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Securities Investor Protection Corporation: Purpose & Authority

Instructor: Glenn Fydenkevez

Glenn is an experienced financial services professional with particular expertise in the financial markets, securities law, and real estate.

Are you protected from fraud in securities investment? In this lesson, learn the history and purpose of the non-profit, consumer protection organization called the Securities Investor Protection Corporation (SIPC).

Types of Risk

Investing in securities markets involves risks. Most investors understand and accept the risks that are inherently associated with investing. In other words, people know they can lose money in the securities markets.

Most investors are prepared to take losses sometimes when they guess wrong about the markets, but they aren't prepared to lose money because of fraud or poor business management. Protection from these latter risks is why the Securities Investors Protection Corporation (SIPC) exists.

What is the SIPC?

The Securities Investors Protection Corporation (SIPC) was mandated by an act of Congress called The Securities Investors Protection Act of 1970. While the SIPC was created by a federal law, it is not a US Government agency. The SIPC is not funded or supported by the government.

The SIPC is a non-profit member organization, which simply means investment companies join the SIPC the way individuals might join an exclusive, private club. Member firms fund the operations and functions of the SIPC through fees and assessments.

Once a firm joins, they are allowed to promote themselves as members who can offer SIPC protection to their clients. All member firms must prominently display the SIPC logo in every company location. Non-members must specifically inform clients that they are not members.

SIPC Protection Limits

The purpose of the Securities Investor Protection Corporation is consumer protection, but the organization does not protect investors against market risk. In other words, it's not insurance against bad decisions or volatile markets. The SIPC offers limited and specific protection in the event that a broker becomes insolvent or is guilty of fraud.

Every customer of a member firm enjoys SIPC protection of their interests in registered securities, investments where ownership is reordered by an agent and where transfer (change of ownership) is controlled. This includes stocks, bonds, mutual funds, and other securities that trade on regulated exchanges. Things like physical commodities, precious metals, insurance contracts, and private placements are not covered by SIPC.

The dollar amount of coverage for each individual customer is limited to $500,000 to include up to $250,000 in uninvested cash. So, for example, if a client has $200,000 in ABC stock, $50,000 in a corporate bond, and $250,000 sitting in cash, all three - the stock, the bond, and the cash - are covered.

Who is Covered?

Because SIPC coverage is limited, it is necessary to define who is eligible for benefits and who is not.

The SIPC bases its coverage not on separate individuals who might have many brokerage accounts at any given brokerage firm, but on the separate capacity of the registered owners of each account. A client may have five accounts at one firm, but if that client has the sole authority to control all of them, all the accounts are considered one 'separate capacity' and are covered only once and only to the stated maximum.

The same client might have another account that's owned jointly with a spouse. The joint entity, which is to say the married spouses, control the joint account in concert. Neither spouse can act independent of the other and neither can control the other's individual accounts. For this reason the SIPC considers joint accounts a separate capacity and extends full coverage to them even if the individuals have other accounts.

In this way people who own multiple accounts in multiple capacities will get maximum coverage.

Other examples of fully covered separate capacities are trust accounts, custodial accounts, estate accounts, guardian accounts for minors, and ROTH IRA accounts.

The Authority of the SIPC

The Securities Investor Protection Corporation has no authority or control over an investment firm unless and until the firm becomes statutorily insolvent and a court appoints the SIPC as Trustee of the failed firm. Remember, the SIPC is not a government agency or a regulatory body.

Once an SIPC Trustee is appointed, they have full authority to oversee the dissolution of the firm and to recover and return client assets.

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