In a statement the SIPC said it applied to wind up the business after information from the Securities and Exchange Commission and the Financial Industry Regulatory Authority convinced it that the firm's clients need protection under the Securities Investor Protection Act.
The company and its founder, Bernard L Madoff, are currently charged with committing one of the biggest frauds ever seen on Wall Street. Losses from the alleged Ponzi scheme could top $50 billion.
Irving Picard will act as a trustee to oversee the liquidation of the advisory firm, with legal practice Baker and Hosteler acting as his counsel, the SIPC said.
"I will work with SIPC to do what the law allows to ameliorate the losses to customers," Mr Picard commented.
However, SIPC president and CEO Stephen Harbeck cautioned that the scale of the alleged fraud and the state of the company's records would significantly complicate the liquidation process.
Elsewhere, the Man Group, the world's largest publicly-listed hedge fund manager, has disclosed potential losses of $360 million linked to the affair.