The Securities Investor Protection Corporation (SIPC ) is a
federally mandated,
non-profit
A nonprofit organization (NPO) or non-profit organisation, also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in co ...
, member-funded, United States
corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and ...
created under the
Securities Investor Protection Act The Securities Investor Protection Act of 1970, Public Law No. 91-598, 84 Stat. 1636 (Dec. 30, 1970), codified at through , established the Securities Investor Protection Corporation
The Securities Investor Protection Corporation (SIPC ) is a fe ...
(SIPA) of 1970 that mandates membership of most US-registered
broker-dealers. Although created by federal legislation and overseen by the
Securities and Exchange Commission, the SIPC is neither a
government agency nor a regulator of broker-dealers. The purpose of the SIPC is to expedite the recovery and return of missing customer cash and assets during the
liquidation of a failed
investment firm
An investment company is a financial institution principally engaged in holding, managing and investing securities. These companies in the United States are regulated by the U.S. Securities and Exchange Commission and must be registered under t ...
.
History
Enactment
In response to the
near collapse of the financial markets in 1970, Congress chose to enact legislation that could prevent an escalation of brokerage firm insolvencies and help stabilize the financial markets. In December 1970, Senator
Edmund Muskie pushed forward a bill to create a Federal Broker Dealer Insurance Corporation. A compromise with the House resulted in the SIPA, which President
Richard Nixon
Richard Milhous Nixon (January 9, 1913April 22, 1994) was the 37th president of the United States, serving from 1969 to 1974. A member of the Republican Party, he previously served as a representative and senator from California and was ...
signed into law at the end of the month. Excerpts from the President's statement made clear the goals of the legislation:
The Paperwork Crunch and financial crisis
The SIPC was born in the shadow of the "Paperwork Crunch" of 1968-70 as a means to restore confidence in the U.S. securities market. During this period,
An explosion in the volume of trading had occurred. A system designed to handle an average three million share trading day was incapable of dealing with the thirteen million share trading day common in the late 1960s. The resultant breakdown in the securities processing mechanism caused chaos as the number of errors in recording transactions multiplied. ... In December 1968, member firms of the New York Stock Exchange had $4.4 billion in "fails to deliver" and $4.7 billion in "fails to receive." Brokers and dealers were finding it difficult, if not impossible, to ascertain their own financial condition. ... This operational and financial crisis forced more than one hundred brokerage firms into liquidation causing thousands of customers to be seriously disadvantaged.
In response, the Securities Investor Protection Act of 1970 was enacted as a way to quell investor insecurity and save the securities market from a
financial crisis
A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
. 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. ... 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.
Functions
The SIPC serves two primary roles in the event that a
broker-dealer fails. First, the 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, the SIPC can pay the customer (via its trustee) up to $500,000 for missing equity, including up to $250,000 for missing cash.
In most cases where a brokerage firm has failed or is on the brink of failure, SIPC first seeks to transfer customer accounts to another brokerage firm. Should that process fail, the insolvent firm will be liquidated.
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. In certain circumstances, securities or cash may not exist in full based upon a customer's statement. In this case, protection is also extended to investors whose "securities may have been lost, improperly hypothecated, misappropriated, never purchased, or even stolen".
While customers' cash and most types of securities - such as
notes
Note, notes, or NOTE may refer to:
Music and entertainment
* Musical note, a pitched sound (or a symbol for a sound) in music
* ''Notes'' (album), a 1987 album by Paul Bley and Paul Motian
* ''Notes'', a common (yet unofficial) shortened versio ...
,
stocks,
bonds and
certificates of deposit
A certificate of deposit (CD) is a time deposit, a financial product commonly sold by banks, thrift institutions, and credit unions in the United States. CDs differ from savings accounts in that the CD has a specific, fixed term (often one, t ...
- are protected, other items such as
commodity or
futures contract
In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
s are not covered. Investment contracts, certificates of interest, participations in
profit-sharing agreement
Profit sharing is various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company's profitability in addition to employees' regular salary and bonuses. In publicly traded companies thes ...
s, and oil, gas, or mineral
royalties or
lease
A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...
s are not covered unless registered with the
Securities and Exchange Commission.
Organization
SIPC is led by seven directors, five appointed by the
President of the United States
The president of the United States (POTUS) is the head of state and head of government of the United States of America. The president directs the executive branch of the federal government and is the commander-in-chief of the United States ...
with the advice and consent of the United States Senate, one by the
United States Department of the Treasury
The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and ...
