Legal Definitions - Securities Investor Protection Corporation

The Securities Investor Protection Corporation (SIPC) is a non-profit, federally chartered corporation established to protect investors in the United States. Its primary role is to restore customer cash and securities that are missing from a brokerage firm when that firm fails financially or goes bankrupt. Essentially, SIPC acts like an insurance program for brokerage accounts, providing a safety net for investors up to $500,000 (including $250,000 for cash) in the event their brokerage firm collapses, rather than protecting against losses due to market fluctuations or poor investment choices.

• Example 1: Brokerage Firm Bankruptcy

  Imagine "Global Markets Inc.," a brokerage firm where you hold your investment portfolio, suddenly declares bankruptcy due to severe financial mismanagement. Many clients, including yourself, have stocks, bonds, and mutual funds held in their accounts, which are now inaccessible. In this scenario, SIPC would step in to ensure that these clients' securities and cash, up to the specified limits, are returned to them or transferred to a new, solvent brokerage firm. This illustrates SIPC's function of protecting investors when their brokerage firm experiences financial failure, preventing the loss of their invested assets due to the firm's collapse.

• Example 2: Misappropriation of Client Funds

  Consider a situation where "SecurePath Investments," a brokerage firm, is discovered to have illegally misappropriated client funds and securities, using them for the firm's own speculative ventures rather than holding them securely for clients. If SecurePath Investments becomes insolvent as a direct result of this fraudulent activity, SIPC would initiate a liquidation proceeding. It would work to recover and return the missing customer assets, or compensate clients up to the statutory limits, ensuring they don't lose their investments due to the firm's illegal actions. This demonstrates SIPC's role in situations where a brokerage firm's misconduct leads to the disappearance of customer assets, providing a mechanism for recovery and protection.

• Example 3: Orderly Firm Closure with Shortfalls

  Suppose "Community Brokerage," a smaller, regional firm, decides to cease operations due to declining profitability, rather than outright bankruptcy. While the firm intends an orderly wind-down, an audit reveals that some client accounts have unexplained shortfalls in their holdings due to poor record-keeping and minor financial difficulties leading up to the closure. In this case, SIPC can oversee or facilitate the orderly transfer of customer accounts and assets to another solvent brokerage firm. If, during this process, any client assets are found to be missing or mishandled due to Community Brokerage's financial struggles, SIPC's protection would apply to cover those shortfalls, ensuring clients receive their full entitlements up to the coverage limits.