What is SIPC?
A bit of history
In the 1960s, the US experienced an unexpected increase in trading volume, and firms were unable to keep up with proper record-keeping (keep in mind everything was pen and paper). The result was chaos.
At the time, there was no requirement for firms to segregate client funds and securities from the firm’s assets. When firms went bankrupt, they could not return client funds or securities. Investors were losing confidence in the markets, so congress stepped in. The Securities Investors Protection Act was passed. At the same time, the Securities Investor Protection Corporation (SIPC) – a nonprofit industry membership organization – was born.
SIPC is neither a government agency nor a regulatory body. It’s a private nonprofit group funded by the brokerage industry in the US. It provides limited insurance for customers in cases where their brokerage firm defaults. SIPC protection is limited to up to $500,000 for securities or $250,000 for cash only.
What does SIPC do
The insurance limit of $500,000 applies only to the value of any missing securities in case the brokerage firm becomes insolvent, not losses due to market volatility. If there are securities identified as belonging to the customer, the value will be returned regardless of account size, and the $500,000 limit will apply only to the difference.
Since the inception of SIPC in 1971, fewer than 1% of all SIPC member broker-dealers have been subject to an SIPC insolvency proceeding, and less than 0.1% had partial losses incurred.
Why is SIPC insurance so rarely used?
Simply put, when it comes to financial institutions that are regulated, there is an elaborate framework of regulatory safety checks and audits that these institutions, such as brokerage firms like Sarwa, undergo on a regular basis. This increases the likelihood that your assets are made whole if the firms go insolvent regardless of your account size without having to resort to any additional insurance such as SIPC.
Even when brokerage firms have SIPC, not all investments are protected by SIPC. In general, SIPC does not cover instruments such as:
- unregistered investment contracts
- unregistered limited partnerships
- fixed annuity contracts
- escrow receipts
- direct investments
- commodities or related contracts
- hedge funds
- other investments
On Sarwa’s Protective Measures
Starting a long-term investment plan requires that you feel secure about where your money is going.
Sarwa takes several measures to protect investments in your account. All assets managed by Sarwa are secured by an elaborate set of guardrails, or protective financial measures, which surround financial institutions licensed by top tier regulators.
Sarwa is regulated by the Dubai Financial Services Authority in Dubai and the Financial Services Regulatory Authority in Abu Dhabi.
(Fun fact: the Financial Services Regulatory Authority has been recognized by the GAR Awards 2020 ADGM as a leading global destination for dispute resolution.)
These measures impose a strict set of rules and guidelines for any financial institution to follow.
The multi-layered safeguard system is in place to protect investor assets. Brokerage firms and financial institutions must comply with regulations that help shield clients should they fail. One of which is the custodian structure that segregates clients’ assets from the firm’s operational capital. It is also mandatory to maintain a minimum amount of prescribed capital in liquid form. Firms undergo regular audits to ensure that issues are flagged right away.
Because of that, historical data shows that in the worst-case scenario of a brokerage firm going insolvent, and even if you had millions of dollars invested, generally your assets remain whole.
When you invest, protecting yourself is always common sense
These are three main points you would want to look out for when investing:
- The company you invest with is regulated. That means that it is subject to strict laws, stringent financial reporting requirements, regular audits by authorities, and specific client-handling regulations. You would know that a proper course of action can be taken to protect you when needed.
- Your assets are in a segregated account. With any brokerage you use, your money and the firm’s operational account (i.e. what the firm uses to pay its bills and to operate on a daily basis) should never be mixed. You also should have visibility over the movement of your assets at any time. With Sarwa, you can follow your performance on your own dashboard at any time.
- Do your due diligence. If something seems too good to be true, it typically is. If the investment strategy is too complicated, and the returns promised seem “tempting,” look into it and make sure it does not come with that extra risk. This is usually a red flag.
We understand that safety, security, and transparency must play a crucial role in the management of something as important as your financial future. Since our launch in 2017, it has been one of Sarwa’s top directives to only work with globally reputable partners and banks – such as Saxo Bank, a fully licensed Danish bank under the supervision of the Danish FSA and EU Banking and Investment Directives – for these purposes. This mission has helped us further ensure maximum security and transparency to our clients.