SIPC Insurance: It May Not Cover What You Think it Does

As someone making smart money moves, you want to make sure you’re protected when you open any type of financial account. The last thing you want is to lose your hard-earned money to fraud. Thankfully, the financial industry has protections in place to prevent this.

That’s where SIPC insurance comes in. Yet there are a lot of myths and misconceptions when it comes to what sort of accounts and financial institutions are covered by SIPC. Here’s what you need to know about SIPC insurance and why it may not cover as much as you might think.

What is SIPC insurance?

SIPC stands for Securities Investor Protection Corporation. This entity is a nonprofit membership corporation, funded by member broker-dealers, and it is not a government agency. It provides SIPC insurance to help protect investors’ assets in the unlikely event that a SIPC member firm goes bankrupt or becomes financially troubled and customers’ assets go missing.

Congress created the SIPC in the Securities Investor Protection Act of 1970. The SIPC oversees the liquidation of SIPC member firms as a court-appointed trustee. Their goal during the bankruptcy process is to return customers’ covered investments and cash as quickly as possible.

How SIPC insurance works

SIPC coverage kicks in when a SIPC member goes bankrupt or becomes financially troubled and the assets in customer accounts are missing. Account holders’ assets must be missing to be able to file a claim. If the assets are not missing, the customers do not technically have a loss and the SIPC does not need to step in.

Brokerage firms must keep customers' assets separate from their own. Additionally, they must hold assets of their own according to Securities and Exchange Commission regulations. These SEC rules mean that missing assets are not a common occurrence. In fact, when a brokerage firm fails, it usually transfers all customer assets to another firm. Fraud does occur and assets do go missing, but it’s a rare exception.

If the SIPC gets involved, the courts appoint the SIPC as the trustee of the failed company. At this point, the SIPC works to recover customer assets and return them as quickly as possible.

SIPC protection generally covers the following types of assets:

• Stocks
• Bonds
• Treasuries
• CDs (certificates of deposit)
• Mutual funds
• Money market mutual funds
• ETFs (exchange-traded funds)
• Certain options

SIPC insurance limits are up to $500,000 per qualifying account. This amount includes a smaller $250,000 limit for cash.

You can make a SIPC claim after the SIPC takes over as a trustee for the failing company. The SIPC will put a claim form on the trustee’s website and mail a claim form to each customer who had an account with the failed brokerage within the last 12 months. To qualify for SIPC insurance coverage, you have to make a claim by the deadline in the notice you receive.

What account types SIPC covers

The SIPC insurance coverage limits apply separately to each brokerage firm you have accounts at. This means that if you have accounts at three different SIPC member firms, you’d benefit from three separate $500,000 coverage limits.

And if you’re just learning how to invest money, you may not know you could qualify for more than $500,000 even at a single SIPC-insured member brokerage firm. The coverage limit applies to each “separate capacity,” which is essentially an account type.

Each of the following accounts qualifies for a separate $500,000 coverage limit:

• Individual account
• Joint account
• An account for a corporation
• An account for a trust created under state law
• An individual retirement account (IRA)
• A Roth IRA
• An account held by an executor for an estate
• An account held by a guardian for a ward or minor

If you hold an individual brokerage account, an IRA, and a Roth IRA at the same brokerage firm, each of those account types would have up to $500,000 of SIPC coverage.

The coverage cannot transfer between account types, though. For example, if you have $750,000 in an individual brokerage account and $250,0000 in an individual retirement account, the individual brokerage account is still limited to $500,000 in coverage.

What SIPC insurance does not cover

SIPC insurance doesn’t cover every investment type available today. In particular, it does not cover the following, in most cases:

• Currency (foreign exchange trades)
• Commodity futures contracts (Gold, oil, corn, etc.)
• Investment contracts
• Fixed annuity contracts not registered with the SEC under the Securities Act of 1933

SIPC insurance doesn’t cover all situations, either. Exclusions include:

• Losses exceeding SIPC limits
• Losses due to decrease in the market value of securities
• Losses due to trading securities
• Losses from brokerage firms that aren’t a SIPC member
• Losses in bank accounts or money market accounts (not to be confused with money market mutual funds)
• Losses from bad advice from a broker

If you find unauthorized transactions on your account, you must notify your broker in writing as soon as you’re aware of the transactions. Keep records of this notification. Without it, the SIPC may not cover unauthorized trades made before a brokerage became insolvent since you wouldn’t have proof.

How to pick a safe investing platform

Picking a safe investing platform can help you sleep better at night. In general, you should check to make sure the brokerage is a SIPC member. If they are, your SIPC-insurable assets should qualify for coverage up to the applicable limits.

Most firms display they’re a SIPC member, but that isn’t always the case. Firms usually list this in small print in their website’s footer. If you don’t find it there, search the website for “SIPC” and see if any information comes up. You can also check to see if your brokerage firm is on this list of SIPC members.

The following brokerage firms are examples of SIPC members:

• Acorns
• Betterment
• Fidelity
• M1 Finance¹
• Stash
• TD Ameritrade
• Vanguard
• Wealthfront

If you’re investing in assets that could qualify for SIPC insurance, it doesn’t make much sense to choose a firm that isn’t a SIPC member. However, you may want to select investments SIPC insurance doesn’t cover. In these cases, it doesn’t matter if the brokerage firm is a SIPC member or not because you wouldn’t have insurance coverage either way.

Remember, SIPC insurance doesn’t mean investing is safe and it doesn’t eliminate the inherent risk in investing. You can still lose money if your investments decrease in value. SIPC coverage only protects you if your assets go missing when a brokerage firm faces financial trouble or goes bankrupt. It does not protect you against market fluctuations.

FAQs

Bottom line

SIPC insurance covers qualifying securities held in a qualifying account type at a SIPC member brokerage firm. It only covers you up to the stated limits per account type, but that’s more than enough for most everyday investors. It’s important to understand that investment services can be SIPC-insured and banks can be FDIC-insured.

Unfortunately, SIPC insurance doesn’t cover you if your investments decrease in value. It only protects your assets should a firm fraudulently take them out of your account when a SIPC member brokerage firm faces financial difficulties or goes bankrupt. The best brokerage firms and best investment apps usually are SIPC members, but it never hurts to double-check before opening an account.