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Difficulty: MediumSIPC vs. FDIC Protection and Coverage Limits

An investor maintains an individual cash account at Meridian Brokerage, a SIPC-member firm that has been placed into financial liquidation. At the time of insolvency, the account contains 200,000inequitysecurities,200,000 in equity securities, 180,000 in corporate bonds, 280,000inuninvestedcash,anda280,000 in uninvested cash, and a 50,000 commodity futures contract. What is the maximum dollar amount of protection SIPC will provide for this customer's account?

  1. $500,000Answer
  2. B
    $630,000
  3. C
    $660,000
  4. D
    $710,000

Answer

$500,000
SIPC provides coverage up to 500,000totalperseparatecustomerintheeventofabroker−dealerfailure,ofwhichnomorethan500,000 total per separate customer in the event of a broker-dealer failure, of which no more than 250,000 can be for cash claims. In this scenario, the customer has 380,000ineligiblesecurities(380,000 in eligible securities ( 200,000 equity + 180,000corporatebonds)and180,000 corporate bonds) and 280,000 in cash. Cash coverage is capped at 250,000,giving250,000, giving 630,000 in eligible claims (380,000+380,000 + 250,000). However, the total claim is limited by the $500,000 aggregate cap per separate customer. Commodity futures contracts are not covered by SIPC.

Step-by-Step Solution

1
Identify covered vs. non-covered assets under SIPC rules.
Securities (equities of 200,000+corporatebondsof200,000 + corporate bonds of 180,000 = 380,000)andcash(380,000) and cash ( 280,000) are covered asset types. The $50,000 commodity futures contract is explicitly non-covered.
SIPC covers cash and securities held at member broker-dealers, but excludes commodity futures, fixed annuities, and foreign currencies.
2
Apply the SIPC cash claim sub-limit.
Out of the 280,000inuninvestedcash,SIPCprotectsupto280,000 in uninvested cash, SIPC protects up to 250,000.
SIPC coverage caps cash protection at $250,000 per separate customer.
3
Combine eligible assets and apply the overall SIPC cap.
380,000insecurities+380,000 in securities + 250,000 in protected cash = 630,000totalclaim.BecauseoverallSIPCprotectioncannotexceed630,000 total claim. Because overall SIPC protection cannot exceed 500,000, the maximum coverage provided is $500,000.
SIPC coverage per separate customer has an absolute ceiling of $500,000.

Key Concept

SIPC Coverage Limits and Asset Exclusions
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Topics

SIPC vs. FDIC Protection and Coverage Limits

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