Thursday, November 25, 2010

SIPC Coverage Has Increased to 250K

For a long, long time SIPC, which protects customer accounts held by broker-dealers, covered only 100K of uninvested cash. Well, in this industry everything is subject to change. At this point, if you get a question on the maximum SIPC coverage, the answer is 500K total, of which 250K can be in cash. I'm not sure that the test questions focus on memorized numbers in the first place, but if so, you do need to know those numbers. More likely, you'll need to know what SIPC covers (cash, securities) and what it doesn't (commodity futures, mutual fund shares held by the transfer agent, market loss). Remember, if you buy $300,000 of stock, and it drops to zero, SIPC would like you to know that this was a very bad idea. You aren't insured against market loss. You're only covered in the sense that broker-dealers holding your assets could go belly up (like Lehman or Merrill Lynch, i.e.). If so, your ass-ets are covered up to a certain amount.
What is "cash"? When you fund your account with a check, the broker-dealer is holding your cash. When you receive dividends, interest, and capital gains distributions, that goes into your cash balance. Same thing when you sell securities for . . .yes . . . cash. Broker-dealers use your cash as THEIR asset in order to earn interest and to post collateral for the crazy highly leveraged trading strategies they love to engage in. If they go belly up, your cash and securities can get held up by creditors of the firm--that's why SIPC is so important. It provides a line of defense to customers. If they hold too much cash, or their account is larger than 500K, they might become general creditors of the bankrupt firm for those excess amounts. But at least customer accounts are covered up to 500K, of which no more than 250K can be in cash. You'll notice that the firm where you work has "Member FINRA and SIPC" on their business cards, signage, and in any commercials they put out.
I wouldn't invest with any firm that wasn't a member of both, myself.


  1. Note that the unfortunate folks who lost MILLIONS through Bernie Madoff did receive the SIPC coverage up to $500,000 total. Kind of hard to get excited by turning $10 million into $500,000, but I'm also thinking these folks did enjoy receiving their checks just the same.

  2. to see how it works in the "real world"

  3. MF Global statements had SIPC on them but SIPC is refusing to reimburse me for the CASH.

  4. Hmm . . . did they state WHY? Did MF Global have a particular type of insurance coverage outside the normal test-question angle?