Does the FDIC Cover Investments too?
Most people know that there is a governmental agency called the Federal Deposit Insurance Corporation (or FDIC) that protects bank deposits (or NCUA which protects credit union deposits). The FDIC insurance amount limit for banks and NCUA insurance amount limit for credit unions are both at $250,000 in deposits per member, per financial institution, per account category, if that institution were to fail. The goal of FDIC, for example, is to instill confidence in our banking system so that you keep your deposits at the bank – preventing bank runs that lead to bank failures.
But what about investments? Does FDIC coverage apply to investments?
It turns out it doesn’t.
But before you go and sell off all of your investments, there is an alternative.
The Securities Investor Protection Corporation (SIPC)
There is an organization called the Securities Investor Protection Corporation, or SIPC for short, that provides insurance coverage on your investment assets, if the investment brokerage you are holding them in were to fail or your assets were to come up missing for another reason.
Unlike the FDIC, the SIPC is not a governmental agency. It is, however, a federally mandated non-profit organization with Presidential appointees. It was founded in 1970 and is financially supported by financial institution membership. Investment brokerages need to pay to become members in order to be covered by the SIPC.
The SIPC is to securities (investment assets) as the FDIC is to bank deposits. The goal of the SIPC is to instill confidence in the U.S. Securities market, so investors don’t pull all of their assets from an institution at the first sign of its financial trouble. They also can cover assets stolen by brokers.
The SIPC may protect investors against unauthorized trades in their account, but the failure to execute a trade is not covered.
One popular case recently with SIPC involvement was the Lehman Brothers bankruptcy failure. In that case, 100% of the $38 billion in investor assets were rightfully returned to investors, despite the company failing.
SIPC Insurance Investment Coverage Limits
The SIPC covers up to a ceiling of $500,000 per customer per account type, including a maximum of $250,000 for cash claims.
This is not a blanket coverage, however. The stock, bond, and other equities markets are a risk-return model. You invest for returns with the risk of potentially losing money. The SIPC does not cover losses on the value of your investments (while it would be nice, that’s not the goal here).
The SIPC also does not cover against cases of fraud – that is the role of the Securities and Exchange Commission (SEC).
In most cases, the SIPC would work to orchestrate a switch of your assets to another brokerage if one were to fail, or return the equities if they are stolen or otherwise missing.
Are Any Investments not Protected by the SIPC?
Cash and securities – such as stocks and bonds – held by a customer at a financially troubled brokerage firm are protected by SIPC.
There are, however, some investments that are ineligible for SIPC protections: commodity futures contracts (unless in portfolio margining accounts and defined as customer property under the Securities Investor Protection Act), fixed annuity contracts, and currency, as well as investment contracts (such as limited partnerships) that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.
Most amateur investors will probably never invest in these types of investments due to their complexity, and the lack of SIPC coverage is another reason to not invest in them.
Investment Insurance Takeaways
The SIPC’s mission is to protect individual investors. Make sure that whomever you are investing with is “Member SIPC”. Here is the SIPC Member database to confirm. Most, if not all, major investment brokers in the U.S. are SIPC members, but I would always double check before handing over your hard-earned dollars en masse. If a brokerage is not SIPC protected, you should probably not walk, but run away.
Some firms will purchase additional insurance coverage above and beyond the SIPC’s, to instill confidence in investors to give them their assets. If your assets were to go over the $500,000 level, they’d hate to have you leave to go to another firm.
Also, note that by law, investor assets and the investment broker’s business assets/liabilities must be separated, offering you further protection on missing securities.
If you ever run in to missing securities or an insolvent broker, you can make a claim directly to the SIPC here.
That should ease your mind a bit about investing large sums, no?
Update: I recently wrote a post on if your money is safe in an investment account that dives into this topic further.