Understanding FDIC insurance vs. SIPC protection

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When evaluating bank account options for your startup, how can you tell which one is best for you? As a prospective account holder, some initial considerations include the potential yield you’ll earn on your cash, the monthly fee structure, or the rewards and perks that come with different types of accounts. But after you’ve evaluated the perks, consider the potential drawbacks. What happens if your banking institution or brokerage firm fails? Are your personal finances protected? And if so, how? Today, most banking-for-startups options offer either FDIC insurance coverage or SIPC protection for customer accounts. Both are effective, but it’s important to know the differences and how each might serve your own account. 

At a high level, FDIC insurance covers cash in a bank account, while SIPC coverage includes securities (and cash intended to purchase securities) in a brokerage account. These types of coverage operate differently, depending on the account you have. Let’s dive into more differences between the two.

What is FDIC insurance and what does it cover?

The Federal Deposit Insurance Corporation (FDIC) is a federal agency that protects against the loss of cash value in checking accounts and savings accounts held at FDIC-insured banks. For each insured institution, FDIC coverage typically extends up to $250,000 per deposit account. Depending on account ownership category and financial institution, it’s possible to have more than $250,000 in deposits at the same bank and still be fully insured. This can happen if you have multiple ownership capacities (like having both an individual account and a joint account at the same bank). But it’s important to keep in mind that no single account is covered for more than $250,000.

What are FDIC coverage limits?

FDIC does not insure anything that’s not cash, such as money invested in stocks, bonds, money market mutual funds, life insurance policies, retirement accounts, annuities, municipal securities, treasury securities, money market funds, certificates of deposit, or money market accounts. Even if these investments were bought from a brokerage affiliated with an insured bank, if it was not a cash deposit, the FDIC does not insure it.

What is SIPC protection and what does it cover?

On the other hand, the Securities Investor Protection Corporation (SIPC) is a nonprofit membership corporation that protects customers of member brokers and dealers. To receive protection, broker-dealers firms must be members of the Financial Industry Regulatory Authority (FINRA), and registered to buy and sell securities on behalf of customers. If the broker-dealer managing their holdings fails, customers are protected for up to $500,000 of securities (inclusive of up to $250,000 in cash). 

Why are FDIC and SIPC insurance important?

The Federal Deposit Insurance Corporation (FDIC) was created in 1933, during the height of the Great Depression in the United States. Its intention was to restore public trust in banks, especially after seeing hundreds of banks fail in the span of just a few years. Nowadays, the FDIC monitors member banks, oversees the liquidation process if those banks fail, and insures bank deposits at member banks. You can easily tell if your bank is a member by reviewing their website, looking for ‘Member FDIC’ signs in your bank’s local branch, or by searching FDIC.gov.

Similarly, the Securities Exchange Act (SEA) of 1934 was created to regulate securities transactions on the secondary market. Its role is to monitor the financial reports that publicly traded companies are required to disclose. This ensures financial transparency and accuracy, while preventing fraud or manipulation. Following a period of expansion in securities in the 1960's, the industry contracted at the end of the decade, leading to voluntary liquidations, mergers, and bankruptcies by many brokerage firms. Cash and securities depositors with these firms lost confidence in the established banking institutions. 

In response, the Securities Investor Protection Act of 1970 established the SIPC to prevent more brokerage houses from failing. It also restored investor confidence in the capital markets, and increased the financial liability requirements for registered brokers and dealers. In addition to the SIPC, this legislation expanded the responsibility of the Securities and Exchange Commission (SEC) and various self-regulating organizations in the securities industry. Nowadays, the SIPC maintains a fund that protects investors from the misappropriation of their money and most types of securities in the event that their bank fails. Most brokers registered under the SEA are also required to be members of the SIPC.

So, FDIC insurance and SIPC protection were created to protect your money and prevent the erosion of public confidence in the banking industry. When you shop with member institutions, rest assured that your assets are being properly guarded against big banks failing.

The key difference between FDIC insurance and SIPC protection

At the end of the day, the key difference between FDIC vs. SIPC is that while SIPC provides protection for brokerage accounts in the event of broker-dealer failure, FDIC insurance offers coverage in the event of a bank failure. FDIC insurance covers cash assets in checking- and savings-like accounts, while SIPC protection covers funds held in securities at SIPC member broker-dealer firms.

 

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