FDIC and SIPC

 

In the world of financial abbreviations it’s easy to get confused on what’s what. Chances are you have heard the terms FDIC and SIPC many times before. But are you aware of what these two forms of protection do for you?

FDIC Defined

Created by Congress in 1933, The Federal Deposit Insurance Corporation (FDIC) is an independent agency whose mission is to maintain stability and public confidence in the United States’ financial system. The FDIC’s major programs revolve around depositor insurance, the supervision of financial institutions, and receivership management (the liquidation and disposition of claims to creditors when an institution fails).

FDIC insurance provides depositors at banks and savings associations protection from loss in the event of the financial institution failing or “going under.” As of July 2010 FDIC insurance is $250,000 per depositor. Please note that protection is only provided if the bank is a member firm. So, be sure to ask your financial institution if they are FDIC insured.

SIPC Defined

Also created by Congress, the Securities Investor Protection Corporation (SIPC) was formed to protect clients of brokerage firms that are forced into bankruptcy. In practice, the SIPC will work to recover assets on behalf of the investor or step in as trustee for the insolvent institution.

SIPC provides up to $500,000 insurance coverage for cash and securities held by the firm; of that amount there is a $250,000 limit of coverage on cash. SIPC protection does not protect investors against investment losses. It only protects investors against the insolvency of a broker/dealer or custodian.

Some custodians offer additional protection above and beyond SIPC. Charles Schwab for example, the custodian we use, provides additional brokerage insurance through third-party underwriters. Their website states, “Schwab’s coverage with Lloyd’s of London and other London insurers, combined with SIPC coverage, provides protection of securities and cash up to an aggregate of $600 million, and is limited to a combined return to any customer from a Trustee, SIPC, and London insurers of $150 million, including cash of up to $1,150,000. This additional protection becomes available in the event that SIPC limits are exhausted.”

Conclusion

If you have funds on deposit with a bank or savings institution, you are likely covered by FDIC insurance. If you have assets invested with a broker/dealer or custodian, then you are likely protected via SIPC. Make sure you are aware of how your assets are protected at any given institution and the potential limitations of such coverage.

 

Sources:

https://www.fdic.gov/about/strategic/strategic/insurance.html

http://www.schwab.com/public/schwab/nn/sipc_account_protection.html