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Securities Investor Protection Act

In 1970 the U.S. Congress passed the Securities Investor Protection Act as a measure to protect investors from losses due to the failures of investment brokerage firms and dealers, and so created the Securities Investor Protection Corporation (SIPC). The SIPC is not a government authority or regulatory body, but it is a private corporation funded by its members, made up of securities dealers and brokers. The job of the SIPC is to recover assets for investors in the event of the bankruptcy, or other financial difficulty of one of its members.

It is important to note that the SIPC is not the equivalent of what the Federal Deposit Insurance Corporation (FDIC) is for banks. The arena of investment is a lot riskier than banking, and because of exposure to securities fraud it would not be feasible to insure against losses due to the failure of investments on a broad scale. Securities regulators estimate that losses from investment fraud in the U.S. range from $10 billion to $40 billion per year.

The SIPC would not be able to operate for long as an insurer with reserves of only $1 billion. What they do instead is utilize their resources to recover assets from failed members and return them to investors that could have otherwise lost everything. From the time of its creation through 2007, the SIPC has forwarded a total of $508 million from its reserves to recover $15.7 billion for an estimated 625,000 investors.

As an appointed trustee in the case of a failed dealer or broker the SIPC steps in to recover assets and return them to investors. If enough can not be recovered to make up for all the losses then the SIPC reserves will be tapped to pay for losses up to $500,000 to an investor for covered securities, and for cash losses up to $100,000. The SIPC maintains a website at www.sipc.org , which has information on how to file claims, and provides access to a database of SIPC members.

The SIPC also provides education to investors about avoiding fraud and what trouble signs to look for when working with an investment dealer or broker. SIPC only protects investor accounts that are held with its member brokers and dealers.