpower, a free online wealth management tool. Empower enables you to easily and securely monitor your finances all in one place.
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