You have probably heard of the SIPC before, and you probably know that your brokerage firm is a “member of SIPC.” But, what does that mean? And, why is it important? If you don’t know, you should read on.

SIPC stands for Securities Investor Protection Corporation. It was established in 1970 through enactment of the Securities Investor Protection Act (SIPA). The main purpose of the SIPC is to “cover[] the replacement of missing stocks and other securities up to $500,000, including $250,000 in cash claims . . . when a firm shuts down due to financial circumstances in which customer assets are missing—because of theft, conversion or unauthorized trading—or are otherwise at risk because of the firm’s failure.”[1] (Emphasis added). The SIPC does not protect investors against losses arising out of negligent investment advice or fraud.

Establishing that “conversion or unauthorized trading” has taken place can be challenging. The customer bears the burden of demonstrating to the SIPC (in a direct payment procedure) or a court-appointed trustee (in a judicially-administered liquidation proceeding) that a given trade was unauthorized. Historically, the SIPC has required “some reasonably contemporaneous written evidence that [the customer] objected to a transaction[.]” For that reason, the SEC recommends that investors “send a complaint in writing” to their brokers as soon as they “become aware of an unauthorized transaction.” [2] The SEC warns that those who “do nothing,” or who “ratify” the trade, “will have a difficult time proving that [they] did not authorize the trade.”[3]

There are tight deadlines for filing complaints in SIPC proceedings and the filing requirements can be confusing. If you receive a letter from the SIPC or a court-appointed trustee regarding a SIPC liquidation proceeding, you should consider contacting an attorney for assistance with the claim-filing process.[4] If your losses are not recoverable from the SIPC because they are the result of fraud or negligent investment advice, you may have other avenues for relief. Mika Meyers is experienced in all of these areas. Call us for a free consultation.

[1] https://www.finra.org/investors/alerts/if-brokerage-firm-closes-its-doors

[2] https://www.sec.gov/answers/sipc.htm

[3] Following the collapse of Stratton Oakmont, the notorious boiler room operation depicted in the movie Wolf of Wall Street, the SIPC denied the overwhelming majority of unauthorized trading claims filed by investors. Only those investors who could produce “contemporaneous written evidence” that they objected to a transaction were able to recover.

[4] Contributory credit for this article goes to Mary Hakken-Phillips, a JD candidate at Michigan State University College of Law who is currently enrolled as a student clinician in the MSU College of Law Investor Advocacy Clinic.