Bankruptcy risk exists in domestic and foreign brokerage houses based in the USA. So what do we do if this risk materializes? For example, what happens if Interactive Brokers goes bankrupt? Are our assets safe? These are natural and legitimate questions. I get similar questions from my readers from time to time. I decided to investigate this issue a little more. Let’s start our review by stating that your assets in foreign brokerage houses are secured up to a specific limit.
Securities Investor Protection Corporation (SIPC)
The Securities Investor Protection Corporation (SIPC), based on the Securities Investor Protection Act (SIPA), is a non-profit company operating since 1970 to protect investors. SIPC is not an institution or organization affiliated with the American government. There is no anti-fraud duty. All brokerage houses subject to US law must be members of this company. It compensates its clients’ assets when a brokerage firm member of this company closes, goes bankrupt, or when clients’ assets are lost. In other words, in the event of bankruptcy, the firm’s assets are quickly liquidated by the trustee appointed by the SIPC and the court.
Unfortunately, SIPC’s obligation is not unlimited. There is a limit of $500,000 for assets in your account and $250,000 for cash. The Investor Compensation Center fulfills a similar function in Turkey. Accordingly, when a brokerage house operating in Turkey goes bankrupt, The Investor Compensation Center will cover your loss up to 237,643 TL for 2021. Let’s point out that the Central Securities Depository stores your securities not held in the brokerage house in Turkey. Therefore, the assurance given by SIPC for the risk of bankruptcy is much greater. Of course, the situation in your country may be different.
How does SIPC protection work?
When a SIPC member company goes bankrupt, the trustee collects the assets and cash of the bankrupt company in the Customer Property Fund. Suppose the assets accumulated in the fund do not cover all customers’ net assets. In that case, the assets on hand are distributed proportionately to each customer’s net worth. SIPC closes the gap to a limit of $500,000 in assets and $250,000 in cash for each client. Net amounts are calculated by subtracting the liabilities from the customer’s assets. If your account type is a margin account, you must pay off your loan debt within the time determined by the trustee to compensate for your assets.
Does SIPC protection cover all assets?
Unfortunately no. Assets covered by the definition of securities in SIPC are protected. For example, gold and silver coins, some options, and futures contracts are not compensated under SIPC. Therefore, SIPC compensates on an asset basis.
If I have more than one account
In case accounts are in the same company
Suppose you have more than one investment account in a bankrupt company. Then the scope of protection is determined according to the ‘separate capacity’ rule. Accordingly, if you have two separate accounts in your name, the degree of protection is valid after the two accounts are combined. So it’s not $500,000 separately. But let’s say you have your account and a joint account with your spouse. In this case, SIPC does not merge the accounts. There is a $500,000 protection limit for both accounts separately.
If in a different company
If your investment accounts are with different companies, SIPC protects each one.
Are non-US citizens protected?
Yes. Whether a US resident or a US citizen, your accounts are under SIPC protection for bankruptcy risk.
What if someone hacks my account or stoles my assets?
Suppose your account has been compromised or the assets in your account stolen. In that case, you must first contact your brokerage firm, the US Securities and Exchange Commission, the Financial Industry Regulatory Authority, or law enforcement. As I mentioned above, SIPC has no duty to fight fraud. SIPC compensates based on your situation.
Liquidation process
When a SIPC member brokerage firm goes bankrupt, the institution applies to the relevant court for liquidation. If the court deems it appropriate, the process begins. The trustee carrying out the liquidation may transfer the customer accounts to another brokerage firm. This process is called ‘bulk transfer.’ In such a case, it is possible to access your account within a few days or weeks. Even if this transfer occurs, it would be good to apply to the trustee to protect your property rights. If not, you must apply. Suppose the court approves the liquidation process. Then the trustee sends a claim form to anyone with an account with the company in the last 12 months. If you have not received this form, you can download it from the SIPC website. It is also possible to fill out the form electronically.
The bankruptcy court can set a time limit for customers to claim their claims during the liquidation process. This limit is usually between 30 and 60 days from the start of the legal process. The deadline in SIPC for the right of claim application is six months. According to this law, if you miss the deadline, you will not be able to benefit from SIPC protection, except in infrequent circumstances.
In conclusion
SIPC protects the investor against bankruptcy risk up to a specific limit. So our property rights are protected even if US-based brokerages like Interactive Brokers and TD Ameritrade go bankrupt. However, we must know our rights and follow the legal process. Of course, this effort is also valid in case of bankruptcy of intermediary institutions in Turkey. Meanwhile, investor protection is not limited to SIPC. Intermediary institutions may also have different insurance policies.
That’s it for today. See you in the next post.