SIPC Coverage Limitations
When a brokerage firm is a member of SIPC, it means that the firm’s customers’ assets are protected against the firm going bankrupt. If the firm fails, the customers get back all securities that are registered in their name and those securities that are in the process of being registered. The firm’s customer assets are then divided among customers in proportion to the size of their remaining claims.
If these funds are not sufficient to satisfy the claims, SIPC will supplement up to $500,000 per customer, with a maximum of up to $250,000 cash. SIPC can also borrow up to $1 billion from the SEC if necessary.
SIPC covers a maximum of $500,000 per “separate customer” at a dealer or clearing firm, including up to $250,000 in cash. Total coverage can be higher for multiple accounts owned by the same person if the accounts are considered to be held by separate customers. There are five categories of separate customers defined by the SIPC. These categories include (1) individual accounts; (2) joint accounts; (3) accounts held by executors, administrators, and guardians/custodians/conservators (such as UGMA accounts); (4) accounts held by corporations, partnerships, or unincorporated associations; and (5) trust accounts.
If a customer has both a cash and margin account, the accounts are combined for coverage purposes.
Example: John has three accounts at the same firm: an individual account, a joint account with his wife, and a Uniform Gifts to Minors (UGMA) account for his daughter. Each of these accounts would be considered a separate account by SIPC, resulting in a maximum coverage of $1,500,000 for the three accounts. In contrast, if John has two individual accounts in which one is a cash account and the other is a margin account, his maximum coverage