Regulator SIPC


SIPC –  Security Investor Protection Corporation – is a non-profit self-regulating organization, which is financed by its members. It was established in 1970 after the crisis in 1968-1970, when the trust of private investors to bankrupt brokers was undermined

Today, there are more than 40 thousand companies participate in it. The capitalization of the fund is estimated 2.5 billion dollars.

In contrast to NFA, SEC, CFTC, this organization does not belong to government regulators, but works closely with the state SEC, performing its major task – the protection of clients of broker and dealer companies licensed by the SEC. The essence of protection is to minimize potential loss of customers from the illegal actions of brokers. However, if the financial losses are associated with the fall in the value of securities it is already the risk for the customer.

The decrease of the value of the securities is possible due to changes in market conditions, as well as due to contractual insider transactions. The interesting fact is that SIPC protects investors from broker fraud, and SEC monitors the insider transactions. However, the mechanism of protection of the traders due to losses because of an artificial securities price fall from SIPC side is unclear. Except that the SEC will impose on a broker a fine, and SIPC will take part in the consideration of the claim by the investor.

The powers of the SIPC:

  • With the onset of bankruptcy, SIPC has a right to appeal to the Federal court to appoint a trustee, who will liquidate the legal entity, and also for protection of the investors. In case of small brokers, SIPC may defend the traders interests directly;

SIPC refers to the very strong regulators, but the wording regarding the powers and lobbying for the rights of investors may be a little alerted. In our understanding, such a serious structure should not “be entitled”, and “to be obligated” to lobby the interests of their own representatives in the event of liquidation of broker in favor of the investors.

  • SIPC contributes to the transfer of a portion of customer accounts (or transfer full portfolio) from one broker company to another, provided that both brokers are the members of the organization. Customers thus leave the right to remain in the proposed brokerage company or to change the broker at its discretion;

And this function is very useful. Indeed, in case of financial problems at the broker closure of accounts from potential bankruptcy and their opening at a new broker – it is a long process, while profitable trade is urgent. SIPC has developed the technological and organizational structure that allows it to transfer the client accounts with a minimum time interval, preserving the client’s trading activity.

  • SIPC defends the interests of the investors even when the investor did not conduct financial reporting in accordance with the requirements of the license. Such a violation makes it difficult to transfer customer accounts to another broker (because the segregated account is a single account for all customers, which has its own accounting analyst. The analysis determines the individual identity of the client money and also the tool traded at their expense, because some derivatives are not the subject for insurance). Within the regulation of such situations, customers receive all securities registered in their name, and money and other shares are divided on a proportional basis. Only after that, it is possible to submit investor claims within 500 thousand dollars (including 100 thousand dollars for funds).

It is difficult to say that this situation of solving the problem of bankruptcy of the broker will delight the investors, but, as practice shows, it is better than nothing. Some European and Russian regulators have compensation funds, but the amount of compensation (and that is not always possible to achieve) is relatively minor. That is why such way of dispute resolution is really more attractive to investors than ongoing contributions to compensation funds, which are almost useless.

Important: You may find an information on many sites that the regulator (which is not in the full sense) in case of broker bankruptcy, will pay 500 thousand US dollars to a single investor. If in practice, every client could be guaranteed to qualify for such sum, the money would not be enough for anything. So:

  • The investor could only be qualified for complaint consideration to state bodies to such limits, but how he could get is a question;
  • SIPC does not participate in the proceedings regarding the fraudulent activities from the broker side (as we mentioned earlier, this is handled by SEC). The goal of the structure is to guarantee the stable work of the investor in future and help in solving of the issues about the compensation of the lost funds.

Conditions of legal protection of the affected broker:

  • investors, who had an account with the broker in securities and the trading activity was performed by means of them, fall under the protection;
  • funds also fall under the protection of SIPC, but partially;
  • if the trader opened several accounts with the broker, they will be considered as a single unit;
  • different approach to different accounts is only possible if the trader operated accounts for different purposes, for example, one account was for trading on his capital, the other was in charge of the money of other investors under the terms of trust management.

To qualify for the reimbursement, the investor needs to have on hand all the statements on the trading account. On average, the refund process takes about 3 months.

Official SIPC website:

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