The Securities Investor Protection Corporation (SIPC) was created in 1970 as a non-profit, non-government, membership corporation, funded by member broker/dealers. Its primary role is to return funds and securities to customers if the broker/dealer holding these assets becomes insolvent.
SIPC coverage applies to current (and in some cases former) SIPC members. Virtually all broker/dealers registered with the Securities and Exchange Commission (SEC) are SIPC members; those few that are not must disclose this fact to their customers. SIPC members must display an official sign showing their membership. To check whether a firm is a SIPC member go to www.SIPC.org, call the SIPC Membership Department at (202) 371-8300, or write to SIPC Membership Department, Securities Investor Protection Corporation, 805 Fifteenth Street, NW, Suite 800, Washington, DC 20005-2207.
SIPCís power to protect customers of former SIPC members ends 180 days after the member loses SEC registration. The SEC normally does not terminate a broker/dealerís registration if the SEC knows that the broker/dealer owes securities or cash to customers. Customers can therefore better protect themselves and assist the SEC by reporting their losses promptly.
In general, SIPC coverage is available in two distinct types of situations.
SIPC was created to return customer property when a clearing firm became insolvent. In the securities industry, there are many cases where two separate broker/dealers work together to service a customer account. These firms are known as the introducing firm and the clearing firm. The introducing firm typically employs the individual broker who takes the customerís order and who sees that the order gets executed. The clearing firm will hold the customerís cash and securities and send out statements describing the assets it holds "on deposit" for the customer. If the clearing firm becomes insolvent or otherwise cannot return the customerís property, it is SIPCís responsibility, not the introducing firmís, to make sure the customerís cash and securities are returned. For years, this was the most common situation where SIPC came forward to protect customers.
In recent years, SIPC has expanded its coverage to include protection against unauthorized trading in customersí securities accounts. This coverage can include unauthorized trading by persons associated with the introducing firm and may be available even if the clearing firm is still solvent.
The following example shows how important this coverage can be: Customer Jones has $20,000 cash in his account and no other assets. Without his authorization, an individual broker of Jonesí introducing firm buys 300 shares of stock XYZ for Jones, costing $20,000. Jonesí account now has 300 shares of XYZ that the clearing firm can send to Jones upon request. However, Jones wants the $20,000 that was in his account before the unauthorized trade, not the 300 XYZ shares. It now becomes SIPCís responsibility - not the clearing firmís - to ensure Jonesí cash is returned if the introducing firm is not financially able to return the $20,000 to Jonesí account. To be eligible for this important coverage, customers must clearly establish that the trades were unauthorized, and file a complaint in writing as soon as they become aware of the unauthorized trade.
Limits Of SIPC Coverage
SIPC is limited in the risks, amounts, and investments that it covers, as described below.
Market Risk Not Covered
An example shows this risk: A broker is shut down owing a customer 100 shares of ABC stock that was worth $50 a share, for a total value of $5,000. Five months later when the SIPC trustee is appointed, the stock has dropped to $30 a share. SIPC coverage would be limited to either replacing the 100 shares of ABC or the $3,000 in cash that the customerís stock is worth at the time of the appointment of the trustee. Conversely, if the stock rose to $70 a share when the trustee was appointed, SIPC would either give the customer 100 shares of ABC stock or, if the shares are not available, would give the customer $7,000. In short, the fluctuation in the value of the shares represents the market risk that is not covered by SIPC.
SIPC Liquidation Process
SIPC will generally ask a court to appoint a trustee to supervise the liquidation of a SIPC member that is insolvent or cannot return customer cash or securities. The trusteeís duties include ensuring the return of customer property. The trustee will send claim forms to each customer of the liquidating broker/dealer based on the broker/dealerís records and publish notice of the liquidation in some newspapers. Customers receiving a claim form must return it to the trustee by the deadline on the form or risk not recovering their cash or securities. The trustee reviews the customersí forms and determines what moneys to pay and what securities to return.
Customers should protect themselves by taking the following steps:
Read And Keep All Documents
Check Trade Confirmations
Pay The SIPC Member
Report Unauthorized Trades
Report Problems To Regulators ASAP