If you’ve read this site for any period of time, you’re most likely familiar with FDIC insurance, which protects your deposits in the event of a bank failure. But what if when a brokerage fails? What happens to your investments? The good news is that you’re covered — to a point — by the SIPC.

What is the SIPC?

The Securities Investor Protector Corporation (SIPC) is a non-profit, non-government, membership corporation that is funded by its members. The role of the SIPC is to return funds and/or securities to investors if the broker hold those assets fails. The SIPC also provides protection against unauthorized trading in a customer’s account.

What does the SIPC cover?

In general terms, the SIPC covers notes, stocks, bonds, mutual funds, and other registered securities. It’s important to keep in mind that the SIPC does not protect investors against market risk. Thus, if you make a bad investment decision and lose a ton of money, you’re on your own.

SIPC coverage is limited to $500k per customer, including up to $100k in cash. Note, however, that investor assets cannot legally be co-mingled with brokerage assets. Thus, as long as no laws were broken, all of your assets should be recoverable. In other words, the $500k limit really only applies in the worst case scenario of illegal co-mingling of assets.

How quickly does the SIPC act?

Most investors receive their investments back within 1-3 months after their broker fails. It is important to note here that the SIPC covers your investments themselves, not their value per se. In other words, if you owned 100 shares of stock that were worth $50/share when your broker failed, but which fell to $30/share by the time the SIPC acted, you will get your 100 shares back at current market value.

How can I protect myself?

The first step in protecting yourself is to be sure that your broker is a member of the SIPC. Look for “Member SIPC” or similar language on their signs, ads, etc. Note that all of the entries on my list of the best online brokers are SIPC members, as are most other “mainstream” brokers (i.e., those that you’ve heard of). When in doubt, check the SIPC database.

It’s also important to file your claims in a timely manner. There are a couple of deadlines to be aware of. First, the court-appointed trustee will send out a notice and claim forms with a 30-60 day deadline filing your claim. If you miss that date, but file within six months, your claim may be delayed and/or reduced. After six months, no claims can be filed.

Finally, be sure to keep good records. While the SIPC will take over the broker’s records, it’s possible that there will be errors. Keep track of all transaction confirmations, as well as your latest monthly or quarterly statement. If there’s an error and you can’t substantiate it, the SIPC and/or the new trustee will assume that the broker’s records are correct.