SIPC Insurance
TL;DR: Covers $500k (including up to $250k in cash) in the event your brokerage firm liquidates.
Last week we looked into FDIC-insurance, and this week we’re going to explore something similar: SIPC insurance. This is to protect your assets/investments in brokerage firms. The key takeaway here is that it insures your investments in brokerage firms that FDIC did not.
History: Established in 1970 after the congress passed SIPA, it’s meant to protect investors from failing brokerages. Although it was created under federal law, it’s not an agency or establishment of the United States Government.
How does it work? First check that your brokerage is a member of SIPC. A quick Google search would tell you, and usually it comes with a logo. For example, Schwab and Robinhood are both members of SIPC. This means that if the brokerage firm fails, you are covered for up to $500k in securities (including up to $250k in cash).
What securities are covered? Most things most people think of, but not exactly everything. For example, stocks/bonds/notes/CDs are covered but currencies/commodities futures/warrants and rights are not. A full list can be seen here.
What if my brokerage used to be a member SIPC but now isn’t? Apparently it appears that you have 180 days of coverage still so you can switch brokerage firms, but after that there are no guarantees.
What do I do if my brokerage actually fails? Know that you have a deadline to file your claim, which is usually 60 days but could be as little as 30 days to get your maximum insured amount. Make sure you receive a claim (which you should be able to get from the Trustee), but if not you should visit the page with all open claim forms and/or search on the SIPC website and contact them. You should collect all your records (e.g. monthly/quarterly statements) to prove what you owned within the brokerage. Then you fill out the claim form and file it with the Trustee. You should expect your insured assets to be transferred to a more stable brokerage.
What if I need to be insured for more than $500k? Much like FDIC-insurance, you can be insured for more. Different account types are insured separately (for example individual accounts vs. joint accounts). A full explanation can be found here. You can also split your assets into separate brokerages, and the SIPC website implies that as long as these different brokerages have separate liquidation proceedings, they will be processed separately and so each will be covered by SIPC separately.
In addition, because SIPC is not a government agency, some brokerage firms (like Schwab) offer extra protection on top of SIPC’s insurance. This is certainly a plus to look for as well.
I have more questions! You can visit the SIPC website.
Happy SIPC’ing!
TheJKW
Disclaimer: this is just what I learned from skimming their website and is not guaranteed to be the most accurate/up to date. For the most accurate information please visit their site or call.