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SIPC Protection for Investors

Investors who engage in securities transactions through a brokerage firm that is a member of the Securities Investor Protection Corporation (SIPC) receive protection for cash and securities held by the brokerage firm for the accounts of the investors. The SIPC covers up to $500,000 in losses of such cash and securities per investor with a $100,000 limit on the amount of cash in an account that is covered.

If a brokerage firm ceases doing business or becomes insolvent, the SIPC will deal directly with customers of the firm or seek appointment by a court of a trustee. The trustee will oversee liquidation of the firm and resolve claims of investors who did business with the firm. Such claims may be substantial. Over $10 billion was distributed to customers of one brokerage firm to restore the value of customer accounts as of the time the SIPC ordered liquidation of the firm. Claims are valued by calculating the financial worth of a customer account as of the filing date established for the claims.

Investors may not recover losses in their accounts due to a decline in the market value of securities in the accounts prior to the filing date. However, investors may recover losses arising from unauthorized trading by brokerage firms of securities in the investors’ accounts. Such recovery depends upon proof that the trading was unauthorized. Thus, once an investor becomes aware of unauthorized trading of securities in the investor’s account, a written notification to the brokerage firm from the investor of such unauthorized trading not only can bring a halt to such trading but also can be proof needed for a successful claim to the SIPC.

Missing stocks, bonds, mutual fund shares, and other types of securities are covered by the SIPC. However, there are investments that are not eligible for SIPC protection, including commodity futures contracts and securities that are not registered with the Securities and Exchange Commission. Also, cash and securities placed with a broker not registered with the SIPC are not covered. Placement of cash or securities with a non-SIPC broker is avoidable, however, because brokers are required to disclose their membership or lack of membership in the SIPC.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.