The Securities Investor Protection Corp. (SIPC) acts as or with a trustee to recover funds in a missing asset case. If a brokerage fails, SIPC works to ensure that its customers receive all non-negotiable securities that are already registered in their names or are in the process of being registered.

Securities held in street name are split on a pro rata basis among the customers. Funds from the SIPC reserve are intended to satisfy remaining claims up to $500,000, including a maximum $250,000 in claims for cash.

Before this discussion of secondary markets comes to a close, let's look at four other laws you need to be aware of for the Series 7 exam:

  • Securities Exchange Act of 1934: This act regulates and governs security transactions on the secondary market, or after issues, for the purpose of protecting investors. Its inception created the Securities and Exchanges Commission (SEC) which is primarily responsible for enforcing federal laws pertaining to the trading of securities.
  • Investment Company Act of 1940: This act regulates the organization of companies, particularly mutual funds, that engage primarily in investing, and whose own securities are offered to the public. It requires these companies to disclose their financial status and investment policies to investors on a regular basis. This act focuses on getting investment companies to disclose information to the investing public about their funds and their investment objectives, as well as company structure and operations.
  • Investment Advisers Act of 1940: This act regulates investment advisors. With certain exceptions, it requires firms or sole practitioners compensated for advising others about securities investments to register with the SEC and to conform to regulations designed to protect investors. Since the act was amended in 1996, advisors who have at least $25 million of assets under management or who advise a registered investment company are generally the only ones that must register with the Commission.
  • Sarbanes-Oxley Act of 2002: This act introduced reforms to enhance corporate responsibility and financial disclosure and to combat corporate and accounting fraud. "Sox", as it is sometimes called, created the Public Company Accounting Oversight Board to examine the activities of the auditing profession.

Expect to see a few scenario-type questions on SIPC Protection on your upcoming exam.

The Federal Deposit Insurance Corporation (FDIC)

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