Individual Protection when a Brokerage Firm Fails or Files for Bankruptcy

Many financial advisers and do it yourself financial websites advise that you have a diverse portfolio that combines savings and investments. For many Americans, that means investing with brokerage firms which can be a lucrative or nerve wracking experience. In order to provide some sense of stability and predictability for people who invest their money with brokerage firms, Congress passed the Securities Investor Protection Act in 1970.

 

The Securities Investor Protection Act requires most brokers who are registered under the Securities Exchange Act to be part of the Securities Investor Protection Corporation (SIPC). The SIPC, while mandated by federal law, is not a government agency. It is an independent nonprofit entity that protects investors if their brokers default or run into financial trouble. SIPC does not protect investors from any losses resulting from being invested in the stock market. It does not operate like the FDIC because it does not insure an investor’s money. Rather, it makes sure that an investor’s loss is based on the market value of his or her shares and not on the brokerage firm that handled the investments.

 

When a brokerage firm closes for financial reasons and customer assets are not accounted for, SIPC works to return the customers’ assets. Prior to the development of SIPC, investors often lost assets when brokerages failed or were only able to regain their assets after considerable time and expense had been spent litigating the matter in court.

 

According to SIPC statistics, SIPC has been able to recover over 15 billion dollars for more than 600,000 investors from the time it was established until 2007. Approximately 99 percent of eligible investors recovered their assets. The usual recover time was one to three months.

 

Investors should be aware of two important deadlines if they are thinking about filing a claim with SIPC. The first deadline is the one set by the bankruptcy court. Typically, this is 60 days from the time that the notice of the bankruptcy proceeding is published. However, it can happen in as little as 30 days so it is important to file as quickly as possible. The second deadline is the one set by federal law. If an investor files a claim after the time set by the bankruptcy court but within six months of the publication of the bankruptcy preceding then the investor may be eligible for a payment although it may be delayed and less than the investor would have otherwise received.

 

SIPC is not meant to investigate nor combat alleged fraud that may have been committed by brokers or brokerage firms. SIPC does not insure any investments and does not cover losses in the stock market. Further, SIPC covers only cash and securities such as stocks and bonds. It does not provide protection for other investments such as commodities futures contracts or investment contracts. 

 

Investing in the stock market involves risk. However, that risk should be limited to the ups and downs of the market and not the financial health of your brokerage firm. SIPC gives investors some confidence that the failed finances of their brokers will not affect their own finances.