Recordkeeping Rules - 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. (Broker-dealers handling only open-ended investment company shares or UITs and broker-dealers handling only variable annuities or insurance are exempt from this rule.) 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.

There are seven members of the SIPC board of directions. The Federal Reserve Board and the Secretary of the Treasury each appoint one member who is either an officer or employee of that organization. The President appoints three members who are associated with the securities industry and two members from the general public.

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.

These dollar amounts apply to customers who have their cash and securities held in street name. However, if the securities are registered in the customer's name, there is no limit to the amount of reimbursement.
 

Look Out!
Note that an individuals\' 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. However, 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 has $500,000 in his individual account, $262,000 of which is in cash, only $488,000 would be covered.

The SIPC fund is maintained from assessments on SIPC members as well as interest on U.S. government securities. This fund is then used to reimburse the customers of failed broker-dealers.

Customers' claims are limited to their net equity, which is calculated by subtracting the total value of cash and securities the customer owes the firm from the total value of cash and securities the firm owes the customer.

The following customer claims are exempt from SIPC protection:

  • General partner, officer or director of the failed firm
  • Limited partner with a participation of 5% or more of the net assets or profits of the firm
  • A member firm or bank acting for itself and not for its customers
  • Beneficial owner of 5% or more equity in the firm
  • Anyone with the power to exercise a controlling influence over the firm

 

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