What Does SIPC Coverage Protect and How Does It Work?

Investors often assume their brokerage accounts are fully protected, but the reality is more nuanced. The Securities Investor Protection Corporation (SIPC) provides specific coverage to safeguard investors if a brokerage firm fails. However, it does not function like traditional insurance and has clear limitations.

Understanding SIPC protection helps investors set realistic expectations and take additional steps to secure their assets.

Coverage Limits

SIPC coverage has defined limits. The maximum protection is $500,000 per customer, with a $250,000 cap for cash. If an investor holds both securities and cash, SIPC covers up to $500,000 in total, but no more than $250,000 of that can be in cash.

These limits apply per customer, not per account. However, SIPC treats different types of accounts separately. An individual brokerage account, a joint account, and an IRA at the same firm each qualify for up to $500,000 in protection. Investors seeking to maximize coverage may structure their accounts accordingly.

SIPC replaces missing securities but does not cover market losses. If a brokerage firm fails and an investor’s stocks, bonds, or other covered assets are missing, SIPC works to restore them. If the securities are available, they are returned. If not, SIPC compensates based on their market value at the time the firm enters liquidation.

Eligible Accounts and Assets

SIPC protection applies to individual and joint investment accounts, trust accounts, and retirement accounts like traditional and Roth IRAs, provided they are held at a SIPC-member brokerage. Corporate and partnership accounts are also covered unless engaged in active trading as a business.

Most securities—including stocks, bonds, and mutual funds—are covered. However, commodities, futures contracts, and currency holdings are not. Private placements and unregistered securities are also excluded, requiring investors to assess their risk exposure independently. While margin accounts are covered, SIPC does not protect margin loans or losses from forced liquidations.

Some brokerage firms offer additional protection through private insurers, extending coverage beyond SIPC limits. However, these policies do not protect against investment losses. Investors should review their brokerage’s disclosures to understand any supplemental coverage.

The Claim Process

When a brokerage firm fails, SIPC steps in to return customer assets. Investors must file a claim and provide documentation within a set timeframe. The resolution depends on the complexity of the firm’s liquidation.

Filing Requirements

To initiate a claim, investors must submit a written request to the court-appointed trustee overseeing the liquidation. Claims must be filed within the deadline specified in the trustee’s notice, typically 60 days from the start of proceedings. Late claims may still be considered but face delays or reduced recoveries.

The claim must include the investor’s account number, the types and quantities of securities held, and any cash balances. Investors should also specify pending trades or unsettled transactions at the time of failure. If brokerage records are incomplete, SIPC relies on customer-provided documentation to verify claims. Failing to submit a claim on time can result in losing SIPC protection.

Required Documentation

Investors must provide documents to support their claims, including recent account statements, trade confirmations, and correspondence with the brokerage. If margin debt was involved, loan agreements and margin call notices may be required.

SIPC and the trustee compare customer records with brokerage books to confirm ownership. If discrepancies arise, additional documentation such as tax forms or bank statements may be needed. Missing documentation can complicate and delay the claims process.

Timeline for Resolution

The time required to resolve a claim depends on the complexity of the brokerage’s failure. In straightforward cases, SIPC aims to return assets within a few months. If records are disorganized or fraud is suspected, the process can take years.

Once a claim is verified, SIPC either returns the actual securities or compensates based on their market value at the liquidation date. If assets are recovered through the brokerage’s remaining funds, investors may receive distributions over time. Cases involving fraud or missing records may require forensic accounting investigations, further extending the process. Investors should monitor updates from the trustee and SIPC.

Reasons for Ineligible Claims

SIPC coverage is not a blanket guarantee, and certain claims are denied based on the nature of the assets, the circumstances of the brokerage’s failure, or investor actions outside SIPC’s mandate.

One common reason for ineligibility is losses from fraudulent schemes that do not involve a SIPC-member brokerage. If an investor is deceived by an unregistered firm or a Ponzi scheme outside SIPC’s jurisdiction, no protection applies. This became evident in the Bernard Madoff scandal, where many victims had indirect investments not held in their names at a SIPC-member brokerage, making them ineligible for full reimbursement.

Another reason for denial is holding assets not considered securities under SIPC’s definition. While stocks and bonds are covered, promissory notes, limited partnership interests, and certain alternative investments are not. If a brokerage offered proprietary products or private placements not traded on public exchanges, SIPC does not cover those losses. Investors in high-risk or complex financial instruments should verify their holdings’ eligibility.

Some claims are rejected due to investor agreements that limit SIPC’s ability to intervene. Certain brokerage account contracts contain arbitration clauses or indemnification provisions affecting the claims process. If an investor signed an agreement waiving specific protections or acknowledging investment risks, SIPC may determine the claim is ineligible. Additionally, investors knowingly involved in fraudulent activity—such as wash trades or market manipulation—are not entitled to SIPC restitution.