Series 6

Securities Industry Regulations - Securities Investors Protection Act of 1970

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.

 




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