SIPC
The Securities Investor Protection Corporation (SIPC) is a nonprofit membership corporation that protects customers of failed SIPC-member brokerage firms, covering up to $500,000 in securities and cash — including up to $250,000 in cash — per customer account.
SIPC was created by Congress in 1970 under the Securities Investor Protection Act after a wave of brokerage firm failures in the late 1960s left thousands of investors unable to recover their securities. While FDIC protects bank depositors, SIPC protects brokerage customers — an important distinction because most Americans hold far more wealth in brokerage accounts than in bank savings accounts.
It is critical to understand what SIPC does and does not cover. SIPC protects against the risk that a brokerage firm becomes insolvent and customer assets go missing or are misappropriated — it does NOT protect against investment losses. If your stocks or bonds drop in value due to market movements, SIPC offers no recourse. SIPC steps in only when a brokerage firm fails and customer assets cannot be located or are otherwise inaccessible.
In a SIPC liquidation, a trustee is appointed to recover and return customer assets. SIPC funds help make customers whole up to the $500,000 limit ($250,000 for cash claims). Customers with accounts exceeding those limits become unsecured creditors of the failed firm for the excess. Many large brokerages carry additional private insurance — sometimes in the hundreds of millions per customer — beyond SIPC limits.
High-profile cases have tested SIPC's boundaries. The Bernard Madoff Ponzi scheme, discovered in December 2008, was technically a SIPC-covered situation because Madoff Securities was a registered broker-dealer. However, the SIPC trustee used the 'net investment' method, compensating victims only for the cash they actually deposited minus withdrawals — not the fictitious account balances Madoff had reported — a policy that sparked years of legal battles.
For investors, knowing your brokerage is an SIPC member (virtually all registered U.S. broker-dealers are) is a basic but important safeguard. SIPC membership information is publicly available on SIPC.org. Investors with very large accounts should inquire about whether their broker carries excess-SIPC insurance for additional peace of mind.