How does SIPC protection work?
Federal securities laws require that client assets be segregated from a broker-dealer’s own assets. The law requires internal and external audits, regulatory examinations, and weekly and monthly reporting requirements. Most client assets are held in book-entry form at industry depositories and are not in physical possession by the broker-dealers themselves. SIPC funds are used to make investors whole after all client assets held in custody by the broker-dealer have been recovered. SIPC coverage provides $500,000 of net equity protection, including $100,000 for claims for cash awaiting reinvestment, but that does not necessarily mean that the account will receive only up to $500,000. Rather, in a SIPC proceeding, the account will receive a pro-rata share of all client assets recovered in liquidation and then will receive up to $500,000 from SIPC to make up any difference that may still exist. To illustrate a SIPC liquidation, assume that a broker-dealer fails (e.g. Pershing), resulting
