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HOW SIPC PROTECTS YOU
Understanding the Securities
Investor Protection Corporation
ROLE OF SIPC
WHAT SIPC COVERS AND WHAT IT DOES NOT
HOW WE HELP: WHAT YOU NEED TO KNOW ABOUT SIPC
SEVEN QUESTIONS INVESTORS ASK MOST OFTEN
AVOIDING INVESTMENT FRAUD
THE ROLE OF SIPC
SIPC is the first line of defense in the event a brokerage firm fails owing customers cash and securities that are missing from customer accounts. Although not every investor is protected by SIPC, no fewer than 99 percent of persons who are eligible get their investments back from SIPC. From its creation by Congress in 1970 through December 2010, SIPC advanced $1.6 billion in order to make possible the recovery of $109.3 billion in assets for an estimated 739,000 investors.
When a brokerage is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers' cash, stock and other securities, and other customer property. Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever … or wait for years while their assets are tied up in court. However, because not everyone, and not every loss, is protected by SIPC, you are urged to read this whole brochure carefully to learn about the limits of protection.
WHAT SIPC COVERS AND WHAT IT DOES NOT
SIPC is not the FDIC. The Securities Investor Protection
Corporation does not offer to investors the same blanket
protection that the Federal Deposit Insurance Corporation
provides to bank depositors.
How are SIPC and the FDIC different? When a member bank fails,
the FDIC insures all depositors at that institution against loss up to
a certain dollar limit. The FDIC's no-questions-asked approach
makes sense because the banking world is "risk averse." Most
savers put their money in FDIC-insured bank accounts because
they can't afford to lose their money.
That is precisely the opposite of how investors behave in the stock
market, in which rewards are only possible with risk.
Most market losses are a normal part of the ups and downs of
the risk-oriented world of investing. That is why SIPC does not bail
out investors when the value of their stocks, bonds and
other investments falls for any reason. Instead, SIPC replaces
missing stocks and other securities where it is possible to do
so...even when investments have increased in value.
SIPC does not cover individuals who are sold worthless stocks and
other securities. SIPC helps individuals whose money,
stocks and other securities are stolen by a broker or put at
risk when a brokerage fails for other reasons.
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HOW WE HELP: WHAT YOU NEED TO KNOW ABOUT SIPC
Understanding the rules is the key to protecting yourself and
your money.
- When SIPC gets involved. When a brokerage firm fails owing
customers cash and securities that are missing from customer
accounts, SIPC usually asks a federal court to appoint a trustee to
liquidate the firm and protect its customers. With smaller brokerage
firm failures, SIPC sometimes deals directly with customers.
- Investors eligible for SIPC help. SIPC aids most customers
of failed brokerage firms when assets are missing from customer
accounts. (A list of ineligible investors may be found in the fourth
question in the next section of this brochure.)
- Investments protected by SIPC. The cash and securities –
such as stocks and bonds – held by a customer at a financially troubled
brokerage firm are protected by SIPC. Among the
investments that are ineligible for SIPC protections are commodity
futures contracts (unless in portfolio margining accounts and
defined as customer property under the Securities Investor
Protection Act), fixed annuity contracts, and currency,
as well as investment contracts (such as limited partnerships)
that are not registered with the U.S. Securities and Exchange
Commission under the Securities Act of 1933.
- Terms of SIPC help. Customers of a failed brokerage firm get
back all securities (such as stocks and bonds) that already are
registered in their name or are in the process of being registered.
After this first step, the firm's remaining customer assets are then
divided on a pro rata basis with funds shared in proportion to the
size of claims. If sufficient funds are not available in the firm's
customer accounts to satisfy claims within these limits, the
reserve funds of SIPC are used to supplement the distribution,
up to a ceiling of $500,000 per customer, including a maximum
of $250,000 for cash claims. Additional funds may be available
to satisfy the remainder of customer claims after the cost of
liquidating the brokerage firm is taken into account.
- How account transfers work. In a failed brokerage firm with
accurate records, the court-appointed trustee and SIPC may arrange
to have some or all customer accounts tranferred to
another brokerage firm. Customers whose accounts
are transferred are notified promptly and then
have the option of staying at the new firm or
moving to another brokerage of their choosing.
