Securities Investor Protection Corporation (SIPC)

The Securities Investor Protection Corporation is a nonprofit membership corporation funded by member securities firms. SIPC protects investors in the event that their broker-dealer fails and is unable to return their money or securities. In such cases, SIPC works to return funds to investors and, if necessary, provide additional protection through a reserve fund.

The History of the Securities Investor Protection Corporation

The U.S. Congress created the SIPC in 1970 in response to the failure of a number of broker-dealers that left investors without recourse. Prior to SIPC’s formation, there was no similar insurance program in place to protect investors’ assets. Since its existence, the organization has recovered assets worth $141.8 billion.

In 1978, SIPC received its first set of comprehensive amendments. The most important involved raising the ceiling of consumer protection to $40,000 for cash and $100,000 for other assets. By 1980, the ceiling climbed to $100,000 for cash and $500,000 for other investments.

In 2010, the U.S. government passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. This raised the cash ceiling to $250,000 and created some leeway to make adjustments for inflation. In 2020, the SIPC celebrated five decades of investor protection.

The Mission of the Securities Investor Protection Corporation

SIPC’s mission is “to protect investors in the event of the failure of a broker-dealer.” SIPC maintains a fund that it uses to reimburse investors for losses due to those investors’ broker-dealers going under. The organization also works to return missing investments and takes disciplinary action against firms that violate securities laws.

Unlike many other regulatory bodies, SIPC does not focus on targeting fraud or other threats to market integrity. Its specific role involves ensuring investors do not lose their money when brokers or dealers experience financial failures. Other U.S. agencies exist that play that role, such as the Securities and Exchange Commission.

How the Securities Investor Protection Corporation Works

In order to qualify for protection, investors must purchase their securities through a broker-dealer that is a member of SIPC. When a member firm fails, investors may file a claim with SIPC in order to recover any lost assets.

If the court approves the liquidation, SIPC appoints a trustee to oversee the process. The trustee then works to return any missing cash or securities to investors. If the trustee cannot do this, the SIPC returns the investment up to the covered limit.

In order for an investor to receive coverage, the losses must have occurred due to the financial failure of the broker-dealer. SIPC does not cover losses that occur due to market fluctuations or fraud.

Even though the SIPC does not get as involved in enforcement actions as other agencies, the threat of liquidation benefits the integrity of the markets. It reduces the likelihood of mismanagement by brokers and dealers. The safety net also reduces some of the risks of investing in U.S. financial markets.

How To Become a Member of the SIPC

U.S. law requires all registered dealers or brokers to become SIPC members. However, there are three exceptions:

  1. Entities the SIPC determines primarily conducts businesses outside of the United States
  2. Brokers or dealers who only deal in some excluded areas, such as selling insurance or variable annuities
  3. Persons whose broker or dealer registration is based on 15 U.S.C. section 78o(b)(11)(A)

Eligible entities must submit an application and pay the required fees to become a member. The organization reviews the application to ensure the firm meets all of the eligibility requirements.

The benefits of becoming a member include access to the SIPC fund and increased investor confidence. This can generate more customers and higher levels of business.

The Role of Record-keeping Solutions in Compliance

Companies affected by the Securities Investor Protection Corporation also need to comply with other regulatory bodies, such as FINRA and the SEC. Consequently, firms must have adequate archiving capabilities. When it comes to SIPC, that includes maintaining records of customer complaints, orders, and transactions.

The purpose of this requirement is to help the SIPC fulfill its mission. In the event of a broker-dealer failure, the records can be used to return missing investments or take disciplinary action against the firm.

An archive must be able to reproduce customer records in an easily readable format within a reasonable amount of time. The SIPC has no specific requirements for how long covered broker-dealers must maintain long records. However, members must follow all relevant state and federal laws.

LeapXpert makes it easy for our clients to achieve compliance with SIPC and other regulatory bodies that need message capturing and archiving solutions for communications records. We streamline the process through automation and add world-class data protection. Contact us for more information.