By the way, Im no expert. Just read it somewhere.
I just searched it up.
Insurance Against Broker and Dealer Bankruptcy
In 1970, Congress created a new agency known as the Securities Investor Protection Corporation (SIPC). This agency's only function is to cover the losses of investors' accounts incurred by the bankruptcy of their broker or dealer.
The SIPC does not cover any kind of loss incurred as a result of market activity, fraud, or any other cause of loss other than the bankruptcy of a broker or dealer. Regulatory agencies such as the Securities And Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) deal with issues related to fraud and other losses.
The SIPC either acts as a trustee or works with the client to recover assets in the event a broker or dealer becomes insolvent. The SIPC will also oversee the recovery process and ensure that all customer claims are paid in a timely and orderly fashion, and all recovered securities are distributed on an equitable, pro-rata basis.
The SIPC will reimburse investors for up to $500,000, of which up to $250,000 can be cash. Any securities that are already registered in the certificate form in the investor's name will be returned as well.1
Example of SIPC Protection
Say an investor has $300,000 in cash and $150,000 in securities held in street name with a broker or dealer that becomes insolvent. They also deposit $450,000 worth of securities registered in their own name with the broker or dealer just before it declares bankruptcy.
The SIPC guidelines dictate that the investor will receive $250,000 of their cash and all of their securities that are held in street name, for a total of $400,000. Although the SIPC will reimburse for up to $500,000, the remaining $50,000 of cash will not be covered because it is over the $250,000 limit for cash. They will get back all of their stock certificates, provided they are still registered in their name.
When SIPC Protection May Not Apply
Not all types of securities are eligible for SIPC reimbursement. Securities that the SIPC will not reimburse for include commodities, futures, currency, fixed, and indexed annuity contracts, and limited partnerships (LP), which are covered separately by insurance carriers. In addition, any security that is not registered with the SEC will not be eligible for reimbursement.1