- How claims are valued. Typically, when
SIPC asks a court to put a troubled brokerage
firm in liquidation, the financial worth of a customer's
account is calculated as of the
"filing date." Wherever possible, the actual stocks
and other securities owned by a customer are
returned to him or her. To accomplish this, SIPC's
reserve funds will be used, if necessary,
to purchase replacement securities (such as
stocks) in the open market. It is always possible
that market changes or fraud at the failed
brokerage firm (or elsewhere) will result in
the returned securities having lost some –
or even all – of their value. In other cases, the securities may have increased in value.
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SEVEN QUESTIONS INVESTORS ASK MOST OFTEN
- How can I be sure I am dealing with a SIPC member? Why is that
important?
Look for this language:
MEMBER SECURITIES INVESTOR PROTECTION CORPORATION
Those words – or "Member SIPC" – appear in
all signs and ads of SIPC members. If you have a
question as to whether or not a particular firm is a
member of SIPC, you may call the SIPC Membership
Department at (202) 371-8300 or visit us on the Web at www.sipc.org.
Why is the issue of SIPC membership relevant to you? SIPC
protects customers of broker-dealers as long as the brokerdealer
is a SIPC member. However, if a SIPC member's
registration with the U.S. Securities and Exchange Commission
is terminated, the broker-dealer's SIPC membership is also
automatically terminated. SIPC loses its power to protect
customers of former SIPC members 180 days after the brokerdealer
ceases to be a member of SIPC. Normally, the SEC will
attempt to prevent the termination of the registration and SIPC
membership of a broker-dealer if the firm owes securities or
cash to customers. However, a SIPC membership may be
terminated if the SEC is unaware the firm owes securities
or cash to customers.
- What should I be vigilant about before a problem strikes?
Some SIPC members have affiliated or related
companies or persons that conduct financial or
investment businesses but are not members of SIPC.
Some of these affiliates have names which are
similar to the name of the SIPC member, or which
operate from the same offices or with the same
employees. Be sure you receive written confirmation
of each securities transaction in your securities
account with the SIPC member, and that each
confirmation statement and each statement of account is
issued by the SIPC member and not by a non-SIPC affiliate. Deposits for credit to your securities account,
by check or otherwise, should not be made payable
to your account executive, registered representative,
or to any other individual, but generally only to
your SIPC member broker-dealer or, if your account
is carried at another SIPC member who provides
clearing services for your SIPC member broker-dealer,
then to that other SIPC member. If your check or
deposit is payable to anyone other than a SIPC
member broker-dealer (such as to the issuer of the
securities you are purchasing or to a bank escrow
agent), you should take steps to insure that your funds
are properly applied.
You should be vigilant to assure that you receive your periodic
statements on a timely basis. The failure to provide statements
may indicate the broker-dealer has gone out of business. If
you do not receive your statement when due and cannot get a
satisfactory explanation, or if for any other reason you believe your
broker-dealer may have ceased doing business, you should promptly
contact the nearest office of the SEC. If your broker-dealer ceases
to be a SIPC member while still owing cash and securities to you,
you should notify the SEC well within the 180-day period.
- How quickly will I get my investments back?
Most customers can expect to receive their property in one to three
months. When the records of the brokerage firm are accurate,
deliveries of some securities and cash to customers may begin
shortly after the trustee receives the completed
claim forms from customers, or even earlier if
the trustee can transfer customer accounts to
another broker-dealer. Delays of several
months usually arise when the failed brokerage
firm's records are not accurate. It also is
not uncommon for delays to take place when
the troubled brokerage firm or its principals
were involved in fraud.
- Who is not eligible for SIPC protections?
Most customers with cash and securities missing from customer
accounts are eligible for SIPC assistance. However, SIPC's funds
may not be used to pay claims of any failed brokerage
firm customer who also is:
- A general partner, officer, or director of the firm.
- The beneficial owner of five percent or more of any class of
equity security of the firm (other than certain nonconvertible
preferred stocks).
- A limited partner with a participation of five percent or more
in the net assets or net profits of the firm.
