The Securities Investor Protection
Corporation is a federally mandated,
non-profit, member-funded, United States
corporation created under the Securities
Investor Protection Act of 1970 and
mandates membership of most
US-registered broker-dealers. It is not
a Self-regulatory organization. "The
SIPC fund, which constitutes an
insurance program, is designed to
protect the customers of brokers or
dealers subject to the SIPA from loss in
case of financial failure of the member.
The fund is supported by assessments
upon its members. If the fund should
become inadequate, the SIPA authorizes
borrowing against the U.S. Treasury. An
analogy could be made to the role of the
Federal Deposit Insurance Corporation in
the banking industry."
SIPC is required to report to, and be
overseen by, the Securities and Exchange
Commission. "Pursuant to SIPA, the
Commission also has delegated authority
to conduct inspections of SIPC, review
SIPC annual reports, and approve SIPC’s
bylaws, rules, and any amendments to the
bylaws and rules." As the SIPC states on
its website, "Though created by the
Securities Investor Protection Act, SIPC
is neither a government agency nor a
regulatory authority. It is a nonprofit,
membership corporation, funded by its
member securities broker-dealers."
History 
= Enactment =
In response to the near collapse of the
financial markets in 1970, Congress
chose to enact legislation that could
prevent an escalation of brokerage firm
insolvencies and help stabilize the
financial markets. In December 1970,
Senator Muskie resumed discussion of
S.2348, which proposed creation of the
Federal Broker Dealer Insurance
Corporation, a compromise with the House
version H.R.19333 followed, and the bill
passed. President Richard Nixon signed
the bill into law on December 30, 1970.
Excerpts from the President's statement
made clear the goals of the legislation:
"I AM SIGNING today the Securities
Investor Protection Act of 1970. This
legislation establishes the Securities
Investor Protection Corporation, a
private nonprofit corporation, which
will insure the securities and cash left
with brokerage firms by investors
against loss from financial difficulties
or failure of such firms.... I urged the
formation of a corporation to afford
protection to small investors.... Just
as the Federal Deposit Insurance
Corporation protects the user of banking
services from the danger of bank
failure, so will the Securities Investor
Protection Corporation protect the user
of investment services from the danger
of brokerage firm failure.
"This act protects the customer, not the
broker, since only the customer is paid
in the event of firm failure. It does
not cover the equity risk that is always
present in stock market investment, but
it will assure the investor that the
solvency of the individual firm with
which he deals will not be cause for
concern. It protects the small investor,
not the large investor, since there is a
limit on reimbursable losses. And it
assures that the widow, the retired
couple, the small investor who have
invested their life savings in
securities will not suffer loss because
of an operating failure in the
mechanisms of the marketplace.""
= The Paperwork Crunch and financial
crisis =
The SIPC was born in the shadow of the
"Paperwork Crunch" of 1968-70 as a means
to restore confidence in the U.S.
securities market. During this period,
"An explosion in the volume of trading
had occurred. A system designed to
handle an average three million share
trading day was incapable of dealing
with the thirteen million share trading
day common in the late 1960's. The
resultant breakdown in the securities
processing mechanism caused chaos as the
number of errors in recording
transactions multiplied.... In December
1968, member firms of the New York Stock
Exchange had $4.4 billion in "fails to
deliver" and $4.7 billion in "fails to
receive." Brokers and dealers were
finding it difficult, if not impossible,
to ascertain their own financial
condition.... This operational and
financial crisis forced more than one
hundred brokerage firms into liquidation
causing thousands of customers to be
seriously disadvantaged."
In response, the Securities Investor
Protection Act of 1970 was enacted as a
way to quell investor insecurity and
save the securities market from a
financial crisis. In his introduction of
the Securities Investor Protection Act
to the floor of the Senate, Senator
Edmund Muskie stated:
"The economic function of the securities
markets is to channel individual
institutional savings to private
industry and thereby contribute to the
growth of capital investment. Without
strong capital markets it would be
difficult for our national economy to
sustain continued growth.... Securities
brokers support the proper functioning
of these markets by maintaining a
constant flow of debt and equity
instruments. The continued financial
wellbeing of the economy thus depends,
in part, on public willingness to
entrust assets to the securities
industry."
Functions 
The SIPC serves two primary roles in the
event that a broker-dealer fails. First,
the SIPC acts to organize the
distribution of customer cash and
securities to investors. Second, to the
extent a customer's cash and/or
securities are unavailable, the SIPC
provides insurance coverage up to
$500,000 of the customer's net equity
balance, including up to $250,000 in
cash. In most cases where a brokerage
firm has failed or is on the brink of
failure, SIPC first seeks to transfer
customer accounts to another brokerage
firm. Should that process fail, the
insolvent firm will be liquidated. In
order to state a claim, the investor is
required to show that their economic
loss arose because of the insolvency of
their broker-dealer and not because of
fraud, misrepresentation, or bad
investment decisions. In certain
circumstances, securities or cash may
not exist in full based upon a
customer's statement. In this case,
protection is also extended to investors
whose "securities may have been lost,
improperly hypothecated,
misappropriated, never purchased, or
even stolen".
