What happens when your stock broker goes out of business?

SIPC is short for the Securities Investor Protection Corporation. Created by Congress in December of 1970, SIPC assists investors if the brokerage firm they are dealing with happens to go under. The role of SIPC then is to step in when a brokerage company closes its doors as the result of financial problems or bankruptcy.

How SIPC Differs from the FDIC

The assistance offered by SIPC is different from the coverage provided by the FDIC. If an FDIC-insured bank fails, the FDIC will cover the financial losses of the customers up to a specific dollar amount. Because putting your money in a financial institution, such as a bank, is far less risky than in the stock market, you are given the guarantee that you can recoup any funds up to a certain limit that are in your account at the time of a bank’s closure.

How SIPC Helps Investors

Because risk is part of the milieu of Wall Street, loss is also a part of the exchange’s volatile nature. Therefore, SIPC is not designed to help investors if they suffer a loss as a result of a bear market. Also, the entity does not provide protection for investors who buy stocks or securities that are found to have no value. However, SIPC will step in and assist stock customers who have their investments stolen because of broker fraud or for reasons that have to do with the financial failure of a brokerage company.

Intervention by SIPC

In the case of a brokerage failure, SIPC will intervene by appointing a trustee via the court system who will move to liquidate the assets of the failed company. In cases where the brokerage business operates on a smaller scale, SIPC will frequently deal with investors on a one-on-one basis.

Provisions of Protection: What is Not Covered

As a result SIPC guards the stock and bond accounts for investors by making sure they obtain their holdings if a brokerage becomes insolvent. However, the following investments or items are not protected:

  • Currency
  • Investment agreements
  • Commodity futures

Return and Transfer of Securities

Customers who have accounts in failed brokerage houses can therefore obtain their securities in the form of bonds and stocks. Usually, the brokerage’s assets are allocated so that the funds are supplied in relation to the size of a filing or claim. If money cannot be provided, then SIPC will include an additional allotment up to ½ million dollars per investor. Sometimes, certain returned securities will have either increased in worth or lost their value depending on the conditions prevailing in the marketplace. Accounts can be transferred, in some cases, by the trustee. When this happens, customers can either choose to remain at the brokerage where their account is placed or move their account to a company that they like better.

SIPC is your advocate if you invest in stocks and bonds and use a brokerage company or maintain a brokerage account. In these economic times, that is one point in your favor financially.