- Someone with the power to exercise a controlling influence over
the management or policies of the firm.
- A broker or dealer or bank acting for itself rather than for its
own customer or customers.
- Where do I submit my claim form?
If your brokerage firm is put into liquidation, the court-appointed
trustee will notify you and send a claim form and instructions.
You must return the completed claim form to the trustee within the
time limits set forth in the notice and as described in the instructions.
Failure to do so may result in the loss of all or a
portion of your claim. If you are notified that your brokerage
account has been transferred to another brokerage firm, you
should still file a claim form in order to preserve the right to
correct any errors that may crop up during the transfer of accounts.
For a step-by-step guide to this process, see the SIPC Web site at www.sipc.org.
- Is there a time limit for filing claims?
Yes. There are two deadlines for the filing of customer claims:
- Court deadline. The time set by the bankruptcy court for filing
of customer claims is usually 60 days after the date the notice of the
proceeding is published, but could be as little as 30 days after the
publication date. The deadline appears in the published notice and
a copy of the notice is mailed to customers along with claim forms
and instructions that also prominently display the date.
Pay close attention to the deadline set forth in the notice and be certain
the trustee receives your claim in a timely manner.
- Federal law deadline. If your completed claim form is received by
the trustee after the date set by the bankruptcy court but no later
than six months after public notice is published, the claim is subject
to delayed processing and, possibly, limited payment. The
six-month deadline is set out in the federal law governing SIPC.
The federal deadline absolutely bars any claim that is
received more than six months after the publication date.
Except for some very narrow exceptions, there are no grounds for
time extensions beyond the deadline.
- Do I have to prove what the broker owes me? How does that work?
Yes, usually that is done by describing in your claim form the cash
and securities that are owed to you. The court-appointed trustee
will compare what you claim against the books and records of the
brokerage firm. SIPC and court-appointed trustees assume that the
brokerage firm's records are accurate. Frequently, your entire
account can be transferred to another brokerage firm for your benefit
before you have even filed a claim. However, there are sometimes
instances of mistakes in brokerage firm records. In rare
cases, these mistakes show transactions made without your authority.
You should keep copies of trade confirmations. You should keep
copies of your latest monthly or quarterly statement of account
from your brokerage firm. A trustee may ask you to supply copies
of these documents. If you ever discover an error in a confirmation
or statement, you should immediately bring the error to the
attention of the brokerage firm in writing. Keep a copy of any such
writing you send to the brokerage firm. Remember, if there is
something wrong with the brokerage firm's records of your
account, you will have to prove that, or SIPC and the trustee
will assume that the firm's records are accurate.
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AVOIDING INVESTMENT FRAUD
Learn about investment fraud ... and where to turn for help.
SSIPC urges all investors to understand the dangers of investment
fraud and where to turn for help if swindled. That is
why SIPC works with regulatory and self-regulatory agencies,
consumer groups, and other concerned parties to increase
investor awareness about scams. Check out the investment fraud
warnings on the following Web sites:
U.S. Securities and Exchange Commission
www.sec.gov/
www.investor.gov
FINRA (Financial Industry Regulatory Authority)
www.finra.org
National Fraud Information Center
www.fraud.org
Investor Protection Trust
http://www.investorprotection.org
Alliance for Investor Education
www.investoreducation.org
Your state securities agency
See the "Contact Your Regulator" page at www.nasaa.org
Securities Industry and Financial Markets Association
www.sifma.org
Canadian Investor Protection Fund
www.cipf.ca
You can find a list of the best investment fraud education resources on the
Web by visiting SIPC on the Web at www.sipc.org.
IMPORTANT NOTICE: The Securities Investor Protection Act of 1970 (SIPA) is a complex and
technical statute. This brochure provides a basic explanation of the
Securities Investor Protection Corporation and SIPA. However, it does not
explain the SIPA statute with respect to any particular fact pattern. Answers
to questions involving particular facts depend upon interpretations,
trustees' decisions, and court actions.
The U.S. Securities and Exchange Commission's Office of Investor
Education and Advocacy has reviewed this publication. The SEC
does not endorse the commercial activities, products, or members
of this or any other private organization.
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