Securities Markets - The Securities Investor Protection Corp. (SIPC)

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)


Related Articles
  1. Economics

    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.
  2. Home & Auto

    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.
  3. Professionals

    What You Must Know To Pass The Series 6 Exam

    Learn what you need to know about the creation and components of a mutual funds to pass the Series 6 exam.
  4. Trading Strategies

    Is Your Broker Legit? 6 Steps to Take

    The Great Recession may have ended, but broker wrongdoing hasn't. Here's how to make sure you don't get stuck with the next Bernie Madoff.
  5. Investing Basics

    How A Company Files With The SEC

    Filing with the SEC is not as complicated as you might thing -- just be meticulous about following the steps.
  6. Economics

    Understanding the SEC

    The SEC's triple mandate of investor protection, maintenance of orderly markets and facilitation of capital formation makes it a vital player in capital markets.
  7. Investing

    How To Insure Non-Traditional Assets

    You acquire these assets to hedge against financial turbulence in conventional investment markets. What's the best way to protect them?
  8. Economics

    Financial Regulations: Glass-Steagall to Dodd-Frank

    Here are some of the most important financial regulations that have been established.
  9. Professionals

    Introduction To The Series 65 Exam

    The Series 65 is required in many states in order to be a fee-based advisor. Find out what it is and whether you need it.
  10. Savings

    Question the Funds Picked By Your Financial Advisor

    Learn the importance of having a financial adviser whom you can trust and why questioning the funds he selects is part of that process.
RELATED TERMS
  1. Uniform Securities Act

    An act created as a starting point for state-level securities ...
  2. Registered Investment Advisor - ...

    An advisor or firm engaged in the investment advisory business ...
  3. SEC Form S-6

    A filing with the Securities and Exchange Commission (SEC), which ...
  4. Investment Company

    A corporation or trust engaged in the business of investing the ...
  5. Investor Protection Act

    A component of the Wall Street Reform and Consumer Protection ...
  6. SEC Form S-11

    A filing with the Securities and Exchange Commission (SEC) that ...
RELATED FAQS
  1. How are investment banks regulated in the United States?

    Read about the extensive regulations placed on investment banks in the United States, beginning with the Glass-Steagall Act ... Read Answer >>
  2. Do common stock owners have any protections against bankruptcy or fraud?

    Learn about common stock ownership including the standing of holders in the event of bankruptcy or fraud, and familiarize ... Read Answer >>
  3. How are asset management firms regulated?

    Find out how the asset management industry is regulated and how those regulations fit within the broader scope of financial ... Read Answer >>
  4. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    Learn the effects the Sarbanes-Oxley Act has on corporate governance in the United States, including strict disclosures, ... Read Answer >>
  5. How do I know if I am buying unregistered securities or stocks?

    All securities, including stocks, bonds and notes, must be registered with the Securities and Exchange Commission (SEC) before ... Read Answer >>
  6. Can mutual funds fail?

    Learn what may cause a mutual fund to fail and how the process plays out, and find out about your protection as an investor ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center