Many people are surprised to learn that their investment losses are not covered by SIPC insurance. SIPC insurance may cover you in specific cases, but it’s important to know exactly what the Securities Investor Protection Corporation (SIPC) does and does not do.
From 1968 to 1970, confidence in the securities market plummeted as many broker-dealers went out of business. To restore faith in the market, in 1970 Congress passed the Securities Investor Protection Act. Against this backdrop, SIPC was formed—as a non-profit membership organization with no regulatory authority.
Spearheaded by its new CEO, Josephine Wang, and funded by the financial services industry itself, SIPC does not rely on taxpayer funds and is not a government agency.
It’s important to be protected. If your brokerage firm fails, SIPC will work to recover your funds. Thus, it’s important to choose a broker-dealer that is a member of SIPC.
The most high-profile instance in which SIPC was called upon came in December of 2008. First came the failure of Lehman Brothers in September, and then came the revelation that the wealth management arm of Bernard L. Madoff Investment Securities LLC was nothing but a massive Ponzi scheme. The effects of these losses were devastating, throwing individual investors and even charities who had relied on this money into distress. There seemed to be no way out, but once Bernard L. Madoff Investment Securities LLC was liquidated, SIPC stepped in, and since then has recovered $13.403 billion in recoveries and settlement agreements, $11.758 billion of which has been distributed to former customers of Madoff.
While this may seem miraculous given the scope of Madoff’s fraud and the number of jurisdictions involved (which totals over 30), the power of the SIPC is limited. Thus, it is important to understand what SIPC is and what it is not, what it can and cannot do. Most notably, each account is protected up to $500,000, but no more than $250,000 for cash claims. Since these figures are per account, if you have a joint account, each person won’t get a separate payout. Let’s look at what types of investments are covered, and which are not.
What is Covered?
- anything defined as “securities” under the Securities Act of 1933
- foreign currency used to pay for investments that are “securities” (protected up to $250,000)
- employer’s pension fund if held by a brokerage
- money market mutual fund shares (but SIPC is not responsible for recovering any losses should the shares decline in value)
- foreign currency used to pay for investments that are “securities”
What is NOT Covered?
- anything NOT defined as “securities” under the Securities Act of 1933
- foreign currency held as an investment
- gold and silver coins
- commodity futures contracts held in ordinary futures accounts
- fixed annuities
Although the SIPC’s power is limited, it is still important to know how to file a claim, especially since your time frame for doing so is limited. A Trustee oversees the claims process. Generally, you must file a claim within 60 days, but you could have as few as 30 days to do so in some circumstances. If you wait more than six months, SIPC will not be able to help. Even if you received notice that your investments were transferred to another brokerage firm after your initial brokerage firm failed, it is still important to file a claim. Whether you’re an investor, general creditor, or broker-dealer, you can file a claim online, sending electronic copies of your documents to the Trustee and keeping all originals for yourself.
Not everyone is eligible for SIPC protection. If you’re a partner at an investment firm or otherwise hold sway over management, or if you are working for yourself rather than for the benefit of investors, you’re not eligible for protection. Still, according to SIPC, “99 percent of persons who are eligible get their investments back with the help of SIPC. From its creation by Congress in 1970 through December 2018, SIPC advanced $2.9 billion in order to make possible the recovery of $139.8 billion in assets for an estimated 773,000 investors.”
While all investments contain risk, SIPC can help you recover lost investments when the entity that was supposed to guide you—your brokerage firm—fails. The good news is that this is a relatively rare occurrence. But if it ever happens to you, instead of despairing over your lost funds, if you’re eligible for SIPC’s protection, you’ll likely be able to recover them, ensuring your financial health for years to come.
When you invest your hard-earned money, you do so with the knowledge that all investments have risk, and that market losses can and do occur. SIPC cannot protect you unless your brokerage firm goes bankrupt or is otherwise liquidated. If you’ve experienced significant losses due to theft or even a Ponzi scheme orchestrated by a brokerage that is still operational, SIPC cannot help you. However, help is still available through the counsel of a securities fraud attorney. If you believe that an investment firm has defrauded you (but they are still in business), you should seek counsel by calling (877) 238-4175. Consider contacting one of the attorneys at Fitapelli Kurta.