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What is SIPC insurance coverage and how does it work?

SIPC coverage insures people for up to a limit of $500,000 in cash and securities per account. SIPC protections also include up to $250,000 in cash coverage. The total amount of coverage is $500,000; thus, if you have $500,000 in securities and $250,000 in cash, that entire amount may not be covered.

However, there are circumstances in which investors are covered for more than $500,000. This happens primarily when investors have multiple accounts of different types. For instance, if you have a traditional individual retirement account (IRA) and a Roth IRA at the same brokerage, the SIPC will insure them separately. Thus, you will be insured up to $1 million between the two accounts.

Of course, SIPC insurance only comes into play under circumstances in which the SIPC must intervene. This happens when it receives a referral from regulatory agencies such as the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Agency (FINRA). If a broker-dealer fails and customers have lost securities and/or cash, the liquidation process will begin.

During the liquidation process, the SIPC asks the court to appoint a Trustee to liquidate the firm. The Trustee can either be a lawyer with relevant experience or it can be the SIPC itself for smaller cases. In very small cases, the SIPC may deal with customers directly outside of court in a direct payment procedure.