Securities fraud is an issue that, unfortunately, affects more and more people every year. Understandably, investors are constantly seeking ways to protect their investments and ensure that they’re covered in the event that they fall victim to securities fraud.
One common question from investors is whether SIPC (Securities Investor Protection Corporation) insurance covers securities fraud. The short answer is no, but keep reading for additional context about what SIPC covers and how it differs from securities fraud protection.
What is the SIPC?
First, let’s begin with an explanation of what the SIPC is and who it was intended to serve. The SIPC was created under the Securities Investor Protection Act. It’s a non-profit, member-funded corporation that steps in when member assets are on the line. Most US-registered broker-dealers are required to become members.
What does the SIPC cover?
When an SIPC member is liquidated or finds itself in financial trouble, the SIPC steps in to return customers’ securities and cash assets as quickly as possible. These assets are protected up to $500,000 per customer (with a limit of $250,000 for cash).
You might be thinking that the SIPC has a narrow focus compared to other investor protection entities, and that’s correct. There are many other organizations that deal with investment fraud, but the SIPC was never designed to deal with cases of fraud. Instead, its focus is to restore customer assets when its member firms run out of money.
Another nuance here is that the SIPC is not a government entity. Although its creation was mandated in response to a federal law, SIPC is not a U.S. government agency, and it has no authority to regulate its members.
How is the SIPC different from the FDIC?
Many people assume that the SIPC is the securities equivalent of the FDIC (Federal Deposit Insurance Corporation), which is the entity that insures the depositors of member banks. While at first glance there are similarities here, the FDIC provides blanket coverage that applies to each account holder at each bank. The SIPC provides no equivalent to this blanket coverage; as we shared above, its purpose is very specific.
The key limitation to understand is that the SIPC does not protect against any losses of value in your assets. It does not offer protection if your assets decline in value, if you receive securities that are worthless, if you receive bad investment advice, or if you’re a victim of fraud. Because these scenarios don’t arise as a result of a broker firm going bankrupt, the SIPC’s function doesn’t kick in.
What does cover securities fraud?
Your coverage in the event of securities fraud depends on the nature of the fraud that occurs. If your brokerage account is hacked and you lose money or assets due to unauthorized transactions in your account, your brokerage likely offers zero-liability terms on your account that will kick in to reimburse your investment. Unfortunately, these terms typically don’t apply if you’ve been negligent in the protection of your account information.
If instead, you’ve fallen victim to a Ponzi scheme or other similar fraudulent investment, you likely won’t have insurance coverage that acts as a protection.
Securities fraud is a challenging situation for any investor to navigate, and the confusion between the SIPC and FDIC protections often adds to the complexity. Hopefully, you now understand that the SIPC provides coverage if your broker-dealer is liquidated and doesn’t have the funding to restore your assets. For situations outside this narrow scope, the SIPC is not involved.