SIPC Insurance Limits: An Overview of How They Work (2024)

Securities Investor Protection Corporation (SIPC) was formed in 1970 as a nonprofit membership corporation. Unlike the FDIC, which protects depositors, SIPC protects securities at member broker-dealers when a firm fails.

SIPC protection is only for the market value of an account during the event the firm fails. Fluctuations in the market value of an account’s securities aren’t protected. Meaning, if you own stock in a company that files for bankruptcy, SIPC can’t help you recover those funds.

If you’d like to see SIPC in action, MF Global is a great example of how SIPC was able to recover 100% of investors’ funds. MF Global was started by Goldman Sachs executive Jon Corzine. The firm’s strategy was to invest in sovereign debt using large amounts of leverage. When countries such as Ireland, Italy, Portugal, Spain, and others that MF Global invested in were downgraded, the firm was not able to meet its margin calls.

Rather than filing for bankruptcy, MF Global used customer funds to shore up the firm. In the end, this did not work, and the company was forced to file for bankruptcy.

• SIPC insures $250,000 in cash
• SIPC insures $500,000 in securities
• SIPC doesn’t protect against market downturns

SIPC covers up to $500,000 of securities and $250,000 of cash per legal entity. Legal entity differentiates certain account types. The following are legal entities and each has its own limits, even if held by the same person:

• Individual account
• Joint account
• Spouse’s individual account
• Custodial account for a child
• Trust
• Trust and IRA
• IRA

If an individual holds two of the same types of accounts, the SIPC limit applies to both combined. As an example, let’s say you have $300,000 in one trust and $250,000 in another, for a combined total of $550,000. Only $500,000 is covered by SIPC.

Someone who has $300,000 in a trust and $300,000 in an IRA, for a combined total of $600,000, has $500,000 of SIPC protection on both accounts. This means the full $600,000 is protected.

Security, as defined by SIPC, includes any [Editor’s Note: The following items are direct quotes from the linked page.]

• note,
• stock,
• treasury stock,
• bond,
• debenture,
• evidence of indebtedness,
• any collateral trust certificate, preorganization certificate or subscription,
• transferable share,
• voting trust certificate,
• certificate of deposit
• certificate of deposit for a security, or
• any security future as that term is defined in section 78c(a)(55)(A) [Editor’s Note: Omitted question mark in box] of this title,
• any investment contract or certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or mineral royalty or lease (if such investment contract or interest is the subject of a registration statement with the Commission pursuant to the provisions of the Securities Act of 1933 [15 U.S.C. 77a et seq.]),
• any put, call, straddle, option, or privilege on any security, or group or index of securities (including any interest therein or based on the value thereof), or
• any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency,
• any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase or sell any of the foregoing, and
• any other instrument commonly known as a security.

The following are not considered securities [Editor’s Note: The following items are direct quotes from the linked page.]:

• currency, or
• any commodity or related contract or futures contract, or
• any warrant or right to subscribe to or purchase or sell any of the foregoing.

As previously mentioned, SIPC does not cover a decrease in the value of securities. If the market drops and your account value with it, any loss incurred is not covered by SIPC since the loss was not due to the brokerage’s failure.

Some financial institutions or robo-advisors avoid keeping too much money in cash. An individual that has $300,000 in cash and $400,000 in securities might put $50,000 of cash into securities, providing complete SIPC protection. To maintain capital preservation, which cash does, the $50,000 would be invested very conservatively, such as in Treasury bonds. This changes the account values to $250,000 in cash and $450,000 in securities.

SIPC protection can get complicated. An example of this is Robinhood’s checking and savings products. Bloomberg first reported this story in 2018. Robinhood, a no-fee stock trading app, lists that they are a member of SIPC. The problem with Robinhood’s checking and savings is that they run them through their brokerage arm rather than a bank. SIPC had an issue with this.

“I disagree with the statement that these funds are protected by SIPC,” Stephen Harbeck, president and chief executive officer of SIPC, said in an interview with Bloomberg. “Had they called us, I would have told them what I just told you in that I have serious concerns about this. This has gigantic ramifications for the banking industry.”

Harbeck went on to say, “The statute that we administer says that we protect money with a brokerage firm that is used for the purchase of securities.” Continuing, he stated, “On Robinhood’s help page, it says that you don’t need to invest to use Robinhood checking and savings, that statement is wrong. If you deposit money for any other purpose, it is not protected.”

While the above scenario is rare, it is a great example of how a firm can potentially disqualify funds from SIPC protection. When in doubt, ask the firm for details or call SIPC.

The SIPC is another great protection for investors to ensure their investments are safe from the firm that holds them collapsing - very similar to how FDIC Insurance limits work for banks.

But investors should remember that the SIPC doesn't protect against loss due to poor investment returns.

And with new FinTechs starting all the time, you want to always double-check you know what protections you're getting with a specific tool.