Source: Securities and Exchange Commission
The SEC’s Office of Investor Education and Advocacy and the Securities Investor Protection Corporation (SIPC) are issuing two Investor Bulletins to help educate investors about SIPC protection for brokerage accounts. The first Investor Bulletin (“SIPC Basics”) will provide investors with an overview of how SIPC protection works and what it protects, and the second Investor Bulletin (“Filing a SIPC claim”) will provide investors with an overview for how to file a SIPC claim.
If you have an investment account at a SIPC member brokerage firm that closes due to bankruptcy or other financial difficulties, here are some steps to take and issues to consider if you need to file a claim for SIPC protection.
IMPORTANT: THE CLOSURE OF A SIPC-MEMBER BROKERAGE FIRM MAY NOT REQUIRE A PROTECTION PROCEEDING OR THE FILING OF A CLAIM FOR SIPC PROTECTION. A CLOSED SIPC MEMBER MAY BE ABLE TO TRANSFER ITS CUSTOMER ACCOUNTS TO ANOTHER SIPC-MEMBER BROKERAGE FIRM WITHOUT THE NEED FOR SIPC’S INTERVENTION. THE APPROPRIATE REGULATORS WILL MONITOR THESE CLOSURES, AND IF SIPC INITIATES A PROTECTION PROCEEDING TO LIQUIDATE A BROKERAGE FIRM, ITS CUSTOMERS WILL BE NOTIFIED OF THE CLAIMS PROCESS.
Once I have a securities account with a SIPC member, how does SIPC protection work?
SIPC initiates a customer protection proceeding
SIPC protection applies only when a brokerage firm is unable to meet its obligations to customers and has been placed in liquidation under the Securities Investor Protection Act of 1970 (SIPA). SIPC relies upon regulators such as the SEC or the Financial Industry Regulatory Authority (FINRA) to notify SIPC when customers need its protection.
When SIPC determines that a brokerage firm (1) has failed or is danger of failing to meet its obligations to customers and (2) meets a specified condition such as insolvency or an inability to meet certain financial responsibility guidelines, SIPC will ask a court to place the brokerage firm into liquidation under SIPA for the protection of its customers and appoint a trustee to oversee the liquidation of its brokerage business. This date usually is considered the “filing date,” which will be used to value the securities in customer accounts.
Importantly, SIPC also pays the administrative costs of the liquidation, including attorneys’ fees, if the brokerage firm is insolvent. This means that even if the brokerage firm lacks funds to pay the costs of the liquidation, the trustee can still process claims, distribute customer property, and recover stolen or fraudulently transferred customer property.
You must file a claim in the liquidation
The trustee’s primary goal in the liquidation is the prompt return of customer property to customers. You will be notified of the liquidation and mailed a claim form, and you must file a timely claim with the trustee. On the claim form, you should describe, as of the filing date, the cash and securities that are owed to you by the brokerage firm and the cash and securities that you owe to the brokerage firm.
Customer claims are given two deadlines, each calculated from the date of notice of the commencement of the liquidation is published: If you file a claim within the first deadline (set by the court, usually either 30 or 60 days) and request that the trustee return securities custodied with the broker, the trustee must return the securities unless they are unavailable and cannot be purchased in a fair and orderly market. If you file after the first deadline but within a six-month deadline set under SIPA, the trustee has the option of delivering securities or paying the cash value of the securities as of the filing date, depending upon which is more economical. Claims filed after the six-month deadline will be denied as untimely, and the customer property is forfeited. Except for very narrow exceptions inapplicable to most customers, this deadline cannot be extended.
As the customer, you must establish the validity of your claim and your entitlement to assets. If possible, you should provide any documents that support your claim, including copies of account statements, trade confirmations, and any relevant correspondence with the brokerage firm. If needed, the trustee may ask you for more information. The trustee will also have access to the brokerage firm’s books and records and in most cases will be able to use those records to determine what you are owed.
You may also make a claim for unauthorized trading to recover the property which was the subject of the unauthorized trade. You must support your claim with evidence that the trade was unauthorized, typically in the form of a timely written complaint to your brokerage firm. Otherwise, you could be deemed to have accepted the trade.
