SIPC Insurance: What It Is, What It Covers
SIPC insurance for brokerage firms is similar to FDIC protection for bank failures. Here’s what is and isn’t covered.
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SIPC insurance is insurance that covers up to $500,000 of securities, including up to $250,000 of cash, that a consumer holds in one or more brokerage accounts. SIPC stands for Securities Investor Protection Corporation.
SIPC insurance is not the same as FDIC insurance. The main difference between SIPC insurance and FDIC insurance is that SIPC insurance covers money and securities in brokerage accounts, and FDIC insurance covers money in bank accounts.
» MORE: How to invest $100,000
SIPC insurance rules
Firms that sell stocks and bonds and other investments to the public — as well as the clearinghouses that handle account transactions — are required by law under the Securities Investor Protection Act of 1970 to be members of the SIPC. Customers don’t have to sign up for it, and individual investors can’t purchase extra coverage.
Scroll to the bottom of nearly any page on a brokerage firm’s site and you should see the SIPC membership disclosure. All of the online brokers we review carry SIPC insurance. If yours doesn't, it may be time to find a new one.
In the event your broker or robo-advisor financially fails and investors' assets are missing or at risk, the SIPC will step in.
What SIPC covers
Up to $500,000 in total coverage per customer (or per account, if the accounts are of separate capacities — more on this below) for lost or missing assets of cash and/or securities from a customer’s accounts held at the institution.
Up to $250,000 of that can protect cash in a customer's account that is not yet invested in securities.
Protection in case of unauthorized trading or theft from an account.
What SIPC insurance doesn’t cover
Investment losses or worthless stocks or other securities.
Losses due to account hacking, unless the firm was forced into liquidation due to the hack.
Cash held in connection with a commodities trade.
Claims against bad or inappropriate investment advice. The Financial Industry Regulatory Authority, the Securities and Exchange Commission and state securities regulators handle complaints about firms.
SIPC vs. FDIC: What is and isn’t covered
SIPC (brokerage firms) | FDIC (banks) | |
|---|---|---|
Coverage amount | Up to $500,000 per customer, which includes a maximum $250,000 of cash coverage. For customers with multiple accounts, protection is determined by whether those accounts are of separate capacity. | Up to $250,000 per depositor, per institution and per ownership category |
What is covered | Stocks, bonds, Treasury securities, certificates of deposit, mutual funds, money market mutual funds held at an SIPC member firm | Money in deposit accounts, including checking and savings accounts, money market deposit accounts (not money market mutual funds), certificates of deposit |
What isn’t covered |
|
|
Who is covered | U.S. and non-U.S. citizens with accounts at a member institution | U.S. and non-U.S. citizens with accounts at a member institution |
Is it safe to have more than $500,000 in a brokerage account?
That depends on your account balance. Remember, SIPC coverage is limited to $500,000 total per customer. However, if you have more than that at the institution, you may still be insured for a greater amount based on:
How the accounts are titled. The “per-customer” rule of coverage is based on ownership capacity. If, for example, you have an IRA in your name and a joint account with your spouse, the SIPC treats them as separate accounts and insures each up to $500,000. (Unlike with FDIC coverage, joint accounts aren’t insured to the full amount for each account holder with SIPC insurance.) Other examples of separate capacity include accounts held for a trust or a corporation, by a guardian for a ward or minor or by an estate executor. A margin account is not considered a separate capacity.
The amount of cash in the account. Claims on cash are capped at $250,000. That $250,000 counts toward the full $500,000 policy. SIPC protection may not be adequate if you keep a lot of cash in your account. Money market funds and certificates of deposit (CDs) are considered an investment and not cash under the rules.
If after adding up your assets in all their separate and combined capacities it turns out SIPC coverage falls short, consider moving a portion of your money to a different institution. (Here are instructions on how to switch brokers and move your investments.)
What if you have a Roth and a traditional IRA at one brokerage?
If you have a Roth IRA and a traditional IRA at the same institution, SIPC protection treats them as separately insured accounts and provides a total of up to $1 million in protection, or $500,000 on the Roth account and $500,000 for the regular IRA.
What happens if your brokerage goes out of business?
If your brokerage shuts down or becomes insolvent, other layers of protection shield you from loss before the SIPC needs to step in. As FINRA points out: “In virtually all cases, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm.”
Those other layers of protection include regulatory requirements for brokerage firms to keep customer assets segregated in separate accounts from the firm’s own money and to have a minimum amount of liquid assets on hand, kind of like an emergency fund for a broker.
If against all odds your broker gets to the liquidation phase before you get your money back, you’ll be notified by a court-appointed trustee for the liquidation on how to file a claim. (As a backup you can always go to sipc.org to request a claim form.)
The amount of your claim will be the value of the cash and securities in your account minus any debt you owe the brokerage firm (any margin loans, for example) on the date the SIPC files the court application for liquidation.
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