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Difficulty: MediumSIPC vs. FDIC Protection and Coverage Limits

An investor holds accounts at both a FINRA-member broker-dealer and an FDIC-insured commercial bank. Which of the following statements regarding the coverage rules and limitations of SIPC and FDIC protections are correct?

  1. FDIC coverage protects qualifying bank deposit accounts up to 250,000perdepositorperbankagainstfinancialinstitutionfailure,whereasSIPCprotectscustomeraccountsupto250,000 per depositor per bank against financial institution failure, whereas SIPC protects customer accounts up to 500,000 total (including a $250,000 cap for cash) against broker-dealer insolvency.Answer
  2. Neither SIPC nor FDIC protection guards an investor against financial losses resulting from declines in market value.Answer
  3. C
    Commodity futures contracts and fixed annuity products held inside a brokerage account receive full SIPC protection up to the $500,000 overall limit.
  4. D
    SIPC provides up to $500,000 in cash protection per separate customer if an account holds no debt or equity securities at the time of liquidation.

Answer

The correct statements state that FDIC covers bank deposit accounts up to 250,000perbankwhileSIPCcoversupto250,000 per bank while SIPC covers up to 500,000 total (with a $250,000 cash sublimit) for broker-dealer insolvency, and that neither SIPC nor FDIC protects against investment losses caused by market declines.
FDIC protects qualifying bank deposits up to 250,000perdepositorperbankagainstbankfailure.SIPCprotectscustomerbrokerageaccountsupto250,000 per depositor per bank against bank failure. SIPC protects customer brokerage accounts up to 500,000 total (with a $250,000 cash sublimit) against broker-dealer insolvency. Neither program protects against loss of value due to market fluctuations.

Step-by-Step Solution

1
Differentiate the institutional scope and coverage limits of FDIC vs. SIPC.
FDIC insures bank deposits up to 250,000perdepositorperbank.SIPCprotectscustomerbrokerageaccountsupto250,000 per depositor per bank. SIPC protects customer brokerage accounts up to 500,000 total, which includes a maximum cash sublimit of $250,000.
Establishing the proper statutory caps prevents confusing bank deposit insurance with broker-dealer liquidation coverage.
2
Identify excluded assets under SIPC coverage.
SIPC covers securities (stocks, bonds, mutual funds) and cash. It does NOT cover commodity futures, foreign currencies, or unregistered fixed annuities.
Commodities and fixed contracts are not classified as securities under federal securities laws and are excluded from SIPC coverage.
3
Evaluate protection relative to market volatility.
Neither entity protects investors from market risk or investment losses.
SIPC and FDIC exist to address custodian insolvency and failure, not market risk.

Key Concept

SIPC vs. FDIC Protection Limits and Exclusions
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Topics

SIPC vs. FDIC Protection and Coverage Limits

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