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US deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 in the event the bank goes bust, but what happens if a brokerage firm fails?
Find out what happens to your money and securities in the rare event your broker goes under and what, if any, insurance protection is available for your assets.
What happens if your brokerage fails?
When a brokerage firm fails, the Securities Investor Protection Corporation (SIPC) steps in to initiate and oversee the liquidation process and restore securities and cash to customers. The SIPC is a non-profit membership organization created by the Securities Investor Protection Act of 1970 with the goal of protecting customers in the event their brokerage firm fails.(1)
If the books and records of the failed broker are in order, the SIPC and a court-appointed Trustee for the broker will typically first try to arrange the transfer of the failed broker’s accounts to a different SIPC-protected brokerage firm. The Financial Industry Regulatory Authority (FINRA) notes that customer assets held in a failed brokerage firm are safe in “virtually all cases” and are typically transferred to another SIPC-protected broker that agrees to buy the firm’s assets.(2) If the SIPC is unable to facilitate the accounts’ transfer, the failed broker is liquidated.
Upon liquidation, the SIPC and Trustee go to work to gather the names of all customers who had an account with the brokerage firm within the previous 12 months. At the same time, the Trustee seeks court approval to launch a claim for affected customers. Once the court approves the claim and it’s established, customers have a specified time period in which to submit a claim for insurance — SIPC protection is not automatic.
Did you know? The SIPC is a non-profit membership corporation created under the Securities Investor Protection Act to protect customers against certain types of loss resulting from a broker failing financially. SIPC membership is required for most US brokers, and there are currently over 3,200 members.(3) Since its creation by Congress in 1970, the SIPC has recovered $143.8 billion in assets for an estimated 773,000 investors.(4)
What is SIPC insurance?
In addition to handling the liquidation process of a failed brokerage, the SIPC provides limited coverage to affected customers. Funded by member brokers, the SIPC protects the securities and cash in your brokerage account up to $500,000, which includes a $250,000 limit for cash in your account.
The $500,000 coverage applies to each customer account deemed to be a “separate capacity.” For instance, if you have two individual brokerage accounts with the same broker, the accounts are combined for purposes of the SIPC protection limits. If you have, say, an individual brokerage account and an individual retirement account (IRA) with the same broker, each account is protected up to $500,000 for securities and cash.
Cash in a brokerage account from the sale of or for the purchase of securities
What SIPC insurance doesn’t protect
Most commodity futures contracts
Foreign exchange trades
Investment contracts, such as limited partnerships and fixed annuity contracts that are not registered with the US Securities and Exchange Commission (SEC)
How does FDIC insurance work?
Among other priorities, the FDIC insures customer deposits held at a financially-troubled or bankrupt FDIC-insured bank. Unlike SIPC insurance, coverage is automatic whenever an individual opens a deposit account at an FDIC-insured bank.
What does FDIC insurance cover?
Checking and savings accounts
Savings Negotiable Order of Withdrawal (NOW) accounts
Money market accounts
CDs and other time deposits
Cashier’s checks and money orders issued by a bank
What does FDIC insurance not cover?
Stocks
Bonds
Mutual funds
Life insurance policies
Annuities
Municipal securities
Safe deposit boxes or their contents
US T-Bills, bonds or notes
How much is FDIC insurance per account?
FDIC insurance covers up to $250,000 per depositor, per insured bank and per account ownership type. This means the FDIC provides separate insurance coverage for deposits held in different account ownership categories, similar to SIPC insurance.(5)
For example, if you have an individual account and a joint account at a bank, FDIC provides $250,000 of insurance for each account ownership type. If, on the other hand, you have two accounts that fall under the same ownership category — like two individual savings accounts at the same bank — all those deposits are added together and insured up to the standard insurance amount of $250,000.
So what happens if you have more than $250,000 in a single account ownership type?
Unfortunately, it’s not insured. The FDIC notes, however, that customers with funds above the insured limit may recover some portion of the lost funds from the proceeds from the sale of failed bank assets, but this can take years to finalize.
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If an SIPC member broker goes under and customer assets are missing or are in jeopardy, the SIPC steps in and protects the securities and cash in your brokerage account up to $500,000, which includes a $250,000 limit for cash in your account.
Importantly, you must remember to file a claim within the specified time to receive protection from the SIPC.
Frequently asked questions
SIPC, short for Securities Investor Protection Corporation, is a non-profit membership corporation that handles the liquidation of financially-troubled member brokerage firms and restores securities and cash up to $500,000 for each customer.
The FDIC, or Federal Deposit Insurance Corporation, is a US government corporation that, among other priorities, insures deposits in FDIC-member banks. The FDIC covers up to $250,000 per depositor, per insured bank and per account ownership type.
Your money is generally safe in a brokerage account. Most brokers employ a range of security measures to protect customer information and money. In the event your broker fails, the Securities Investors Protection Corporation covers the securities and cash in your account up to $500,000.
Matt Miczulski is an investments editor and market analyst at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on Yahoo Finance, CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University.
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