SIPC Protection and Custodial Insurance

The SIPC (Securities Investor Protection Corporation, a U.S. federally mandated, non-profit member corporation) safeguards client assets in the event of broker-dealer insolvency or liquidation under the Securities Investor Protection Act of 1970 (15 U.S.C. §78aaa et seq.).

• Coverage Scope: SIPC covers up to $500,000 per customer, which includes a maximum of $250,000 for cash claims. This coverage only addresses the failure of the broker-dealer to return custody of your assets; it does not protect against market losses or fraud in the underlying issuance of securities.
• Asset Separation: Under the SEC’s Customer Protection Rule (Rule 15c3-3, 17 CFR §240.15c3-3), broker-dealers must segregate customer securities from their proprietary accounts. This ensures that in a liquidation, customer assets are insulated from the broker’s general creditors.
• The $500,000 is per customer per separate legal capacity, not per person per firm — the direct analogue to FDIC ownership categories (section “FDIC Insurance Optimization”). An individual taxable account, a joint account, a traditional IRA, and a Roth IRA at the same broker are four capacities, each separately covered. A married couple can therefore hold well over $2 million of SIPC protection at a single firm without opening a second relationship. Two accounts in the same capacity — two individual taxable accounts in your name — are combined and share one limit.
• Commodity futures and options on them, foreign exchange, fixed annuities, unregistered investment contracts and most private placements, and any decline in market value. SIPC restores missing securities, never insuring dollar value. This matters directly for a self-directed IRA holding private placements (section “Self-Directed IRA”), where there is no SIPC backstop at all.
• For multi-million dollar portfolios, the $500,000 baseline is topped up by private excess-of-SIPC policies most major custodians carry, typically underwritten by Lloyd’s syndicates, extending into the tens or hundreds of millions per client. Mind the fine print: these are commercial insurance contracts with an aggregate firm-wide cap that could be exhausted by other claimants ahead of you, and they cover custody failure only, never market losses. Splitting a portfolio across a dozen brokers to chase the statutory limit is unnecessary complexity; verify your custodian’s excess limits, the aggregate cap, and the insurer’s rating instead.
• To preserve SIPC eligibility in a dispute (such as an incorrect trade confirmation), you must submit your complaint to the broker-dealer in writing immediately. Verbal complaints do not satisfy the statutory notice requirements.