Protection For Your Account
Description
This article is from the What Every Investor Should Know.
Protection For Your Account
Investors may be concerned with the safety of securities and funds which are held in brokerage accounts. For instance, what would happen if the brokerage firm were to go out of business? To help protect investors in this situation, Congress passed the Securities Investor Protection Act of 1970 (SIPA). This law is primarily administered by the Securities Investor Protection Corporation (SIPC), a nonprofit membership corporation. Most securities broker-dealers registered with the SEC are members of SIPC. Some brokerage firms may carry insurance on accounts exceeding SIPC coverage.
SIPA provides financial protection for the securities and cash (or credit) balances held in customer accounts with broker-dealers, should a firm be forced to liquidate. In such cases, a court-appointed trustee or SIPC may arrange to have customer accounts transferred to another SIPC member firm. If this is not feasible, SIPC protects customers in the following manner:
- Customers receive securities which are in the possession of the firm, are registered in the customers' names, and are not in negotiable form. Customers then share in all remaining securities on a pro rata basis.
- If there is a customer claim that is not satisfied by the pro rata distribution of customer cash and securities and the $500,000 coverage, it may be satisfied with any assets remaining after payment of liquidation expenses on a pro rata basis with other creditors. The processing time for SIPC liquidation claims will vary according to the size and nature of liquidations.
- Keep in mind, however, that SIPC covers losses resulting from the financial failure of the brokerage firm. It does not cover losses resulting from fluctuations in the market value of your investments.
If the liquidating firm lacks funds or securities to settle all customer claims, SIPC will satisfy remaining claims up to a maximum of $500,000 per customer, not more than $100,000 of which may be for cash claims.
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