Generally speaking, investments held in brokerage accounts are insured by an agency called the Securities Investor Protection Corporation (SIPC). The SIPC is a quasi-governmental body under the oversight of the SEC. The SIPC is definitely not the brokerage version of the FDIC.
Although the SIPC does not have the regulatory power of the FDIC, it does have one similar function: it insures assets held at all SEC-registered brokerages. When a broker-dealer fails, the SIPC manages the distribution of investors’ assets. If any assets are missing, the SIPC replaces insured securities up to the insurance limits.
There are many kinds of losses that SIPC insurance cannot protect against. Among these are
- losses due to market price changes
- losses due to the bankruptcy of a company whose securities you own
- losses associated with any securities not registered with the SEC, including commodities, options, unregistered limited partnerships, fixed annuity contracts, and currency investments
- losses that arise when a brokerage firm uses a non-SIPC clearing firm to execute its trades and the clearing firm goes bankrupt
SIPC insurance does cover investor losses when a brokerage firm becomes insolvent or goes bankrupt. The coverage provided is very specific – each account is insured for up to $500,000 in SEC-registered securities. Of this amount, up to $100,000 held in cash is insured.
An important aspect of SIPC coverage is that $500,000 is the value limit that SIPC will replace if your securities have been misappropriated. So if most of a firm’s assets are intact and only some are missing, you could have more than $500,000 in an account and your losses might still be fully covered. When a brokerage does go under – typically this happens fewer than a dozen times a year – it usually takes one to three months for the SIPC to restore securities and cash lost by investors.
What about account losses in excess of $500,000? Should an investor with lots of assets set up accounts at multiple brokerage firms just to be sure of adequate protection? For most people, this shouldn’t be necessary.
Major brokerage firms carry additional insurance, sometimes called “excess SIPC,” to cover losses beyond the SIPC limits. For example, a group of 15 major brokerage firms has created an insurance company called the Customer Asset Protection Company (CAPCO) which (in principle, at least) provides unlimited coverage for losses that exceed the SIPC limit. Other brokerages have purchased their own excess loss coverage policies. For example, Scottrade provides additional insurance coverage which (in combination with its SIPC insurance) covers losses up to $25MM.
Are Mutual Funds Insured by SIPC?
Oddly enough, the answer is “it depends.”
Mutual fund shares held in a brokerage account are indeed covered by SIPC insurance in the event that they are misappropriated. However, mutual funds purchased directly from a mutual fund company like Vanguard are not insured by the SIPC. This should not present a problem, however. In a mutual fund, all the assets are held in a trust account by a bank custodian. The trust account is separate from the bank’s assets and should not be exposed if the bank becomes insolvent.
So what should you do? If your accounts are at a major brokerage firm, you’re covered by SIPC and by excess insurance coverage. If not, you can check at the SIPC web site to be sure that your brokerage firm is a participant. If it isn’t, you need to change brokers. Make sure that your broker’s clearing firm is also an SIPC member. If you have significant holdings with a single firm – say, in excess of $2MM – inquire about their excess coverage limits, just for your own peace of mind.