Securities Investor Protection Corporation
Encyclopedia
The Securities Investor Protection Corporation (SIPC, sometimes pronounced ˈsɪpɨk) is a federally
mandated, non-profit
, member-funded, corporation in the United States
. It protects investor
s in certain securities
from financial harm if a broker-dealer
fails. It does not protect against losses in the securities markets, identity theft, or other 3rd-party fraud.
SIPIC was born in the shadow of the "Paperwork Crunch", as a means to restore confidence in the U.S. securities market. It's creation was mandated by the Securities Investor Protection Act of 1970, as a way to quell investor insecurity and save the securities market from a financial crisis. In his introduction of the Securities Investor Protection Act to the floor of the Senate, Senator Edmund Muskie stated:
SIPC serves two primary roles in the event that a broker-dealer
fails. First, SIPC acts to organize the distribution of customer cash and securities to investors. Second, to the extent a customer's cash and/or securities are unavailable, SIPC provides insurance coverage up to $500,000 of the customer's net equity balance, including up to $250,000 in cash. In order to state a claim, the investor is required to show that their economic loss arose because of the insolvency of their broker-dealer and not because of fraud, misrepresentation, or bad investment decisions.
While customers are protected for cash and most types of securities, such as notes, stocks, bonds, and certificates of deposit, other items, such as commodity or futures contracts, are not covered. Investment contracts, certificates of interest or participations in profit-sharing agreements, and oil, gas, or mineral royalties or leases are not covered unless registered with the Securities and Exchange Commission.
"SIPC is led by seven directors, some appointed by the President of the United States, and others by the member firms. It employs a staff of only twenty-nine and does not advertise job openings on its website. In 2007, total employee compensation and benefits were a $5.8 million."
. It provides a form of protection for investors against losses that arise when broker-dealers, with whom they are doing business with, become insolvent. The limitations of SIPC protection caused significant confusion among a number of investors following the collapse of Bear Stearns
and Lehman Brothers
and perhaps, most prominently, following the exposure of Bernard Madoff's
ponzi scheme
.
SIPC does not insure the underlying value of the financial asset it protects. In other words, investors still bear the risk of the market. For example, if an investor buys 100 shares of XYZ company from a brokerage firm and the firm declares bankruptcy or merges with another, the 100 shares of XYZ still belong to the investor and should be recoverable. However, if the value of XYZ declines, SIPC does not insure the difference. In other words, the $500,000 limit is to protect against broker malfeasance, not poor investment decisions and changes in the market value of securities. In addition, SIPC may protect investors against unauthorized trades in their account, while the failure to execute a trade is not covered.
By law, investors' assets and the brokerage's assets must be segregated; they may not be commingled. It could be a civil and/or criminal violation if an investor's assets were inappropriately commingled. If the firm files for bankruptcy, provided the assets have been appropriately segregated, the investor's assets should be recoverable, beyond SIPC's current protection limit of $500,000, of the net equity, per account and $250,000 for cash claims. However, as noted above, not all asset types are covered by SIPC, such as annuities. Investors should check applicable rules at www.sec.gov and www.sipc.org, before investing. They should also discuss SIPC coverage and other safeguards which exist with respect to their investments, with their broker.
There may be ways to help protect assets, for example, confirm that your broker is a member of SIPC by visiting www.sipc.org, looking for the SIPC link on your broker's website, or looking for the SIPC logo on your customer account statement; invest only with reputable firms; open multiple accounts (individual, joint, IRA, ROTH) with the same firm; or, if possible, limit the amount invested with each firm to the SIPC covered limit.
July 27 2011
Madoff Trustee’s Actions to Be Probed by GAO, Representative Garrett Says
http://www.bloomberg.com/news/2011-07-27/madoff-trustee-s-actions-to-be-probed-by-gao-representative-garrett-says.html
Federal government of the United States
The federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...
mandated, non-profit
Non-profit organization
Nonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends...
, member-funded, corporation in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
. It protects investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s in certain securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
from financial harm if a broker-dealer
Broker-dealer
A broker-dealer is a term used in United States financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers....
fails. It does not protect against losses in the securities markets, identity theft, or other 3rd-party fraud.
