Legal Definitions - SIPC

The SIPC, which stands for Securities Investor Protection Corporation, is a non-profit, member-funded corporation in the United States. Its primary purpose is to protect customers of its member brokerage firms against the loss of cash and securities if the brokerage firm fails financially or goes bankrupt.

It's crucial to understand that SIPC protection covers the loss of assets due to the *brokerage firm's* insolvency, not losses that result from market fluctuations, poor investment performance, or fraud committed by the investment itself. SIPC protection is limited to $500,000 per customer, which includes a maximum of $250,000 for cash.

Here are some examples to illustrate how SIPC works:

• Example 1: Brokerage Firm Bankruptcy

  Imagine Sarah has an investment account with "Horizon Securities," an SIPC member firm. Her account holds $200,000 in various stocks and bonds, along with $30,000 in uninvested cash. Suddenly, Horizon Securities declares bankruptcy due to internal financial mismanagement, not because of a market crash. In this scenario, SIPC would step in to ensure that Sarah's $230,000 in securities and cash are returned to her, as this amount falls within the $500,000 and $250,000 cash limits. This demonstrates SIPC's role in protecting investors when their brokerage firm becomes insolvent.

• Example 2: Assets Exceeding SIPC Limits

  Consider David, who has a substantial portfolio of $1.2 million in securities and $350,000 in cash held at "Elite Brokerage," another SIPC member. If Elite Brokerage were to fail, SIPC would protect up to $500,000 of David's total assets, including a maximum of $250,000 of his cash. The remaining $1.05 million ($1,550,000 total - $500,000 SIPC coverage) would be subject to the firm's liquidation process, where David would be treated as a general creditor. This example highlights the specific limits of SIPC protection, showing that while it provides significant coverage, it is not unlimited.

• Example 3: Market Losses (Not Covered)

  Suppose Emily invests $10,000 in a new technology stock through her brokerage account at "Secure Investments." Over the next few months, the stock performs poorly, and its value drops by 60%, leaving Emily with only $4,000. Secure Investments, however, remains financially stable and well-managed. In this situation, SIPC would not provide any compensation to Emily. This example clarifies that SIPC protects against the failure of the *brokerage firm*, not against the inherent risks of investing in the market or the decline in value of specific investments.