As a financial advisor, I receive a lot questions from clients about their investments.

Recently, I was asked:

What happens exactly if the brokerage I am a custodian with goes out-of-business?

Many people are unaware that their investments are protected, or have a misunderstanding of what protection covers.

Continue reading to learn more about the SIPC or Securities Investor Protection Corporation and how it protects your investments. Find out what SIPC can and cannot do for investors.

When You go bankrupt, what happens to your investment?What happens to your investments if a broker fails?

What is the Securities Investor Protection Corporation?

The SIPC was created in 1970 by Congress as a nonprofit organization. They are responsible for returning securities, such as stocks and bonds and cash, up to a specified amount, to investors whose brokerage firm has closed and who owe them money.

By March 2023, SIPC reports that they have helped over 773,000 investors to recover assets worth more than $141.8 billion.

SIPC does not cover all investments. Investments like fixed annuities and commodity futures that are not registered at the Securities and Exchange Commission.

The SIPC is Not the same as the FDIC

SIPC and FDIC (Federal Deposit Insurance Corporation ) are often compared, but they have no relation. The SIPC is there to help investors if they lose their money or if the brokerage company goes out of business. However, it does not guarantee their invested funds. The SIPC does not bail out investors from bad investments.

Unlike the FDIC which is a government-funded agency, SIPC’s funding comes from its member companies.

SIPC currently has $3.9 billion of assets, compared to $128.2 for the FDIC ( by March 2023). This wouldn’t be very effective if some of the biggest brokerages suddenly disappeared.

SIPC doesn’t need to be so big.

Broker/Dealers are different from banks. Banks invest your money – they lend your savings out to other customers who may not repay the loans. Brokerages are only required to hold your securities.

SIPC has already released a statement stating that all assets under the brokerage umbrella would be covered. Double-checking to ensure your company is covered by SIPC never hurts.

Who offers SIPC protection?

You’ve likely seen the SIPC logo in brokerage literature and websites. Visit sipc.org to search the database of members and see if your brokerage is a member.

You can also call the SIPC membership department at (202) 372- 8300.

What the SIPC doesn’t cover

SIPC does not cover all losses. There are some restrictions. These include:

• SIPC only covers securities registered with the SEC. Foreign currency, precious metals, and commodity futures are not protected.
• Bad timing. SIPC will not replace dollar values, but your shares. SIPC will only replace 500 shares at current value if your brokerage firm goes under and you own General Electric shares worth $15,000.
• Outstanding margin loans. SIPC will transfer your debt and collateral if you broker fails during the time that you still have an outstanding margin loan. If no one else takes the loan on, then you will be responsible for paying it back to your broker and ultimately its creditors.

You’ll need to be prepared to react quickly if something happens to you.

How to file an SIPC claim

What happens if you lose your money with a SIPC member broker

You will receive a SIPC claim form usually from the court appointed trustee in charge of liquidating assets. There are strict deadlines for filing claims. Be sure to follow any deadlines that you receive.

It’s possible that your account will be transferred to another broker before you know anything is wrong.

It is still recommended that you submit a SIPC claim in the event of a money transfer. It can protect you in the case of any reporting errors that may occur during the transfer.

The Payment of SIPC Claims

The SIPC’s goal is to replace your actual securities. Your investments could have changed in value when the SIPC returns your securities to you, since they had to buy them on the open market.

The SIPC reserves a large amount of money to cover any shortfall in the liquidated brokerage accounts.

SIPC Maximum Coverage

The SIPC’s maximum payout per customer from its reserve is $500,000. The maximum amount for cash claims is $250,000

Most customers will receive their money back in one to three weeks after submitting a claim. It may take longer if fraud is suspected and the financial records of the company are found to be incorrect.

How to file a claim with SIPC

You can make a claim to the SIPC if you feel you deserve compensation because your brokerage firm has failed and you think you’re entitled to it. The following are the steps for filing a claim at the SIPC.

Step	SIPC – How to File a Claim
1	Inquire with your broker about your account status and whether or not they plan to reimburse you.
2	Download and fill out a SIPC Claim Form from the SIPC Website. You will be asked to fill out a claim form that asks for information about your account and investments.
3	Documents supporting your claim, including account statements, confirmations of transactions, and other documentation relevant to the claim, should be submitted.
4	Wait until the SIPC reviews your claim. The SIPC will decide if you qualify for reimbursement. The SIPC will determine if you are eligible for reimbursement. If so, the SIPC will work with the brokerage firm in order to either transfer your account to a different brokerage firm or pay the value of the investments up to the SIPC limits.

SIPC coverage in excess

SIPC has strict limitations on the amount of coverage it provides. SIPC’s coverage is limited to $500,000 and many larger brokerage firms carry “excess SIPC” insurance. These plans cover any losses incurred by clients that are greater than what would be received in a liquidation, including the SIPC payments.

These insurance plans pay only when the distributions of a brokerage’s liquidation aren’t high enough to cover a claim.

Extremely rare are claims for excess SIPC insurance. Only 2 times have the excess SIPC insurance policies been used.