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. Managing Wealth

    Asset Protection for High Net Worth Individuals

    OK, you've made it. Here's how to hang onto it.
  3. Investing

    What Is A Trading Account?

    A trading account enables an investor to buy and sell securities.
  4. Financial Advisor

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  5. Investing

    Top 25 Broker-Dealer Firms as of October 2017

    These are the top 25 broker-dealer firms based on assets under management.
  6. Investing

    Top 10 British Broker-Dealer Firms In 2017 By AUM

    Here are the top 10 broker-dealers in the U.K. by assets under management.
  7. Investing

    Certificates Of Deposit

    Safety is a hallmark of the traditional certificate of deposit (CD) sold by a bank or credit union.
  8. Investing

    Separately Managed Accounts: A Boon For All

    We provide an explanation of individual cost basis and the advantages it brings to these accounts.
  9. Personal Finance

    Handling High-Yield Savings Accounts

    Is this the savings route for you? Read on to find out what these accounts have to offer.
  10. Investing

    A Guide to Bank Accounts

    Find out which type of bank account suits your specific needs.
Frequently Asked Questions
  1. Where do most fund managers get their market information?

    Many fund managers, whether they manage a mutual fund, trust fund, pension or hedge fund, have access to resources that the ...
  2. What's the difference between short-term investments and marketable securities?

    Understand the difference between short-term investments and marketable equity securities, and learn the importance of short-term ...
  3. Are fringe benefits direct or indirect costs?

    Learn how to allocate costs associated with fringe benefits provided to employees and how to determine when a cost is either ...
  4. How is a bank guarantee different from a traditional loan?

    Read about the differences between a traditional bank loan and a bank guarantee, and why a third party might require a guarantee ...
Trading Center