01 Feb What protections do my assets get with SIPC coverage?

Q. My retirement funds are with two large, reputable brokerage houses (R.W. Baird and TIAA-CREF). Both are members of SIPC. In the unlikely event that either goes out of business, what are my protections?
— Investor

A. You’re wise to consider whether your retirement funds are safe.

Here’s what you should know.

First, and probably most importantly, all broker-dealers are legally required to segregate fully-paid customer securities, such as stocks, bonds and mutual funds, said Howard Milove, a wealth advisor with Access Wealth in East Hanover.

Therefore, in the unlikely event that a brokerage firm goes out of business, these segregated assets are not available to general creditors or their claims, he said.

“Typically, the regulators would facilitate a transfer of these segregated assets to another brokerage firm, and in many cases, SIPC insurance is not needed,” he said.

So when is SIPC insurance needed?

After segregated assets are returned to customers, there is a possibility that customer assets are unaccounted for because of fraud, misappropriation or record-keeping errors, Milove said.

This is when the SIPC insurance would apply.

SIPC protects customers against misappropriation of their stocks, bonds, Treasury securities, Certificates of Deposit, mutual funds, money market mutual funds and certain other investments as `securities,’ held for them by the broker, up to $500,000 per customer, he said.

“The $500,000 limit includes a maximum of $250,000 in claims for cash,” he said. “SIPC protects cash in a customer’s brokerage firm account resulting from the sale of a customer’s securities or held in a customer’s account for the purchase of securities.”

SIPC does not protect cash held in connection with a commodities trade or a currency trade, he said.

Importantly, SIPC does not protect investments from market loss because market losses are a normal part of the ups and downs of investing, Milove said. It doesn’t protect investments from promises of investment performance, commodity future contracts — except under certain conditions — foreign exchange trades, fixed annuity contracts or investment contracts not registered with the U.S. Securities and Exchange Commission, he said

So, what happens to an investor with multiple accounts?

“In this case, protection is determined by `separate capacity,’” he said. “Each account, held by a customer in a separate capacity, is protected up to $500,000 for securities and cash — including a $250,000 limit for cash only.”

Examples of separate capacities include:
· individual account;
· joint account;
· an account for a corporation;
· an account for a trust created under state law;
· an individual retirement account;
· a Roth individual retirement account;
· an account held by an executor for an estate and
· an account held by a guardian for a ward or minor.

Accounts held in the same capacity at the same brokerage firm are combined for purposes of the SIPC protection limits, Milove said.

“Some brokerage firms like Schwab and Pershing also have excess SIPC coverage to protect their customers,” he said. “The `excess’ SIPC coverage would become available once SIPC limits are exceeded.”

Historically, Milove said, 99% of assets have been returned to customers in failures occurring over the past 50 years due to the protection offered by the SIPC.

“So in the unlikely — but possible — event that your brokerage firm fails, the segregation of assets along with SIPC insurance will keep you well protected,” Milove said.

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This story was originally published in February 2024.

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