The vast majority of investors have their stocks, bonds, and mutual funds through their brokerage accounts. What this means is that the stock broker actually holds assets in behalf of their clients and retains these assets in clients’ accounts. If a broker is not a member of the SIPC (also known as the Securities Investor Protection Corporation), there is virtually no protection in the event that the brokerage goes bankrupt. However, most legitimate brokerage firms are members.
The SIPC is not an agency of the federal government, but a member agency. This means that member brokers pay into it. You will know that a brokerage is a member because all of its signage and ads will include the words, “Member SIPC”. Should there ever be any doubt, you can contact the SIPC by phone or on the web to verify your broker’s membership. Although the SIPC does not guarantee your investment’s value, they will give you some assurance against losing property.
How The SIPC Protects Investors
The SIPC helps most customers of failed brokerage firms who’ve discovered that their assets are missing from their accounts as a direct result of the bankruptcy. The goal here is for clients to recover their missing stocks and bonds, regardless of their actual value. In other words, the number of shares owned will be returned to the customer without respect to the dollar value. But be aware that futures commodities, cash, and investment contracts that are not registered with the U.S. Securities and Exchange Commission are not protected by the SIPC.
What Happens If Your Broker Faces Bankruptcy?
When an investment brokerage fails, there are several steps that someone needs to go through in order to recover missing assets as per SIPC regulations. The goal of the SIPC is to restore assets and securities to their rightful owners. We’ll give you the highlights:
1. Customers will ultimately get back the stocks and bonds already registered in their name or in the process of being registered.
2. The brokerage firm’s remaining customer assets are divided and divvied up proportionately, based on the size of customer claims.
3. No more than $500,000 per customer, including a maximum of $100,000 for cash claims, will be honored. This is the SIPC cap.
4. Once the brokerage is liquidated and appropriate SIPC compensation is provided to the broker’s clients, it is possible that the bankrupted company may still have leftover assets. If so, these funds are used to satisfy any remaining customer claims above the SIPC cap.
5. The value of recovered securities is not guaranteed to be the same as it used to be, due to fluctuations in the markets.
Customers can expect to receive their property back in about one to three months. If a brokerage keeps good records, it’s possible for assets to be received shortly after the claim is filed. Unfortunately, delays of several months happen when records are not accurate or when the principals are involved in fraud. Still… if I were in this situation, I wouldn’t mind the wait if I can be assured of getting my assets back! I’m just glad we have the SIPC, because without it, investors who are victims of broker bankruptcy would just be out the money!
{ 2 comments… read them below or add one }
Many people are now aware, because of the Madoff case, that SIPC only protects people when they want to, and therefore cannot be relied upon as a form of “insurance” should their brokerage company fail. SIPC has gone so far now not to pay Madoff investors that they have illegally opted to ignore their own statutes from 1970, for the first time, and not pay Madoff investors using the method of calulation they have always used, even in previous Ponzi cases. Investors can no longer rely on SIPC. Therefore, investment decisions (in particular, who you choose to invest with) should be made on the basis of SIPC not existing, for in the case of thousands of Madoff investors who will receive not even a dime, they don’t exist. Don’t let what happened to them happen to you.
Richard,
You make a very good point about the Madoff case. But I can see how that type of fraud may not cover victims. The Madoff scandal is caused by a deliberate scam perpetrated by a financial company that in my mind, doesn’t really qualify as a legitimate company in the first place. So is the SIPC supposed to cover victims of such outright scams based on a formula?
In my mind, I expected the SIPC to be there for customers of legitimate companies which have failed or gone bankrupt through ordinary, licit means. When this happens and there are some missing assets, then my expectation is that the SIPC would then get involved. I didn’t realize they were expected to step in when a full blown scam involving a sham financial company is exposed.