How Is Cash in a Brokerage Account Insured?
There are no federally backed entities that insure cash held in brokerage firms. However, the nonprofit Securities Investor Protection Corporation does provide insurance coverage for up to $250,000 of cash held by each customer at each member brokerage firm. Not all brokerage firms are members of the SIPC, and people with accounts at non-member firms are not insured against loss.
Other People Are Reading
-
SIPC Function
-
The SIPC came into existence in 1970. The company insures investors from losses caused by member brokerage firms going bankrupt. The SIPC protects most types of securities including stocks, bonds and variable annuities. The SIPC covers all types of securities up to a maximum of $500,000, per account holder, but, as of 2010, it limits cash coverage to $250,000. Generally, people keep cash in brokerage accounts only when they are between trades; so, in theory, cash losses during bankruptcies are not usually that significant.
SIPC Process
-
When a member firm files bankruptcy, the SIPC begins court proceedings and asks a judge to appoint a trustee who must oversee the disbursement of the failed firm's assets. If the trustee raises sufficient funds by selling the firm's assets, those proceeds are used to reimburse claimants. The SIPC makes an insurance payout only if the failing firm's assets are not sufficient to cover the losses. The SIPC reimburses account holders based on the value of assets at the time of the settlement as opposed to the value of securities at the time the firm went bankrupt.
-
Considerations
-
The SIPC coverage continues for 180 days after a member firm decides to withdraw from SIPC membership. Any claims filed during that time frame are honored. If a firm goes bankrupt more than 180 days after leaving the SIPC, customer funds are uninsured. The Securities and Exchange Commission requires brokerage firms to notify customers when they leave the SIPC. All member firms must prominently display SIPC signage in the offices of investment representatives.
Other Insurance
-
The Federal Deposit Insurance Corp. provides some coverage for cash equivalent certificates of deposit accounts held at brokerage firms. The FDIC covers CDs issued by member banks that are sold on the secondary investment market as securities. The FDIC coverage amounts to $250,000 per customer, per issuing bank. The FDIC does not protect investors if the brokerage firm files bankruptcy. It only covers losses associated with the bank that sold the CD going bankrupt.
-
