What is the difference between the FDIC and the SIPC coverage?

Answer 1

Francis, like millions of other brokerage customers, thought SIPC coverage was the securities industry's version of Federal Deposit Insurance Corporation coverage on a bank account. It's not.

FDIC coverage ensures you get whatever was in your deposit account, up to $100,000 for non-retirement accounts and $250,000 for retirement accounts, if your bank fails. The U.S. government backs FDIC coverage.

SIPC is not insurance, and the government does not back it.

Congress created the SIPC, but its members, the brokerage companies, fund it. Customer accounts are covered for up to $500,000 in securities and $100,000 in cash.

But, SIPC only gets involved if a brokerage firm becomes insolvent. If your broker is stealing from your account but the firm is up and running, SIPC coverage doesn't come into play. And, it only covers losses due to theft or proven unauthorized trading. Losses due to fraud are not covered.

"Most people think SIPC is like FDIC. It's anything but," says William Thornton, an attorney with Stevens & Lee in Reading, Pa. "It only provides coverage in the event monies or securities disappear. SIPC generally requires some documentation to show a securities account was maintained, but in a fraud operation there may not have been adequate documentation developed or maintained."

Mark Maddox, former Indiana securities commissioner and now an Indianapolis-based attorney representing some of Stratton Oakmont's former customers, including Alfred Francis, says seeing the SIPC logo plastered on your broker's Web site or paperwork is cold comfort.

"People are shocked when they find out how weak the coverage is, and in the few instances when SIPC does cover, how difficult SIPC makes it to recover. They act like a run-of-the-mill insurance company. They act like it's their money and they don't want to give it out," Maddox says.

In its defense, SIPC isn't meant to bail out people when they make bad investment decisions or get snowed by someone pushing the latest hot stock. Hand over money to a broker who cold calls you, you'll probably lose your wallet.

In fact, SIPC's mission, as set forth in the statute that governs it, is very narrow.

"We protect the custodial function that brokers perform," says SIPC general counsel Stephen Harbeck. "We never guarantee the underlying value of the portfolio. The risk of loss never leaves the customer just as the rewards never leave the customer."

But critics say SIPC takes its narrowly defined mission to an extreme.

One complaint is that in instances of unauthorized trading, SIPC reimburses people for the value of the account on the day bankruptcy was declared instead of at the time of the unauthorized trade.

"You have these firms that manipulate the price of some stocks, and they're the only ones out there making a market in that stock," Maddox says. "When they go out of business there's nobody left to support the stock, so it goes down to zero or pennies on the dollar.

"SIPC says they have to give the value of the stock on the day the firm failed. We say the amount covered should be the value on the day they were sold. We've persuaded a bankruptcy court that is the proper measure. The issue is on appeal, and we expect a decision in two or three months."

Another complaint is that SIPC sometimes reimburses customers with worthless stock instead of cash.

Harbeck explains it this way.

"Pretend I'm the broker. I urge you to buy 1000 shares at $1 each of Fly Out the Window Inc., a company that makes a pill that you take once, and it allows unassisted human flight for the rest of your life.

"If my brokerage firm fails, it's SIPC's job to get you 1,000 shares of Fly Out the Window Inc., even if it's just worth one penny now -- not the $1 you paid. If there's any truth to the claim, the price may go up -- but it's SIPC's job to get you 1,000 shares.

"We don't protect. Congress tells us to return shares or claims for shares."

The General Accounting Office recently reviewed SIPC's policies, in part because "the large number of claims denied in several recent SIPC liquidation proceedings has raised concerns that certain SIPC policies and practices may unduly limit the actual protection afforded customers."

The GAO criticized the Securities and Exchange Commission, which oversees SIPC, and said it needs to better monitor SIPC liquidation proceedings. The SEC has set up a program to do that, but whether that means there will be any changes beneficial to consumers has yet to be seen.

The GAO criticized SIPC for doing a poor job of explaining to investors what SIPC covers.

For it's part, SIPC has reworked its Web site to explain, in plain English, what SIPC covers and what the procedures are for filing a claim.

It's all happening too late for Francis, who says he's sticking with mutual funds from now on.

"I have no feeling of safety with stocks and stockbrokers. I will not deal with stockbrokers anymore."

Although SIPC coverage applies to all its member firms, the firms that become insolvent are usually the small ones -- mom and pop or even small regional dealers that usually have to affiliate with a large brokerage firm to do their trading for them.

Attorney Mark Maddox has tips for anyone who invests in the stock market.

Never deal with anyone who cold calls you.


Never respond to an unsolicited e-mail.


Deal with a financial adviser or registered representative who has a good reputation in the community in which they practice.


Check the financial adviser's public record by calling your state securities commissioner's office. Ask for the broker's compliance history. If there are two or more complaints, don't do business with that adviser.


Pay attention to the relationship once it's started, and make sure it proceeds the way you expect it to.

Answer 2

Sipc Vs Fdic

Answer 3

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RE:
What is the difference between the FDIC and the SIPC coverage?

Answer 4

FDIC insures your bank deposits for up to 100k or more for retirement accounts. SIPC is an insurance that provides brokerage customers up to $500,000 coverage for cash and securities held by the firm (although coverage of cash is limited to $100,000).

Answer 5

SIPC is the securities investors protection plan and only replaces stocks and securities from $500,000 to $100,000 in cash if the subsidiary fails. Most mutual funds are backed by SIPC and are not FDIC backed.

Answer 6

FDIC is for banks

SIPC is for brokerage accounts, stocks, bonds, mutual funds etc. Its insurance against your broker going insolvent, not the securities in your account. So that the account itself is preserved, up to 500 thousand dollars, including 100 thousand in cash.

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Answer 8

**** covers stocks, bonds, mutual funds, and other types of securities. FDIC covers money held at a bank.