The Securities Investor Protection Act of 1970 (SIPA) created the Securities Investor Protection Corporation (SIPC), a nonprofit that protects customers of failed broker-dealers.
SIPC coverage limits: - Up to $500,000 per customer per broker-dealer (for securities + cash combined). - Of that, up to $250,000 in cash. - Separate coverage for each "separate capacity" (individual account, IRA, joint account).
What SIPC covers: - Missing securities from a failed (insolvent) broker-dealer. - Cash held at the broker-dealer for investing purposes.
What SIPC does NOT cover: - Investment losses (market losses, bad advice). - Commodity futures contracts. - Fixed annuity contracts. - Currency. - Investment contracts not registered under the securities laws.
How it works: If a broker-dealer fails, SIPC petitions a federal court to appoint a trustee to liquidate the firm and return customer assets. SIPC funds make up shortfalls up to the limits.
SIPC vs. FDIC: SIPC is for brokerage accounts; FDIC is for bank deposits ($250,000 per depositor per institution).
> Exam tip: SIPC covers custody risk (broker failure), not market risk (investment loss). Frequently tested: ETNs are NOT covered for issuer default (they are unsecured debt). Know the $500,000/$250,000 limits cold.