SIPIC was born in the shadow of the "Paperwork Crunch", as a means to restore confidence in the U.S. securities market. It's creation was mandated by the Securities Investor Protection Act of 1970, as a way to quell investor insecurity and save the securities market from a financial crisis. In his introduction of the Securities Investor Protection Act to the floor of the Senate, Senator Edmund Muskie stated:
-
- "The economic function of the securities markets is to channel individual institutional savings to private industry and thereby contribute to the growth of capital investment. Without strong capital markets it would be difficult for our national economy to sustain continued growth: indeed, the state of U.S. capital market development, more advanced than that of any other industrial country, is an important contributing factor in the rapid economic growth this country has experienced. Securities brokers support the proper functioning of these markets by maintaining a constant flow of debt and equity instruments. The continued financial wellbeing of the economy thus depends, in part, on public willingness to entrust assets to the securities industry."
SIPC serves two primary roles in the event that a broker-dealer
Broker-dealer
A broker-dealer is a term used in United States financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers....
fails. First, SIPC acts to organize the distribution of customer cash and securities to investors. Second, to the extent a customer's cash and/or securities are unavailable, SIPC provides insurance coverage up to $500,000 of the customer's net equity balance, including up to $250,000 in cash. In order to state a claim, the investor is required to show that their economic loss arose because of the insolvency of their broker-dealer and not because of fraud, misrepresentation, or bad investment decisions.
While customers are protected for cash and most types of securities, such as notes, stocks, bonds, and certificates of deposit, other items, such as commodity or futures contracts, are not covered. Investment contracts, certificates of interest or participations in profit-sharing agreements, and oil, gas, or mineral royalties or leases are not covered unless registered with the Securities and Exchange Commission.
"SIPC is led by seven directors, some appointed by the President of the United States, and others by the member firms. It employs a staff of only twenty-nine and does not advertise job openings on its website. In 2007, total employee compensation and benefits were a $5.8 million."
Caveats and clarifications
SIPC does not operate like the Federal Deposit Insurance CorporationFederal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
. It provides a form of protection for investors against losses that arise when broker-dealers, with whom they are doing business with, become insolvent. The limitations of SIPC protection caused significant confusion among a number of investors following the collapse of Bear Stearns
Bear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...
and Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
and perhaps, most prominently, following the exposure of Bernard Madoff's
Bernard Madoff
Bernard Lawrence "Bernie" Madoff is a former American businessman, stockbroker, investment advisor, and financier. He is the former non-executive chairman of the NASDAQ stock market, and the admitted operator of a Ponzi scheme that is considered to be the largest financial fraud in U.S...
ponzi scheme
Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
.
SIPC does not insure the underlying value of the financial asset it protects. In other words, investors still bear the risk of the market. For example, if an investor buys 100 shares of XYZ company from a brokerage firm and the firm declares bankruptcy or merges with another, the 100 shares of XYZ still belong to the investor and should be recoverable. However, if the value of XYZ declines, SIPC does not insure the difference. In other words, the $500,000 limit is to protect against broker malfeasance, not poor investment decisions and changes in the market value of securities. In addition, SIPC may protect investors against unauthorized trades in their account, while the failure to execute a trade is not covered.
By law, investors' assets and the brokerage's assets must be segregated; they may not be commingled. It could be a civil and/or criminal violation if an investor's assets were inappropriately commingled. If the firm files for bankruptcy, provided the assets have been appropriately segregated, the investor's assets should be recoverable, beyond SIPC's current protection limit of $500,000, of the net equity, per account and $250,000 for cash claims. However, as noted above, not all asset types are covered by SIPC, such as annuities. Investors should check applicable rules at www.sec.gov and www.sipc.org, before investing. They should also discuss SIPC coverage and other safeguards which exist with respect to their investments, with their broker.
There may be ways to help protect assets, for example, confirm that your broker is a member of SIPC by visiting www.sipc.org, looking for the SIPC link on your broker's website, or looking for the SIPC logo on your customer account statement; invest only with reputable firms; open multiple accounts (individual, joint, IRA, ROTH) with the same firm; or, if possible, limit the amount invested with each firm to the SIPC covered limit.
External links
- Network for Investor Action and Protection
- Madoff Coalition For Investor Protection - Is SIPC insurance? You decide!
- Must see PowerPoint - is SIPC insurance?
- www.sipc.org SIPC is NOT an FDIC for investors;
- Madoff victims support and advocacy group For investors only
- Madoff Trustee, SEC Should be Probed -US Reps http://www.reuters.com/article/2011/06/03/madoff-probe-idUSN0318200920110603
- Letter to Gene L. Dodaro Comptroller General of the United States Government Accountability Office from Congress requesting probe http://www.scribd.com/doc/57140364/Investigation-of-SIPC-Trustee-SEC
July 27 2011
Madoff Trustee’s Actions to Be Probed by GAO, Representative Garrett Says
http://www.bloomberg.com/news/2011-07-27/madoff-trustee-s-actions-to-be-probed-by-gao-representative-garrett-says.html