Have you ever noticed the above symbol on your brokerage account statements or confirmations? You may have also seen nearby the phrase, "Securities in your account protected up to $500,000" and wondered, "What does this mean and when does it apply"?

SIPC stands for the Securities Investor Protection Corporation. SIPC is a non-profit membership organization whose members consist of brokerage firms, as well as individuals who are members of a national securities exchange. SIPC has a 7 member board of directors consisting of 5 presidential appointees and two governmental employees.

SIPC originated in 1970 in the aftermath of hundreds of brokerage firms going out of business due to high trading volume followed by a severe decline in stock prices. SIPC’s goal - to provide protection against loss to customers resulting from broker-dealer failure. The various exchanges and the SEC report to SIPC concerning broker-dealers who are in or approaching financial difficulty. If SIPC determines that customer protection is required, it will institute a "customer protection proceeding" - a filing in federal court requesting the judge to appoint a trustee over the firm and to begin liquidation proceedings. The SIPC staff, numbering 29, plays an active role in advising the trustee, in reviewing claims, and in auditing distributions of property.

You may be entitled to protection from SIPC if you can establish that at the time of failure, you were owed cash or securities of the brokerage firm. In 1996, six broker-dealers who were member of SIPC failed: Hanover, Sterling & Co., New York, NY; MBM Investment Corp., Houston, TX; Barrett Day Securities, Inc., New York, NY; A.R. Baron & Co., Inc., New York, NY; AmeriNational Financial Services, Inc., Santa Monica, CA; and Old Naples Securities, Inc., Naples, FL. SIPC mailed notices and claim forms to 37,693 customers of these six firms. Why only 2,200 customers responded is difficult to understand. Perhaps the vast majority of these customers had no complaint, perhaps people did not understand how to fill out the form, perhaps people rationalized that it was not worth it to become involved in the administrative process, or perhaps people were just lazy and did not timely return the form.

The Payout

It is well worth your while to get help in filling out the form and timely returning it to SIPC. Since most broker-dealers have little in the way of assets (some desks and computer equipment typically), customers who are owed money or securities at the time of a broker-dealer failure are unlikely to obtain a remedy from the failed firm. That’s where SIPC steps in. SIPC will pay customer claims up to a maximum of $500,000, including up to $100,000 on claims for cash. SIPC is not a forum for adjudication of your complaint - it simply determines what you were owed and pays you - usually within one to three months. SIPC covers losses you sustained in cash and in securities, such as notes, stocks, bonds, CDs, mutual funds and cash balances - again, losses which are attributable to the financial failure of the firm - not a decline in value due to market or other conditions.

Let’s say that you have just learned that your broker-dealer has failed, and the day before you sold $20,000 worth of securities. In the interim, you did not get the cash. Since your loss was attributable to the financial failure of the firm, your claim for $20,000 in cash would be covered by SIPC. Let’s say that at the time of failure of your firm, you have $420,000 in securities held by the firm and $100,000 in cash. SIPC would attempt to return your securities to you. If that is not possible, SIPC will attempt to purchase your securities for you on the open market. When missing securities cannot be replaced, SIPC will pay the value of the securities on the date that the customer proceeding commenced. In this scenario, all but $20,000 of the claim would be paid.

SIPC is financially strong. SIPC gets its money from assessments collected from SIPC members and from interest on its own investments. As of December, 1996, SIPC had just over $1 billion dollars in its trust fund. Earned interest on investments in 1996 totaled over $66 million. From 1970 through 1996, SIPC paid almost $174 million dollars to customers of failed broker-dealers. In the event the SIPC fund is insufficient to pay customer claims, SIPC may borrow $1 billion dollars from the SEC. It also has a $1 billion dollar revolving line of credit with various banks.

Make Sure You Are Dealing with a SIPC Member

Membership in SIPC is not voluntary; it is required if a firm is registered under the 1934 Securities Act. However, while over 7,000 broker-dealers are members of SIPC, many are not. Some broker dealers are excluded from SIPC membership due to the nature of their business - for example, if the firm’s principal place of business is outside the United States or if the firm deals exclusively in variable annuities or insurance - there is no SIPC protection. Also, beware of the situation where SIPC members use affiliated or related companies which may have names which are similar to the name of the SIPC member or which operate from the same offices or with the same employees - yet, the affiliate is not a member of SIPC.

Make sure that the entity from whom you receive your confirmations is the SIPC member. Members are required to display the above symbol on advertising. Many display the symbol on monthly statements and confirmations. If in doubt, call SIPC at 202-371-8300 and ask them. If your checks or deposits are payable to something other than a SIPC member (such as to the issuer of securities), you should take steps to ensure that your funds are properly applied.

If a SIPC member loses its registration with the SEC, the SIPC membership is automatically terminated. SIPC loses its power to protect customers of former SIPC members 180 days after the termination of the registration. Normally, the SEC will not allow a termination when it knows that the firm owes money or securities to customers. However, it sometimes happens.

Be vigilant to ensure that you receive your monthly statements on a timely basis. The failure to provide monthly statements may indicate the broker-dealer has gone out of business. If you suspect that your broker-dealer is going out of business, contact the Denver office of the SEC. You may also learn that your broker-dealer is out of business by reading a notice in the newspaper. Alternatively, you will receive a notice and a claim form in the mail if your brokerage firm has been placed in liquidation.

Tracy Pride Stoneman is an attorney specializing in investment related complaints. Email her at Tracy@InvestorFraud.com. Preparation of this article was assisted by Douglas J. Schulz, a registered investment advisor and former stockbroker in Colorado Springs.