SIE Ready🏛️ Regulators & Market Participants · Lesson 4 of 5 · 5 min
SIPC: What's Protected and What Isn't
🛟 SIPC does not care that your stock fell 60%. It cares whether your stock is still there when your brokerage firm goes under.
💡 Key idea
SIPC: up to $500,000 per customer per separate capacity, cash capped at $250,000, when a member firm fails. Never covers market losses, futures or forex.
🧠 Why it matters
The Securities Investor Protection Corporation is a nonprofit created by Congress under the Securities Investor Protection Act of 1970; most SEC-registered broker-dealers must be members and fund it. If a member firm fails and customer assets are missing, SIPC protects each customer up to $500,000, of which no more than $250,000 may be cash. Accounts held in separate capacities (for example an individual account and a joint account) are protected separately. Covered: stocks, bonds, Treasuries, CDs, mutual funds, money market funds and cash held to buy securities. Not covered: commodity futures, foreign-exchange trades, investment contracts and limited partnerships not registered with the SEC, unregistered fixed annuities, currency, and any market loss or loss from bad advice. Memory line: SIPC protects custody, not prices.
📈 In the real world
📉 Dave holds $420,000 in stock and $90,000 in cash at a firm that collapses because of fraud. His claim is $510,000. SIPC can protect up to $500,000, and his cash is below the $250,000 cap, so the remaining $10,000 is not SIPC-protected; Dave can recover it only from what is left of the failed firm's estate in the liquidation. Last year his stocks lost $50,000 in a downturn; SIPC never covers that.
📌 Takeaways
- $500,000 per customer per separate capacity, including no more than $250,000 cash
- Applies only when a member broker-dealer fails and customer assets are missing
- Not covered: market loss, bad advice, commodity futures, forex, unregistered LPs and fixed annuities
📖 Terms in this lesson
SIPC: The nonprofit that restores customers' missing cash and securities when a member broker-dealer fails, up to $500,000 per customer, including $250,000 cash.
500 / 250 (SIPC limits): SIPC: $500 thousand per customer in total, of which at most $250 thousand may be cash.
✅ Test yourself
A customer has $350,000 in securities and $300,000 in cash at a failed SIPC member. What is the most SIPC can protect?
- $650,000
- $250,000
- $500,000
- $600,000
Answer: C · $500,000
SIPC caps protection at $500,000 per capacity and limits cash to $250,000. $350,000 of securities plus $250,000 of cash is $600,000, but the overall cap holds the total at $500,000.
Which loss is protected by SIPC?
- A firm fails and a customer's bonds are missing
- A rep recommends an unsuitable investment
- A stock drops 40% after poor earnings
- A commodity futures account loses value
Answer: A · A firm fails and a customer's bonds are missing
SIPC restores missing customer securities and cash when a member firm fails. It never covers declines in market value, commodity futures, or losses from bad recommendations, which are pursued through arbitration or other claims.
Which item is NOT protected by SIPC?
- Money market fund shares
- Shares of a mutual fund
- Foreign-exchange trades
- US Treasury notes
Answer: C · Foreign-exchange trades
Foreign-exchange trades are expressly outside SIPC protection. Mutual fund shares, Treasury notes and money market fund shares are securities held at the member firm and are protected within the limits.
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