, and one by the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
.
Directors serve terms of 3 years.
In 2017, the total compensation and benefits of its 39 employees was $11 million.
[
]
Caveats and clarifications
Although modeled loosely on the Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cr ...
(FDIC) which protects bank customers, the SIPC has wider discretion in satisfying customer claims. When securities are missing, it can arrange to provide either replacement securities of the same kind, or their cash value on the date that its trustee was appointed to the case. The SIPC does not protect investors against any loss in the value of their securities, nor does it assume responsibility for any promises about investment performance. Unregistered securities and commodity contracts are not covered by the SIPC, even when brokered by a member firm. Account disputes with a brokerage that remains in business are not handled by the SIPC, but typically by the Financial Industry Regulatory Authority
The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) that regulates member brokerage firms and exchange markets. FINRA is the successor to the National Associat ...
(FINRA) and the Commodity Futures Trading Commission (CFTC).
The limitations of SIPC protection caused significant confusion among a number of investors following the collapse of Bear Stearns
The Bear Stearns Companies, Inc. was a New York-based global investment bank, securities trading and brokerage firm that failed in 2008 as part of the global financial crisis and recession, and was subsequently sold to JPMorgan Chase. The comp ...
and Lehman Brothers
Lehman Brothers Holdings Inc. ( ) was an American global financial services firm founded in 1847. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, a ...
and perhaps, most prominently, following the exposure of Bernard Madoff
Bernard Lawrence Madoff ( ; April 29, 1938April 14, 2021) was an American fraudster and financier who was the admitted mastermind of the largest Ponzi scheme in history, worth about $64.8 billion. He was at one time chairman of the NASDAQ ...
's and Allen Stanford
Robert Allen Stanford (born March 24, 1950) is an American financial fraudster, former financier, and sponsor of professional sports. He is serving a 110-year federal prison sentence, having been convicted in 2012 of fraud, on charges that his i ...
's and the Stanford Financial Group's ponzi scheme frauds.
In the Madoff fraud, where securities had allegedly not actually been purchased, SIPC and the SIPC Trustee challenged and disposed of the claims of approximately one-half of customers of the Madoff firm, arguing that over the course of time those investors had withdrawn more funds than had been invested, resulting in a negative "net equity
In finance, equity is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. For example, if someone owns a car worth $ ...
", and, therefore, not eligible for SIPC protection.
Inasmuch as SIPC does not insure the underlying value of the financial asset it protects, investors bear the risk of the market. In addition, investors also bear any losses of account value that exceed the current amount of SIPC protection, namely $500,000 for securities. 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. Again, this only pertains to an insolvent broker or dealer.
Under rules of the regulatory SRO governing brokers and dealers—the Financial Industry Regulatory Authority
The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) that regulates member brokerage firms and exchange markets. FINRA is the successor to the National Associat ...
(FINRA), the investors' and the brokerage firms' assets must be segregated; they may not be commingled. It could be a civil 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.
See also
* Financial Industry Regulatory Authority
The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) that regulates member brokerage firms and exchange markets. FINRA is the successor to the National Associat ...
(FINRA)
* Municipal Securities Rulemaking Board
The Municipal Securities Rulemaking Board (MSRB) writes investor protection rules and other rules regulating broker-dealers and banks in the United States municipal securities market, including tax-exempt and taxable municipal bonds, municipal n ...
(MSRB)
* Portfolio insurance
* Recovery of funds from the Madoff investment scandal
Recovery of funds from the Madoff investment scandal has been underway since the scandal broke in December 2008. That month, recovery trustee Irving Picard received funds from the Bank of New York account where Bernard Madoff held new investments ...
* Canadian Investor Protection Fund (Canadian counterpart)
References
Further reading
*
*
Letter to Gene L. Dodaro Comptroller General of the United States Government Accountability Office from Congress requesting probe
Miscellaneous Congressional testimony and other information regarding Madoff
External links
*
* Resources relative to Madoff fraud:
*
Network for Investor Action and Protection
(NIAP)
**
**
**
{{authority control
Financial regulatory authorities of the United States
Self-regulatory organizations in the United States
Corporations chartered by the United States Congress
Government-owned companies of the United States
United States securities law
Investment in the United States
501(c)(6) nonprofit organizations