What is SIPC protection?
SIPC coverage is a deposit protection scheme on investments and securities. The non-profit Securities Investor Protection Corporation (SIPC) runs the scheme. Broker/Dealer members pay a percentage of their gross revenues as their premium.
This membership corporation protects the customers of broker-dealers. The coverage is in the event that the broker/dealer fails, and has co-mingled the funds of customer accounts with the broker/dealer’s operating account. The broker-dealer first uses its remaining capital and securities to cover customers' deposits. SIPC protection covers the rest if there is not enough money for all customers' securities.
What does SIPC protection cover?
SIPC protection covers investments including $250,000 in cash. SIPC covers brokerage accounts up to $500,000 in securities, of which $250,000 can be cash. Both SPIC and FDIC (federal deposit insurance corporation) cover joint accounts as two individual accounts.
Is there a limit to SIPC protection?
Like most financial policies, SIPC protection has a limit. But it is not as simple as putting a single total on all your investments. It depends on if you hold any of your investments as cash.
The SIPC protection limit has two parts:
- Up to $250,000 cash held.
- Up to $500,000 total securities.
You have total securities worth $400,000. Of this, $200,000 is in cash and $200,000 is in other securities.
You are under the $250,000 limit for cash and the $500,000 total limit. The SIPC protection scheme would cover the total amount.
You have total securities worth $400,000. Of this, $300,000 is in cash and $100,000 is in other securities.
SIPC protection would cover the first $250,000 of your cash and the $100,000 in non-cash securities.
Your total protection would be $350,000. You would lose your cash over the $250,000 limit.
If you deposit large sums of money into your bank account, remember the $250,000 cash limit. This can affect your total payout on investments from $250,000 to $500,000.
Why is the SIPC protection limit set at $500,000?
The SIPC has existed for half a century. There have been very few cases where a broker went out of business and investors lost money because of it. This is because account holders are segregated and are not co-mingled with Brex. Brex cannot use customer funds or securities as part of their day-to-day operations. If the brokerage firm fails, the customer’s individual account is transferred in whole to another broker/dealer.
Being a SIPC member makes sure investors get their money back in these very rare events. It protects the custody of those funds against the broker-dealer's failure.