The Securities Investors Protection Act of 1970 amended the Securities Exchange Act of 1934 and authorized the creation of the Securities Investor Protection Corporation (SIPC). Sponsored by the US government, the SIPC is a non-profit, independent corporation that requires the membership of most registered brokers and dealers under the 1934 Act.
Enacted in 1970, the Securities Investors Protection Act, or SIPA, was intended to build public confidence in securities markets by covering customers for any broker-responsible losses or failures. As such, the SIPC maintains funds which are intended to protect investors against brokers who misappropriate their funds as well as pay them in the event that their broker or dealer goes bankrupt. The SIPC funds are made possible as a result of assessments paid to the SIPC by members based on the gross business they generate from the sale of securities.
The SIPC insures investors for up to $500,000 with cash claims limited to $250,000. This insurance program does not protect against losses due to market conditions. However, when a brokerage firm fails, the SIPC facilitates the transfer of accounts from the failed brokerage to a different member brokerage firm. If the transfer doesn’t go through, then the SIPC pays the investors for the market value of the lost shares or certificates for the stock, and the failed brokerage firm is liquidated.
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