All broker dealers are required to maintain a certain level of net capital in order to ensure that they are financially solvent. A broker dealer's capital requirement is contingent upon the type of business that the broker dealer conducts. The larger and more complex the firm's business, the greater the firm's net capital requirement. If a firm falls below its net capital requirement, it is deemed to be insolvent, and SIPC will petition in court to have a trustee appointed to liquidate the firm and protect the customers. The trustee must be a disinterested party. Once the trustee is appointed, the firm may not conduct business or try to conceal any assets.


SIPC protects customers of a brokerage firm in much the same way that the FDIC protects customers of banks. SIPC covers customer losses that result from broker dealer failure, not for market losses. SIPC covers customers for up to $500,000 per separate customer. Of the $500,000, up to $250,000 may be in cash. Most broker dealers carry additional private insurance to cover larger accounts, but SIPC is the industry-funded insurance and is required by all broker dealers. The following are examples of separate customers:


Securities Market Value


SIPC Coverage

Mr. Jones




Mr. & Mrs. Jones




Mrs. Jones




All of the accounts shown would be considered separate customers, and SIPC would cover the entire value of all of the accounts. If an account has in excess of $250,000 in cash, the individual would not be covered for any amount exceeding $250,000 in cash and would become a general creditor for the rest. SIPC does not consider a margin account and cash account as separate customers and the customer would be covered for the maximum of $500,000. SIPC does not offer coverage for commodities contracts, and all member firms must display the SIPC sign in the lobby of the firm.


All SIPC members are required to obtain a fidelity bond to protect customers in the event of employee dishonesty. Some things that a fidelity bond will insure against are check forgery and fraudulent trading. The minimum amount of the fidelity bond is $25,000; however, large firms are often required to carry a higher amount.

< Prev   CONTENTS   Next >