SIPC: What It Covers and Coverage Limits

Monday’s post about mutual fund safety brought up a few reader questions regarding SIPC coverage — both general questions about what it covers and questions about how the limits apply when you have multiple accounts with one brokerage.

What Does the SIPC Do?

When a brokerage firm fails, the Securities Investor Protection Corporation (SIPC) steps in to make sure that all the securities that the brokerage firm purportedly held are in fact present. If customer assets are missing (e.g., the brokerage firm reported that a customer owned 500 shares of XYZ, but the brokerage firm did not actually have the shares), the SIPC takes action to restore customer assets, up to a limit.

To be clear: SIPC does not protect investors against loss due to a decline in the value of their investments. Rather, SIPC protects investors against their securities being stolen by a broker or lost when a brokerage firm fails.

Also, as mentioned in Monday’s post, when it comes to mutual funds, SIPC coverage does not apply when you hold the shares directly at the fund company. It only applies if you hold shares of a mutual fund at an SIPC-member brokerage firm. For example:

1. You buy 100 shares of Vanguard Total Stock Market Index Fund in a Vanguard mutual fund account. (SIPC coverage does not apply.)
2. You buy 100 shares of Vanguard Total Stock Market Index Fund in a brokerage account at E*Trade. (SIPC coverage does apply — it assures you that you do actually have 100 shares of the fund.)

Please note, however, that SIPC coverage doesn’t make option #2 safer than option #1. It simply makes it as safe as option #1 by removing the risk of funny business on the part of E*Trade.

SIPC Coverage Limits

SIPC coverage, however, has a limit. It’s capped at $500,000 per customer, with an exception of cash holdings, for which the limit is $250,000.

But many investors with portfolios north of $500,000 still don’t have to worry, because, as stated in the SIPC Series 100 Rules, “Accounts held by a customer in different capacities, as specified by these rules, will be deemed to be accounts of ‘separate’ customers.” A quick phone call to SIPC confirmed that this means there would be $500,000 of coverage for each of the following:

• Your taxable brokerage account,
• Your traditional IRA,
• Your Roth IRA,
• Your spouse’s taxable brokerage account,
• Your spouse’s traditional IRA,
• Your spouse’s Roth IRA,
• A taxable brokerage account that you and your spouse own jointly, and
• An account set up for your trust.

In other words, in some cases, a family can have SIPC protection of a few million dollars without having to hold assets at a second brokerage firm.

Note, however, that having two different accounts of the same type wouldn’t increase the coverage limit. For example, if a given brokerage firm let you have two Roth IRAs with them, you would not have $500,000 of coverage for each. The $500,000 limit would be for the two accounts combined, because both accounts are owned in the same capacity.