The SIPC was instituted in 1970 to protect client assets when a brokerage firm goes bankrupt. Here’s what it can do now.
MF Global, a leading derivatives broker with over $40 billion in assets, filed for bankruptcy on October 31. Headed by former Goldman Sachs CEO/Senator/Governor Jon Corzine, the company made risky investment decisions, which failed and wiped out the company’s capital. The Federal Bureau of Investigation and the Securities and Exchange Commission are investigating to determine if any actions that could be construed as criminal or civil violations took place. Part of the reason for the investigations is that over $600 million in client money is missing. The poor investment decisions that the company made were done so with the company’s capital, not customer accounts. Yet there is suspicion that in order to maintain certain trading positions, with the hopes that in time they would turn favorable for the company, MF Global used client funds as collateral or to secure the positions. If that does turn out to be the case, it would be a huge problem.
What about customer money?
With tens of billions of dollars in customer funds, the main question that arises is what happens to that money now that MF Global is bankrupt? If MF Global were a bank that had purchased insurance from the Federal Deposit Insurance Corporation, then any customer money would be protected against the collapse of the institution. But it’s not a bank and there is no investment-world equivalent of the FDIC. So does that mean clients that had their money with MF Global are out of luck? The answer is no, thanks to the Securities Investors Protection Corporation.
The SIPC
The SIPC was instituted in 1970 by an act of Congress to protect client assets when a brokerage firm goes bankrupt. This protection is critical because in its absence investors may not have access to their investments for months while the legal proceedings of a bankruptcy take place; even worse is the possibility that they would never recover their assets. SIPC insures against this possibility by advancing funds (when needed) and securing client assets from the troubled brokerage. Since its founding, SIPC has recovered nearly $110 billion in assets for 739,000 investors.
“If you have investments with a brokerage firm, then it’s very important to understand what SIPC insurance covers and what it does not cover,” indicates Erick Pereda, former director of CityAlliance Bancorp. “Many people confuse it with the FDIC, but there are important differences. It doesn’t protect you against changes in the value of your investments, and it doesn’t cover certain types of investments.”
Cash and securities like stocks and bonds are covered, but the following investments are not covered according to the SIPC.
- Commodity future contracts in most cases (there are a few exceptions)
- Currency investments
- Investment contracts like limited partnerships
- Unregistered fixed annuity contracts
Typically, when a brokerage firm goes bankrupt, a court-appointed trustee will oversee the management of customer accounts.
