Quora Answer: Are Brokerage Accounts FDIC Insured?

The following is my answer to a Quora question: “Are brokerage accounts FDIC insured?” 

No.  The Federal Deposit Insurance Corporation, as the name suggests, only insures deposits in commercial and retail banks, and any savings institutions.  They were founded in 1933, in the wake of the Great Depression, to restore faith in the banking system.  The equivalent for brokerage accounts would be the Securities Investor Protection Corporation, which was founded much later, in 1970.  This is where the similarities end.  The SIPC does not insure your account.  It serves as an intermediary to transfer your account to another brokerage in the event of a failure at the brokerage your account is.  In such a condition, it provides limited insurance of up to US$500,000 for your account, per brokerage. 

In contract, the FDIC protects your deposit up to US$250,000 per institution, including identity theft, third-party fraud and failure of the bank.  This is far more comprehensive.  It can do this because it is an organ of the federal government, a corporation owned by the US government.  The SIPC is independent.  The limitations of the SIPC were exposed when Lehman Brothers and Bear Sterns collapsed.  Whilst they could recover the deposits in brokerage accounts, they could do nothing for the loss of value of financial instruments affected, including hundreds of millions in now, junk bonds.