What Advisors Should Know About SIPC Coverage

Financial advisors and their clients should understand how Securities Investor Protection Corporation coverage works when a brokerage fails. Registered investment advisory firms often use outside custodians, and their clients may hold a range of securities and other assets through those firms.

SIPC has helped investors recover $143.8 billion since its creation in 1970. The protection generally applies to missing cash and securities held by a failed member brokerage. It does not cover losses caused by falling market prices, poor investment advice or investment decisions.

Clients may qualify for up to $500,000 in SIPC protection per customer, for each account held in a separate capacity. The limit includes up to $250,000 for cash. Separate capacities can include individual, joint, corporate, trust and individual retirement accounts, allowing qualifying accounts to receive separate coverage.

When a member brokerage fails and customer assets are missing, SIPC works to recover and return eligible securities and cash. It may provide funds to help replace missing assets. Covered securities include stocks, bonds, Treasury securities, certificates of deposit and mutual funds.

Foreign exchange trades, unregistered investment contracts, fixed annuities, stablecoins and digital assets that are not securities are excluded. SIPC protection also does not cover a decline in the value of securities or losses linked to a broker’s or advisor’s investment advice.

“SIPC protects the custody function of cash and securities against loss — it does not protect against a decline in the value of securities or losses due to a broker’s or advisor’s investment advice,” Michael Post, SIPC’s president and chief executive, wrote in an email.

Cash in a sweep program may fall under a different protection system. When a brokerage transfers cash to a bank automatically, the funds are generally covered by the Federal Deposit Insurance Corp., subject to FDIC rules and limits, rather than by SIPC.

Advisors can help clients prepare by reviewing account confirmations and statements and reporting errors or discrepancies to the brokerage in writing as soon as possible. Michael Quinn, a managing director in financial accounting advisory services at Ernst & Young, urged advisors to understand the rules before a brokerage crisis because they serve as advocates for their clients.

SIPC is financed by fees from member brokerage firms and interest earned by the SIPC Fund. The fund has grown to more than $4.8 billion and can draw on a $2.5 billion credit line from the U.S. Treasury.

SIPC was established in 1970 after the “Paperwork Crisis,” when operational problems and market pressure caused hundreds of broker-dealers to close. It later helped protect investors affected by major failures, including Lehman Brothers after its 2008 bankruptcy and Bernard Madoff’s investment firm.

Mark Tibergien, former chief executive of Pershing Advisor Solutions, reported that many advisory firm owners may have spent less time assessing custodian failure than cybersecurity, investment risk or employee supervision. A custodian’s collapse could create financial, legal and reputational problems for an advisory firm, particularly one working with several custodians.

Tibergien has not seen a custodian serving the registered investment advisory and wealth-management markets fail and trigger SIPC protection. Advisors may therefore have limited direct experience with the process, even when their clients’ accounts depend on outside brokerages for custody and recordkeeping.