Legally considered an amendment to the Securities Exchange Act of 1934, the Securities Investor Protection Act of 1970 created the Securities Investor Protection Corporation (SIPC),which is an independent, government-sponsored membership corporation to which all persons registered as broker-dealers under the 1934 Act must belong.  Each member must pay an "assessment" to SIPC based on the firm's gross securities-generated business, which goes into a fund used to pay customer claims against bankrupt broker-dealers.

SIPC insurance provides protection for customers' cash and securities in the event of a broker-dealer bankruptcy; it covers up to $500,000, of which no more than $250,000 can be cash claims. Each separate customer is covered, meaning that each account is considered a separate legal entity. In order to be considered a separate entity, however, a customer who has several different accounts must be acting in a separate capacity in each account to obtain protection in each case.
 

Look Out!
Note that an individual\'s brokerage accounts are covered by SIPC as separate accounts so long as each account serves a unique, independent purpose. For instance, John Smith cannot open three individual accounts and expect SIPC coverage for all three. But if John Smith owns a joint account with his wife, an individual account for himself, and is listed as custodian for Jason Smith\'s UTMA, all of these accounts would receive SIPC coverage in the amount of $500,000. Note, however, that only up to $250,000 in cash within each account is covered. For example, if John had $500,000 in his individual account and $282,000 was in cash and the balance in securities, then only $468,000 would be covered.
The customer would become a general creditor for the additional $32,000 over the $250,000 coverage limit.

 



Blue Sky Laws

Related Articles
  1. Financial Advisor

    Are My Investments Insured Against Loss?

    Money invested in a brokerage account has some protection, but that doesn't mean you can't lose it.
  2. Insights

    What Happens When A Stock Broker Goes Bust?

    While there is nothing much that can be done against the market volatility, there is a protection mechanism in place in case the broker firm runs into a financial trouble.
  3. Investing

    Bank Failure: Will Your Assets Be Protected?

    The SIPC and FDIC insure against personal financial ruin when banks or brokerages go belly up.
  4. Managing Wealth

    Asset Protection for High Net Worth Individuals

    OK, you've made it. Here's how to hang onto it.
  5. Financial Advisor

    Build A Wall Around Your Assets

    Learn how to protect your money from lawsuits, creditors and other judgment proceedings.
  6. Investing

    What Is A Trading Account?

    A trading account enables an investor to buy and sell securities.
  7. Trading

    Pick the Right Brokerage Account for Options Trading

    Follow these steps to pick the right options brokerage account depending on your trading needs and style of trading.
  8. Personal Finance

    Accountant: Job Description & Average Salary

    Discover what the job description of an accountant entails, along with education and training, salary and skills necessary for success.
  9. Investing

    Top 25 Broker-Dealer Firms of 2017

    A ranking of the largest broker-dealers by assets under management.
Frequently Asked Questions
  1. What is a CUSIP Number?

    The Committee on Uniform Securities Identification Procedures developed a system that identifies securities.
  2. What is the Difference Between Variable Cost and Fixed Cost in Economics?

    Learn what total costs are comprised of, what variable costs and fixed costs are and what the main difference between fixed ...
  3. What are the Major Differences Between a Monopoly and an Oligopoly?

    The major differences between a monopoly and an oligopoly include the number of firms in the market, type of barriers to ...
  4. What's the difference between Google's GOOG and GOOGL stock tickers?

    Learn the difference between Google's GOOG and GOOGL ticker symbols. Splitting shares into classes prevents management from ...
Trading Center