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This article is from the What Every
Investor Should Know.
Protection For Your Account
Investors may be concerned with the safety of securities and funds
which are held in brokerage accounts. For instance, what would happen
if the brokerage firm were to go out of business? To help protect
investors in this situation, Congress passed the Securities Investor
Protection Act of 1970 (SIPA). This law is primarily administered by
the Securities Investor Protection Corporation (SIPC), a nonprofit
membership corporation. Most securities broker-dealers registered with
the SEC are members of SIPC. Some brokerage firms may carry insurance
on accounts exceeding SIPC coverage.
SIPA provides financial protection for the securities and cash (or
credit) balances held in customer accounts with broker-dealers, should
a firm be forced to liquidate. In such cases, a court-appointed
trustee or SIPC may arrange to have customer accounts transferred to
another SIPC member firm. If this is not feasible, SIPC protects
customers in the following manner:
- Customers receive securities which are in the possession of the
firm, are registered in the customers' names, and are not in
negotiable form. Customers then share in all remaining securities on
a pro rata basis.
If the liquidating firm lacks funds or securities to settle all
customer claims, SIPC will satisfy remaining claims up to a maximum of
$500,000 per customer, not more than $100,000 of which may be for cash
claims.
- If there is a customer claim that is not satisfied by the pro rata
distribution of customer cash and securities and the $500,000
coverage, it may be satisfied with any assets remaining after payment
of liquidation expenses on a pro rata basis with other creditors. The
processing time for SIPC liquidation claims will vary according to the
size and nature of liquidations.
- Keep in mind, however, that SIPC covers losses resulting from the
financial failure of the brokerage firm. It does not cover losses
resulting from fluctuations in the market value of your
investments.
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