The trustee satisfies claims
Brokerage firms, under regulation by the SEC and FINRA, are required to segregate customer property from the brokerage firm’s business. This means that if a brokerage firm fails, all customer property should be intact, separate from the failed business. If possible, the trustee in a SIPA liquidation will attempt to bulk transfer customer accounts to a new brokerage firm, and you could have access to your account as quickly as within a week. While this can be accomplished without you filing a claim, you should still do so in case the transfer does not make your account whole.
The trustee pools the available customer property custodied with the brokerage, excluding customer name securities, and distributes it to customers with valid claims on a prorated basis. Securities are valued as of the filing date. The trustee may also bring legal actions to recover stolen or fraudulently transferred customer property, for further distribution to customers. Customer name securities are treated separately and are delivered to the customer in whose name they are registered – i.e., not on a prorated basis – provided that the customer is not indebted to the member.
- To illustrate, suppose you have a valid claim for shares of Company ABC registered in your name worth $300,000, plus $1,000,000 in securities registered in “street” name. The trustee recovers 75% of the customer property the brokerage firm owes its customers. The trustee will deliver to you the shares of Company ABC, assuming the shares are in the broker’s custody, plus $750,000 of customer property, either as securities or cash in lieu of securities, depending on the availability of securities and when you filed your claim. The shortfall of $250,000 will be satisfied by a SIPC advance.
SIPC may advance up to $500,000 per customer (including a $250,000 limit on cash in the account) for customer protection. The benefit of this advance is two-fold. First, the trustee can use it to accelerate the satisfaction of claims while the trustee gathers and recovers customer property. Second, if the trustee’s prorated distribution of customer property does not fully satisfy your claim, the advance can be used to restore missing property and cover any shortfall. To illustrate these limits:
- Customer A has a valid claim for $400,000 in securities and $200,000 in cash. SIPC will advance $500,000 for this customer’s protection. The remaining $100,000 may be distributed as part of Customer A’s prorated share of customer property.
- Customer B has a valid claim for $200,000 in securities and $400,000 in cash. SIPC can only advance $450,000 for this customer’s protection: $200,000 for securities and the limit of $250,000 for cash. The remaining $150,000 may be distributed as part of Customer B’s prorated share of customer property.
If your customer claim is not fully satisfied by the trustee’s prorated distribution of customer property plus the SIPC advance of up to $500,000, then you will become a general creditor. The unsatisfied portion of your customer claim becomes an unsecured creditor claim against the general estate (i.e., the unsecured business assets, excluding customer property) of the brokerage firm in liquidation.
What About Excess SIPC Coverage?
SIPC’s protection is provided under federal law, and it does not offer any way to purchase additional protection. Brokerage firms, however, may have insurance policies called “excess SIPC coverage” which apply once SIPC protection is exhausted and may partially cover remaining losses. Excess SIPC coverage is offered by private insurance carriers to brokerage firms and may operate differently than the protections available under SIPA. SIPC does not maintain information about excess SIPC coverage or monitor or regulate such offerings. Questions about excess SIPC coverage should be directed to your brokerage firm.
Additional Resources
Investor Bulletin: SIPC Protection (Part 1: SIPC Basics) (https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-101)
SIPC Brochure: How SIPC Protects You (https://www.sipc.org/media/brochures/HowSIPCProtectsYou-English-Web.pdf)
SIPC Brochure: The Investor’s Guide to Brokerage Firm Liquidations (https://www.sipc.org/media/brochures/Liquidations-Web.pdf)
Investor.gov Glossary: Securities Investor Protection Corporation (https://www.investor.gov/introduction-investing/investing-basics/glossary/securities-investor-protection-corporation-sipc)
FINRA Investor Alert: If a Brokerage Firm Closes Its Doors (https://www.finra.org/investors/insights/if-brokerage-firm-closes-its-doors)
FINRA: Your Rights Under SIPC Protection (https://www.finra.org/investors/need-help/your-rights-under-sipc-protection)
FDIC: Understanding Deposit Insurance (https://www.fdic.gov/resources/deposit-insurance/understanding-deposit-insurance/index.html)
For more information regarding SIPC, please visit SIPC’s website (www.sipc.org). If you have any questions regarding SIPC and the protection that it provides, you can email SIPC at asksipc@sipc.org.
Visit the SEC’s website for individual investors, Investor.gov.
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