While customers' cash and most types of
securities - such as notes, stocks,
bonds and certificates of deposit - are
protected, other items such as commodity
or futures contracts are not covered.
Investment contracts, certificates of
interest, participations in
profit-sharing agreements, and oil, gas,
or mineral royalties or leases are not
covered unless registered with the
Securities and Exchange Commission.
Organization 
"SIPC is led by seven directors, some
appointed by the President of the United
States, and others by the member firms.
It employs a staff of only twenty-nine
and does not advertise job openings on
its website. In 2007, total employee
compensation and benefits were $5.8
million."
Caveats and clarifications 
Although modeled loosely on the Federal
Deposit Insurance Corporation which
protects bank customers, unlike the FDIC
where accounts are protected against
loss of value, SIPC does not protect
against market fluctuations or changes
in market value. It does not protect
against losses in the securities
markets, identity theft, or other
3rd-party fraud. Unlike the FDIC, SIPC
also does not provide protection where
there are claims against solvent brokers
or dealers. It provides a form of
protection for investors against losses
that arise when broker-dealers, with
whom they are doing business, become
insolvent. Claims against solvent
brokers and dealers are typically
managed by the securities' industry
SROs: the Financial Industry Regulatory
Authority and the Commodity Futures
Trading Commission.
The limitations of SIPC protection
caused significant confusion among a
number of investors following the
collapse of Bear Stearns and Lehman
Brothers and perhaps, most prominently,
following the exposure of Bernard
Madoff's and Allen Stanford and the
Stanford Financial Group ponzi scheme
frauds.
In the Madoff fraud where securities had
allegedly not actually been purchased,
SIPC and the SIPC Trustee challenged and
disposed of the claims of approximately
one-half of customers of the Madoff
firm, arguing that over the course of
time those investors had withdrawn more
funds than had been invested, resulting
in a negative "net equity", and
therefore, not eligible for SIPC
protection.
Inasmuch as SIPC does not insure the
underlying value of the financial asset
it protects, investors bear the risk of
the market. In addition, investors also
bear any losses of account value that
exceed the current amount of SIPC
protection, namely $500,000 for
securities. For example, if an investor
buys 100 shares of XYZ company from a
brokerage firm and the firm declares
bankruptcy or merges with another, the
100 shares of XYZ still belong to the
investor and should be recoverable.
However, if the value of XYZ declines,
SIPC does not insure the difference. In
other words, the $500,000 limit is to
protect against broker malfeasance, not
poor investment decisions and changes in
the market value of securities. In
addition, SIPC may protect investors
against unauthorized trades in their
account, while the failure to execute a
trade is not covered. Again, this only
pertains to an insolvent broker or
dealer.
Under rules of the regulatory SRO
governing brokers and dealers—the
Financial Industry Regulatory Authority,
the investors' and the brokerage firms'
assets must be segregated; they may not
be commingled. It could be a civil
and/or criminal violation if an
investor's assets were inappropriately
commingled. If the firm files for
bankruptcy, provided the assets have
been appropriately segregated, the
investor's assets should be recoverable,
beyond SIPC's current protection limit
of $500,000, of the net equity, per
account and $250,000 for cash claims.
However, as noted above, not all asset
types are covered by SIPC, such as
annuities. Investors should check
applicable rules at www.sec.gov and
www.sipc.org, before investing. They
should also discuss SIPC coverage and
other safeguards which exist with
respect to their investments, with their
broker.
There may be ways to help protect
assets, for example, confirm that your
broker is a member of SIPC by visiting
www.sipc.org, looking for the SIPC link
on your broker's website, or looking for
the SIPC logo on your customer account
statement; invest only with reputable
firms; open multiple accounts with the
same firm; or, if possible, limit the
amount invested with each firm to the
SIPC covered limit.
See also 
Financial Industry Regulatory Authority
Municipal Securities Rulemaking Board
Portfolio insurance
Recovery of funds from the Madoff
investment scandal
References 
Further reading 
"Madoff Trustee, SEC Should be Probed
-US Reps". Reuters. June 3, 2011. 
"Madoff Trustee's Actions to Be Probed
by GAO, Representative Garrett Says".
Bloomberg Business. July 27, 2011. 
Letter to Gene L. Dodaro Comptroller
General of the United States Government
Accountability Office from Congress
requesting probe
Miscellaneous Congressional testimony
and other information regarding Madoff
External links 
Official website
Network for Investor Action and
Protection
Madoff Coalition For Investor Protection
Stanford Victims Coalition
Madoff victims support and advocacy
group
