What Brokerage Custody Insurance Covers — and What It Does Not

Three promises behind one word

“Protected” is doing different work in three sentences an investor might read in the same week.

• SIPC protection is a statutory scheme that restores assets missing from a failed broker’s customer accounts.
• FDIC insurance is a government guarantee on deposits at an insured bank, triggered by the bank’s failure.
• The customer protection rule is an ongoing obligation on the broker to keep customer securities segregated and customer cash reserved, whether or not anything fails.

Only the third is a rule about how the business is run every day. The first two are backstops that activate on insolvency, and both are narrower than most people assume.

SIPC: a custody guarantee, not an investment guarantee

The SIPC page states the boundary in one sentence: “SIPC protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash.”

It then narrows it further: “SIPC only protects the custody function of the broker dealer, which means that SIPC works to restore to customers their securities and cash that are in their accounts when the brokerage firm liquidation begins.”

And the exclusions are explicit:

• “SIPC does not protect against the decline in value of your securities.”
• It does not protect “individuals who are sold worthless stocks and other securities”.
• It does not protect “against losses due to a broker’s bad investment advice, or for recommending inappropriate investments”.

The mechanism is a liquidation, not a payout of losses. In a liquidation, “SIPC replaces the missing stocks and other securities when it is possible to do so” — the word is missing. A customer whose account is intact gets the account back; the protection matters when the broker has lost, lent, or failed to hold the assets.

Two details are useful for readers outside the United States. First, residence is irrelevant: “There is no requirement that a customer reside in or be a citizen of the United States. A non-U.S. 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.” Second, what counts as a security is a defined list — “stocks, bonds, Treasury securities, certificates of deposit, mutual funds, money market mutual funds and certain other investments” — from which commodity futures, foreign exchange trades and unregistered investment contracts are excluded.

The money market fund line is worth noting. A money market fund held in a brokerage account is protected as a security, which is a different basis from a bank deposit — same dollar-like behaviour, different guarantee.

FDIC: deposits only, and a category limit

FDIC insurance is often described as “$250,000”, but the full rule is more specific: coverage is “$250,000 per depositor, per FDIC-insured bank, for each account ownership category.”

The ownership categories are what make the number elastic. The FDIC lists single accounts, joint accounts, certain retirement accounts such as IRAs, trust accounts, employee benefit plan accounts, corporation and partnership accounts, and government accounts. “All of your deposits in the same ownership category in the same FDIC-insured bank are added together for the purpose of determining FDIC deposit insurance coverage” — so two single accounts at one bank share a single $250,000 limit, while an IRA at the same bank is covered separately.

The exclusions matter as much as the limit: “FDIC insurance covers deposits in all types of accounts at FDIC-insured banks, but it does not cover non-deposit investment products, even those offered by FDIC-insured banks.” And it “doesn’t cover default or bankruptcy of any non-FDIC-insured institution.”

That last clause is the one to keep in mind when a platform advertises that its partner bank is FDIC-insured. The insurance attaches to the deposit at the bank, not to the platform, and not to a token or a balance the platform holds on its own books.

The customer protection rule: the part that works every day

The rule that shapes a brokerage account’s custody is SEC Rule 15c3-3, and its core requirement is possession: “A broker or dealer shall promptly obtain and shall thereafter maintain the physical possession or control of all fully-paid securities and excess margin securities carried by a broker or dealer for the account of customers.”

For cash, the rule requires something different and equally specific: a broker “must maintain with a bank or banks … a ‘Special Reserve Bank Account for the Exclusive Benefit of Customers’ … separate from the other and from any other bank account of the broker or dealer”, funded with “cash and/or qualified securities in amounts computed in accordance with the formula” in the rule’s exhibit.

Two consequences follow from that design:

1. Customer securities are not the broker’s balance sheet. Fully paid shares must be held in a way the broker cannot treat as its own inventory.
2. Customer cash is reserved, not merely recorded. The reserve account is calculated from the free credit balances the broker owes customers, and it sits apart from the firm’s operating accounts.

The rule does not insure anything. It reduces the chance that a failure produces a shortfall in the first place, which is why SIPC’s liquidation is usually dealing with missing assets rather than with a general loss.

Where the same dollar changes regime

A brokerage account’s idle cash usually does not sit still. It is swept, and where it is swept determines which backstop applies.

The middle row explains why the two regimes are not interchangeable. A money market fund is protected as a security, which means the protection is about the fund share being restored, not about the fund’s value being guaranteed. A bank deposit is insured as to value, up to the limit, but only if the bank fails and only within the category.

A cash sweep programme that spreads balances across several banks can therefore produce more FDIC coverage than a single bank account, because the limit is applied per bank. That is a real structural difference, and it is invisible in a marketing page that says “FDIC insured” without saying where.

The crypto case: outside both

SIPC addresses digital assets directly, and the answer is narrow: “SIPC does not protect any digital or crypto asset that does not qualify as a ‘security.’” The page explains the test: an investment contract, digital asset or otherwise, “must be registered with the SEC in order to be a ‘security’ as defined by the Securities Investor Protection Act (SIPA)”, and “digital asset securities that are unregistered investment contracts do not qualify as ‘securities’ under SIPA and are therefore not protected under SIPA, even if held by a SIPC-member brokerage firm.”

It also notes that the SEC and CFTC have described a list of assets as digital commodities — among them bitcoin, ether, solana and XRP — which places them outside the securities definition for this purpose.

FDIC is equally clear that it covers deposits and only deposits: it “does not cover non-deposit investment products” and “doesn’t cover default or bankruptcy of any non-FDIC-insured institution”. A balance recorded on a crypto exchange’s ledger is not a deposit at an insured bank, whatever the exchange’s banking partners do.

So a crypto exchange account has neither backstop. What it has is the platform’s terms of service, the segregation arrangements the platform chooses to make, and whatever insolvency law applies in its jurisdiction. Those can be good; they are not insurance, and the difference shows up precisely when it matters.

The same logic runs in reverse for a self-custody wallet. A hardware wallet has no custodian and therefore no SIPC claim, no FDIC coverage, and no counterparty to fail — the risk moves entirely to key management and to the accuracy of the address being used. That is a change in the kind of risk, not a reduction in it.

A checklist before believing the word “protected”

1. Ask which failure the protection addresses — broker insolvency, bank insolvency, or neither.
2. Find the sweep destination for idle cash, and match it to the right regime.
3. Check the limits and the aggregation rules, especially the bank and ownership-category rules under FDIC.
4. Separate custody from performance — no arrangement here protects a position from falling in price.
5. For crypto, do not import the vocabulary. An exchange balance is not an insured deposit, and a hardware wallet is not an insured custody account.

Risk note. The SIPC limits and exclusions in this article were read from SIPC’s own investor page; the FDIC limit, categories and exclusions from the FDIC’s deposit insurance page; and the possession and reserve account requirements from 17 CFR 240.15c3-3, all on 2026-10-27. Coverage rules change and programme structures differ by firm. Nothing here is investment advice.