Securities Investor Protection Corporation (SIPC)
What it is:
The Securities Investor Protection Corporation (SIPC) is a nonprofit corporation created to insure the assets investors have deposited in brokerage firms. All registered brokers, dealers, members of securities exchanges, and the majority of Financial Industry Regulatory Agency (FINRA) members belong to the SIPC.
How it works/Example:
In the event of a bankruptcy, the SIPC insures up to $500,000 in securities and $100,000 in cash that a customer holds at a brokerage firm. To make a claim, a customer fills out an SIPC claim form and submits it to the brokerage firm's trustee. The claim form describes the cash and securities owed. Customers usually have 30 to 60 days to file their claims if they want to be eligible for full repayment.
Most SIPC claimants receive compensation in 30 to 90 days assuming there is no conflict between the customer's records and the brokerage's records and assuming none of the brokerage firm's principals were involved in fraudulent activities.
Why it matters:
The SIPC is one of many federally mandated organizations designed to foster confidence in the U.S. financial system. SIPC members must display "Member SIPC" in all ads, and this is generally a good thing to look for when considering a broker.
Also, having to file a SIPC claim is one reason investors should always keep copies of their trade confirmations and account statements. If an investor does not have supporting documentation for their claim, the SIPC assumes the brokerage firm's information is correct.