How does SIPC protection work?

You can have confidence that, given the very high percentage of client assets that are recovered during liquidation, SIPC protection is adequate for nearly all client accounts. Consider the following: Federal securities laws require that client assets be segregated from a firm’s own assets. The law is backed by internal and external audits, regulatory examinations, and weekly and monthly reporting requirements. Most client assets are held in book-entry form at industry depositories and not in physical possession by the firms themselves. According to the Securities Industry Association, SIPC reports that 99.7% of eligible investors’ claims have been made whole in the 306 failed securities firm cases that it has handled over the past 32 years. None of these cases required a payment using Excess SIPC. The remaining 0.3% of investors had claims in excess of the SIPC limits, but SIA understands that these claims were filed by clients of securities firms that did not carry excess account protection. SIPC funds are used to make investors whole after all client assets held at the securities firm have been recovered. SIPC provides $500,000 of net equity protection including $100,000 for claims for cash awaiting reinvestment, but that does not necessarily mean that the account will receive only up to $500,000. Rather, in a SIPC proceeding, the account will receive a pro-rata share of all client assets recovered in liquidation and then will receive up to $500,000 from SIPC to make up any difference that may still exist. To illustrate a SIPC liquidation, assume that a securities firm fails, resulting in $5 billion of client claims on assets, with a recovery rate of assets in liquidation of 90% or $4.5 billion, and assume a client account value of $5 million: - In a SIPC claim proceeding, the client would receive $4.5 million from recovered assets and $500,000 from SIPC. - The loss on a $5 million client account would be zero.