Securities Investor Protection Corporation
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The Securities Investor Protection Corporation (SIPC //) is a federally mandated, non-profit, member-funded, corporation in the United States. It protects investors in certain securities from financial harm if a broker-dealer fails. It does not protect against losses in the securities markets, identity theft, or other 3rd-party fraud. As the SIPC states on its website, "Though created by the Securities Investor Protection Act (15 U.S.C. §78aaa et seq., as amended), SIPC is neither a government agency nor a regulatory authority. It is a nonprofit, membership corporation, funded by its member securities broker-dealers."
The SIPC was born in the shadow of the "Paperwork Crunch" of 1968-70 as a means to restore confidence in the U.S. securities market. During this period,
- An explosion in the volume of trading had occurred. A system designed to handle an average three million share trading day was incapable of dealing with the thirteen million share trading day common in the late 1960's. The resultant breakdown in the securities processing mechanism caused chaos as the number of errors in recording transactions multiplied ... In December 1968, member firms of the New York Stock Exchange had $4.4 billion in "fails to deliver" and $4.7 billion in "fails to receive." Brokers and dealers were finding it difficult, if not impossible, to ascertain their own financial condition.' ... This operational and financial crisis forced more than one hundred brokerage firms into liquidation causing thousands of customers to be seriously disadvantaged.
In response, the Securities Investor Protection Act of 1970 was enacted as a way to quell investor insecurity and save the securities market from a financial crisis. In his introduction of the Securities Investor Protection Act to the floor of the Senate, Senator Edmund Muskie stated:
- "The economic function of the securities markets is to channel individual institutional savings to private industry and thereby contribute to the growth of capital investment. Without strong capital markets it would be difficult for our national economy to sustain continued growth ... Securities brokers support the proper functioning of these markets by maintaining a constant flow of debt and equity instruments. The continued financial wellbeing of the economy thus depends, in part, on public willingness to entrust assets to the securities industry."
The SIPC serves two primary roles in the event that a broker-dealer fails. First, the SIPC acts to organize the distribution of customer cash and securities to investors. Second, to the extent a customer's cash and/or securities are unavailable, the SIPC provides insurance coverage up to $500,000 of the customer's net equity balance, including up to $250,000 in cash. In order to state a claim, the investor is required to show that their economic loss arose because of the insolvency of their broker-dealer and not because of fraud, misrepresentation, or bad investment decisions.
While customers' cash and most types of securities - such as notes, stocks, bonds and certificates of deposit - are protected, other items such as commodity or futures contracts are not covered. Investment contracts, certificates of interest, participations in profit-sharing agreements, and oil, gas, or mineral royalties or leases are not covered unless registered with the Securities and Exchange Commission.
"SIPC is led by seven directors, some appointed by the President of the United States, and others by the member firms. It employs a staff of only twenty-nine and does not advertise job openings on its website. In 2007, total employee compensation and benefits were $5.8 million."
Caveats and clarifications
SIPC does not operate like the Federal Deposit Insurance Corporation. It provides a form of protection for investors against losses that arise when broker-dealers, with whom they are doing business, become insolvent. The limitations of SIPC protection caused significant confusion among a number of investors following the collapse of Bear Stearns and Lehman Brothers and perhaps, most prominently, following the exposure of Bernard Madoff's ponzi scheme.
SIPC does not insure the underlying value of the financial asset it protects. In other words, investors still bear the risk of the market. For example, if an investor buys 100 shares of XYZ company from a brokerage firm and the firm declares bankruptcy or merges with another, the 100 shares of XYZ still belong to the investor and should be recoverable. However, if the value of XYZ declines, SIPC does not insure the difference. In other words, the $500,000 limit is to protect against broker malfeasance, not poor investment decisions and changes in the market value of securities. In addition, SIPC may protect investors against unauthorized trades in their account, while the failure to execute a trade is not covered.
By law, investors' assets and the brokerage's assets must be segregated; they may not be commingled. It could be a civil and/or criminal violation if an investor's assets were inappropriately commingled. If the firm files for bankruptcy, provided the assets have been appropriately segregated, the investor's assets should be recoverable, beyond SIPC's current protection limit of $500,000, of the net equity, per account and $250,000 for cash claims. However, as noted above, not all asset types are covered by SIPC, such as annuities. Investors should check applicable rules at www.sec.gov and www.sipc.org, before investing. They should also discuss SIPC coverage and other safeguards which exist with respect to their investments, with their broker.
There may be ways to help protect assets, for example, confirm that your broker is a member of SIPC by visiting www.sipc.org, looking for the SIPC link on your broker's website, or looking for the SIPC logo on your customer account statement; invest only with reputable firms; open multiple accounts (individual, joint, IRA, ROTH) with the same firm; or, if possible, limit the amount invested with each firm to the SIPC covered limit.
- "Brokerage Identity Theft Warning". SIPC. 2003-12-11. Retrieved 2011-03-12.
- Thomas W. Joo, Who Watches the Watchers? The Securities Investors Protection Act, Investor Confidence, and the Subsidization of Failure, 71 S. CAL. L. REV. 1071, 1077; H.R. Rep. No. 92-1519
- Guttman, Egon (Summer 1980). "TOWARD THE UNCERTIFICATED SECURITY: A CONGRESSIONAL LEAD FOR STATES TO FOLLOW". WASHINGTON AND LEE LAW REVIEW. XXXVII (3): 717–38.
- S.Rep.No 91-1218, at 2
- "www.sipc.org/brochure". Sipc.org. Retrieved 2011-03-12.
- Securities' and Exchange Commission v. S.J. Salmon & Co., Inc., 375 F.Supp.867 (S.D.N.Y., 1974).
- In re Bell & Beckwith, 124 B.R. 35 (Bankr. N.D. Ohio 1990).
- "www.sipc.org/covers". Sipc.org. Retrieved 2011-03-12.
- "financecareers.com". Financecareers.about.com. 2010-06-14. Retrieved 2011-03-12.
- "www.sipc.org/notfdic". Sipc.org. Retrieved 2011-03-12.
- 1970 U.S.C.C.A.N. 5254, 5255 H.R. REP.No.91-1613
- For a general discussion, see Steven Lessard, E.U. RE-HYPOTHOCATION AND LEHMAN BROTHERS BANKRUPTCY: CHANGES THAT MUST BE MADE TO THE MIFID, Appearing in Folsom, Gordon, Spangle, INTERNATIONAL BUSINESS TRANSACTIONS PRACTITIONERS TREATISE (2010 Treatise Supplement)
- "www.sipc.org/q7". Sipc.org. Retrieved 2011-03-12.
- Official website
- Network for Investor Action and Protection
- Madoff Coalition For Investor Protection - Is SIPC insurance? You decide!
- Must see PowerPoint - is SIPC insurance?
- www.sipc.org SIPC is NOT an FDIC for investors;
- Madoff victims support and advocacy group For investors only
- Madoff Trustee, SEC Should be Probed -US Reps http://www.reuters.com/article/2011/06/03/madoff-probe-idUSN0318200920110603
- Letter to Gene L. Dodaro Comptroller General of the United States Government Accountability Office from Congress requesting probe http://www.scribd.com/doc/57140364/Investigation-of-SIPC-Trustee-SEC
July 27, 2011 Madoff Trustee's Actions to Be Probed by GAO, Representative Garrett Says