Definition
SIPC (Securities Investor Protection Corporation)
A nonprofit membership corporation, created by the Securities Investor Protection Act of 1970 (SIPA), that returns cash and securities to customers of a failed SIPC-member broker-dealer. Coverage is limited to $500,000 per customer (per separate capacity), of which a maximum of $250,000 may be for cash claims. SIPC is not a government agency, is not the FDIC, and does not protect against declines in the market value of investments.
A brokerage firm goes bankrupt while a customer holds $300,000 in stocks and $150,000 in cash awaiting reinvestment in the account. SIPC steps in to return the securities and cash, a combined $450,000 that is fully covered because it is under the $500,000 total limit and the cash portion is under the $250,000 cash sublimit. If those same stocks had simply dropped 40% in a market downturn while the firm stayed solvent, SIPC would pay nothing, because it does not insure against investment losses.
Students often believe SIPC protects them against losing money when their investments decline in value, or treat SIPC like the FDIC. SIPC only replaces cash and securities that go missing because a member broker-dealer fails financially. It is not the FDIC (which insures bank deposits), it is not a government agency, and it never reimburses ordinary market losses or losses from bad investment advice.
How is SIPC (Securities Investor Protection Corporation) tested on the exam?
- Distinguishing what SIPC covers (missing cash and securities at a failed broker-dealer) from what it does not (market-value declines, bad advice)
- Recalling the $500,000 total per-customer limit and the $250,000 cash sublimit
- Calculating covered amounts in a mixed cash-and-securities scenario where the cash sublimit is the binding constraint
- Contrasting SIPC (broker-dealer customer protection) with the FDIC (bank deposit insurance) and clarifying that SIPC is not a government agency
- Identifying assets outside SIPC protection, such as commodity futures contracts, currency positions, and unregistered investment contracts
Regulatory limits
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Maximum SIPC coverage per customer (per separate capacity) | $500,000 total | Covers cash and securities combined; each separate capacity (individual, joint, IRA) is a separate customer |
| Maximum cash claim sublimit | $250,000 | The cash portion of the $500,000 total is capped at $250,000 |
Remember "5-and-a-quarter": SIPC covers up to $500,000 total, with only $250,000 for cash. SIPC is a Safety net if your firm goes under, not Stock-price Insurance. It is not the FDIC and not a government agency: it returns missing cash and securities when a broker-dealer fails, but it never pays you back for a bad investment.
Practice questions
Test your understanding with the questions below. Pick an answer to reveal the explanation.
Marcus holds a brokerage account containing $180,000 in stocks and $40,000 in cash at a SIPC-member firm. The firm files for bankruptcy, and Marcus discovers his securities and cash are missing from the account. Which of the following best describes what SIPC will do?
B is correct. SIPC returns cash and securities to customers of a failed member broker-dealer. Marcus's $220,000 (securities plus cash) is well under the $500,000 total per-customer limit, and his $40,000 in cash is under the $250,000 cash sublimit, so the full amount is covered.
A is incorrect because SIPC coverage does not require proof of fraud; it responds when a member firm fails financially and customer assets are missing. C is incorrect because SIPC protects both cash and securities, not cash alone. D is incorrect because SIPC never covers market-value declines; it replaces missing assets when the firm fails, independent of how those assets performed.
The Series 65 and SIE exams test whether candidates understand that SIPC responds to the financial failure of a broker-dealer, not to market losses or fraud proof. Recognizing the trigger for SIPC coverage is essential for explaining customer protection accurately to clients.
What is the maximum SIPC coverage per customer, and what is the sublimit that applies to cash claims?
B is correct. SIPC coverage is limited to $500,000 per customer (per separate capacity), of which a maximum of $250,000 may be for cash claims. A useful memory hook is "5-and-a-quarter": $500,000 total and $250,000 cash.
A understates both figures and mirrors the FDIC per-depositor amount ($250,000), a common confusion. C is incorrect because the cash claim is specifically capped at $250,000, not left uncapped. D overstates both limits.
The $500,000 total and $250,000 cash sublimit are frequently tested numbers on the SIE and Series 65 exams. Memorizing them precisely lets candidates answer both direct-recall and calculation questions quickly and avoid confusing SIPC limits with FDIC deposit insurance.
A customer has $150,000 in securities and $350,000 in cash held at a broker-dealer that fails and cannot return the assets. How much of the account is protected by SIPC?
B is correct. SIPC covers the full $150,000 in securities plus cash only up to the $250,000 cash sublimit, for a total of $400,000. The remaining $100,000 of cash exceeds the sublimit and is not protected. The $400,000 total is under the $500,000 overall cap, so the cash sublimit is the binding constraint.
A ($250,000) counts only the cash sublimit and ignores the covered securities. C ($500,000) wrongly assumes the full overall cap applies to cash, ignoring the $250,000 cash sublimit. D ($150,000) counts only the securities and ignores the covered cash entirely.
Mixed cash-and-securities scenarios test whether candidates apply the cash sublimit correctly rather than just the overall cap. The exam often sets cash above $250,000 so that the sublimit, not the $500,000 total, determines the answer.
All of the following statements about SIPC are accurate EXCEPT
B is correct (the EXCEPT answer). SIPC does NOT reimburse market-value declines. It replaces cash and securities that are missing because a member broker-dealer fails financially; ordinary investment losses are never covered.
A is accurate: SIPC was established by the Securities Investor Protection Act of 1970 (SIPA). C is accurate: SIPC is a nonprofit membership corporation funded by its member broker-dealers, not a government agency and not the FDIC. D is accurate: SIPC returns cash and securities up to $500,000 per customer (with a $250,000 cash sublimit) when a member firm fails.
The most heavily tested misconception about SIPC is that it insures against investment losses. The exam repeatedly probes whether candidates know SIPC protects against a failed firm, not against a falling market, so they can set correct client expectations.
A SIPC-member broker-dealer becomes insolvent. Which of the following would SIPC protect for an affected customer?
1. Missing shares of stock and bonds held in the customer's brokerage account
2. A commodity futures contract held in the account
3. Cash left in the account awaiting reinvestment, up to the $250,000 sublimit
4. A $30,000 loss because one of the customer's stocks dropped in market value
A is correct. Statements 1 and 3 describe assets SIPC protects.
Statement 1 is TRUE: SIPC returns missing securities such as stocks and bonds held at the failed firm. Statement 3 is TRUE: cash awaiting reinvestment is covered up to the $250,000 cash sublimit within the $500,000 total. Statement 2 is FALSE: commodity futures contracts are generally outside SIPC protection. Statement 4 is FALSE: SIPC never covers a loss caused by a decline in market value, only assets missing because the firm failed.
Roman-numeral questions test whether candidates can separate covered items (missing cash and securities) from excluded ones (futures, market losses) in a single scenario. This distinction is a recurring SIE and Series 65 theme in customer-protection questions.
What concepts relate to SIPC (Securities Investor Protection Corporation)?
This term is part of this cluster :
Where does SIPC (Securities Investor Protection Corporation) appear on the Series 65 exam?
This term is tested in the following Series 65 exam topics: