When a broker fails, SIPC's limit is $500,000, including $250,000 cash

When a US broker fails and the stocks or cash in your account don't add up, the body that steps in is SIPC, the Securities Investor Protection Corporation. The accounts you hold in the same capacity (all of them individual accounts, for example) are combined and protected up to $500,000, of which cash counts for no more than $250,000, provided the broker is a SIPC member.

Money you lose because a stock fell is outside that protection. Whether a broker is on the member list can be looked up on SIPC's website, and if it ever comes to a liquidation, you should still file a claim with the trustee even when your account has been transferred to another broker.

SIPC works to restore the securities and cash missing from your account when the liquidation begins

SIPC only protects the custody function of the broker-dealer; its own What SIPC Protects page draws the boundary there. A broker-dealer holds customers' cash and securities for safekeeping and must keep those assets in segregated accounts, separate from its own business accounts. After a failure, SIPC works to restore to customers the securities and cash that are in their accounts when the liquidation begins. Where shares are missing, it replaces the shares themselves when it is possible to do so, up to the limit.

The cash that counts toward the limit is cash from the sale of securities and cash kept in the account for the purchase of securities. What lands back in the account after you sell shares, the proceeds less sell-side charges such as the SEC fee, belongs to the first kind. Cash held in connection with a commodities trade is not protected.

SIPC does not cover several kinds of loss: a decline in the value of your securities; being sold worthless stocks or other securities; and losses due to a broker's bad investment advice or to a recommendation of inappropriate investments. Fluctuations in market value are not what SIPC was created to protect against, so when stocks or bonds fall for any reason it does not make up the difference. Its protection is also not the same as the protection for cash at a bank insured by the Federal Deposit Insurance Corporation (FDIC), because SIPC does not protect the value of any security.

Which assets count as securities protected by SIPC, and which don't?

The scope of the term security is set by the Securities Investor Protection Act (SIPA). Several categories besides stocks and bonds count as securities, and a few things that can sit in a brokerage account do not.

Digital or crypto assets are issued or transferred using blockchain or distributed ledger technology. Some of them may qualify as securities if they are deemed to be investment contracts, but an investment contract, digital asset or otherwise, must be registered with the SEC in order to be a security as SIPA defines the term. Digital asset securities that are unregistered investment contracts do not qualify as securities under SIPA and are not protected under it, even if held by a SIPC-member brokerage firm. SIPC does not protect any digital or crypto asset that does not qualify as a security.

Among the things SIPA's definition says the term does not include, except as the definition specifically provides earlier, are stablecoins, currency, and any commodity or related contract or futures contract. (Cash in the account is protected as cash; it does not go through the securities category.) The SEC and the Commodity Futures Trading Commission (CFTC) include Bitcoin (BTC), Ether (ETH), Solana (SOL) and XRP among their examples of digital commodities.

If you hold both stocks and crypto assets, the consequence I'd pay most attention to is this one: even at a broker that is a SIPC member, every asset in the account still has to be checked against the definitions above one by one, and membership does not stretch to the part that isn't a security.

SIPC doesn't require customers to be US citizens or residents, but the broker has to be a member

Which country you live in and whether you are a US citizen make no difference to eligibility. A non-US citizen with an account at a brokerage firm that is a member of SIPC is treated the same as a resident or citizen of the United States with an account at a SIPC member.

The requirement is on the broker's side. Any broker-dealer registered with the SEC is automatically a SIPC member, and the statute leaves only a few narrow exceptions:

• persons whose principal business, in the determination of SIPC, taking into account business of affiliated entities, is conducted outside the United States and its territories and possessions;
• persons whose business as a broker or dealer consists exclusively of the distribution of shares of registered open end investment companies or unit investment trusts, the sale of variable annuities, the business of insurance, or the business of rendering investment advisory services to one or more registered investment companies or insurance company separate accounts;
• persons who are registered as a broker or dealer pursuant to section 78o(b)(11)(A) of the Securities Exchange Act of 1934.

If you picked a broker from among the ways to buy US stocks and you live outside the United States, check which legal entity your account was opened with. The navigation on SIPC's website has a List of Members entry; search it with the broker's full name as it appears on your account-opening documents.

How is the $500,000 limit counted across several accounts at the same broker?

The limit follows what SIPC calls "separate capacity", under the rules on its Investors with Multiple Accounts page. Each separate capacity gets the full limit, and accounts held in the same capacity are combined. The examples of separate capacities given there are an individual account, a joint account, an account for a corporation, an account for a trust created under state law, an individual retirement account (IRA), a Roth individual retirement account, an account held by an executor for an estate, and an account held by a guardian for a ward or minor. Four cases show how the counting goes:

• One person with one account in their own name at a brokerage firm is protected up to $500,000.
• One person with two accounts, each in their own name, has the two combined and is protected only up to a total of $500,000.
• A married couple who each have an individual account and also share a joint account get an additional maximum of $500,000 for the joint account.
• One person with a Roth account and an IRA account at the same brokerage is protected up to $500,000 for each of the two.

Additional information on separate accounts is in SIPC's Series 100 Rules.

Within a single account, the cash is capped first; the capped cash is then added to the securities, and the total is capped:

Maximum covered = market value of securities + cash (counted up to $250,000), with the total not exceeding $500,000

Below are four individual accounts, each belonging to a different person. Each is calculated for the worst case, in which every security and all the cash in the account at the start of the liquidation is missing. Amounts are in US dollars:

The last column is not money you have lost for good. Under the claims process SIPC describes, customers whose net equity is over the SIPC limits may be eligible for an additional distribution if the trustee has customer property from the brokerage firm to share out; it is made pro rata on the basis of each net equity claim, and any part still unpaid after that becomes a general creditor claim.

Money market mutual funds are protected as securities, so their shares go in the securities column. Securities are valued at the market price on the filing date, which SIPC says is usually the date the liquidation was started.

The limit is applied only after accounts in the same capacity have been combined. One person with two individual accounts holding securities worth $350,000 and $250,000 has $600,000 combined, of which $500,000 is covered. A joint account with a spouse that holds another $400,000 in securities is counted separately, and the whole $400,000 falls inside the joint account's own limit.

How a SIPC liquidation works: the trustee, account transfers and filing a claim

A liquidation is a court proceeding. SIPC's How a Liquidation Works page says it generally starts when the court appoints a trustee for the broker-dealer. SIPC specifies who the trustee will be and the court makes the appointment; the trustee's job is to determine customer claims and to distribute securities or cash. In smaller cases SIPC may name itself as trustee.

The first move comes as soon as the liquidation is started: the trustee and staff shut the brokerage firm's offices and work to take control of its books and records. In some cases the records are in disarray, and just finding and organizing them can take weeks or even months.

The next step is finding the customers and getting forms to them. Working under SIPC's oversight, the trustee collects a name and address for every customer who had an account with the firm within the previous 12 months, and at the same time works to get the court's approval for the claim forms. Once the court approves them, the trustee publishes notice of the case, sets up a way to file a claim online, and mails the forms to those same customers. How long this takes depends on how accurate the books and records are and on the size of the case.

Where the failed firm's records are accurate, the trustee and SIPC may arrange for some or all customer accounts to be transferred to another brokerage firm. Those customers are notified promptly, and after the transfer they may keep the account at the new firm or move it to a different brokerage. Even if your account is transferred, you should still file a claim with the trustee.

Claims have a deadline. SIPC's page on how the claims process works ties it to the paperwork you receive: a claim has to be filed within the deadlines given in the notice and in the way the instructions describe, and if you miss them you may lose all or a portion of your claim. Fill in the claim form as soon as it reaches you and take the closing date from your own notice. Questions about your account also go to the trustee.

The trustee checks your claim against the brokerage firm's books and records and then sends a determination letter that says whether the claim is allowed or denied, and why. If you disagree, you have 30 days from the date of that letter to object to the court, and the objection has to be in writing; the letter itself tells you how.

One route stays out of court altogether, the Direct Payment Procedure. It applies when every customer's claim is within the limits of protection and the claims, in the aggregate, will not exceed $250,000; then there is no court proceeding and no trustee. SIPC handles the matter itself, and customers are eligible for the same protection they would have in a liquidation. The procedure starts when SIPC sends customers their claim forms and publishes notice in one or more newspapers; a claim can also be submitted to SIPC electronically. You have to submit a claim form to be eligible for protection, and you have six months from the start of the procedure to do it; by law, late claims are not eligible. SIPC then reviews the claim and sends a determination letter. Securities are valued as of the date the notice was published in the newspaper. A customer who disagrees has six months to ask a court to review the determination, and the letter explains how.

When the cash in your account isn't in US dollars