SIPC Insurance: How Your Brokerage Account Is Protected

What SIPC Covers

SIPC protects customer assets held at a failed brokerage firm. Coverage includes stocks, bonds, mutual funds, ETFs, Treasuries, and CDs held in your account. The protection extends up to $500,000 per customer, including a $250,000 limit on cash claims. This means if your brokerage fails and assets are missing, SIPC steps in to replace them up to these limits.

Many brokerages also carry excess SIPC insurance from private insurers like Lloyd's of London for additional coverage. Schwab carries $600 million in aggregate excess coverage. Fidelity carries over $1 billion. This extra layer protects customers even if losses exceed standard SIPC limits.

What SIPC Does NOT Cover

• Market losses — You bear investment risk. If your stock drops in value, SIPC does not compensate you.
• Commodities and futures contracts — These are not considered securities under SIPC rules.
• Currency — Foreign exchange holdings are not covered.
• Crypto assets — Even if held at a brokerage, cryptocurrencies are not covered by SIPC.
• Investment contracts not registered with the SEC — Unregistered securities may fall outside SIPC protection.

How SIPC Works When a Broker Fails

The process follows a structured legal framework. First, SIPC files for a protective decree in federal court. A trustee is appointed to liquidate the firm and return customer property. If assets are missing due to fraud or mismanagement, the SIPC fund pays claims up to the coverage limits. Customer accounts are typically transferred to another brokerage so you retain access to your investments. The entire process is designed to minimize disruption to the investing public.

Is my money safe at a brokerage?

Your money is safe at well-capitalized, reputable brokerages like Schwab, Fidelity, Vanguard, and Interactive Brokers. These firms are required by law to segregate customer assets from their own corporate assets. Combined with SIPC coverage and excess insurance, the risk of losing assets due to brokerage failure is extremely low. However, market losses on your investments remain your responsibility.

What happens if my broker goes bankrupt?

If your broker goes bankrupt, customer assets are generally protected because they are held separately from the firm's assets. SIPC steps in to oversee the return of your securities and cash. Most accounts are transferred to another brokerage within weeks. If assets are missing, SIPC covers losses up to $500,000. Choosing a well-regulated broker reduces this risk significantly.

Does SIPC cover crypto?

No. SIPC does not cover crypto assets, even if purchased through a brokerage that is a SIPC member. Cryptocurrencies are not considered securities under current law. Some brokers offer separate insurance for crypto holdings through third-party custodians, but this is not SIPC protection. If you hold crypto, understand that it falls outside traditional investor protection frameworks.

How is SIPC different from FDIC insurance?

SIPC protects securities (stocks, bonds, ETFs) held at a brokerage if the brokerage fails. FDIC insurance protects cash deposits at banks up to $250,000 per depositor per institution. SIPC does not protect against bank failure, and FDIC does not protect against brokerage failure. They serve complementary roles in the financial safety net. Understanding both is part of basic financial literacy.

How to Protect Yourself

Use well-capitalized brokerages like Schwab, Fidelity, Vanguard, or Interactive Brokers. Keep excess cash in money market funds rather than cash — money market funds are still covered as securities under SIPC. Diversify across institutions if your assets exceed $500,000 at a single firm. Review your account statements regularly to verify your holdings are accurately reported. Understanding account statements is your first line of defense against discrepancies.

Historical Examples

Lehman Brothers (2008): customer accounts were segregated and transferred to other brokers. Most customers did not need SIPC claims. Madoff (2008): a $65 billion fraud where SIPC processed claims, though fictitious profits were not covered. MF Global (2011): customer funds were misused, and SIPC processed claims to return assets to customers. These cases highlight why segregation of customer assets and SIPC protection matter. Index fund investing through a sound broker is one of the safest approaches.

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