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Difficulty: MediumSIPC vs. FDIC Protection and Coverage Limits

An investor holds two separate individual accounts at Horizon Community Bank (an FDIC-insured institution): a checking account with 160,000andacertificateofdeposit(CD)with160,000 and a certificate of deposit (CD) with 110,000. The same investor also maintains an individual cash account at Beacon Brokerage (a SIPC-member firm undergoing financial liquidation) containing 210,000incorporatestock,210,000 in corporate stock, 180,000 in municipal bonds, 80,000inuninvestedcash,andacommodityfuturescontractvaluedat80,000 in uninvested cash, and a commodity futures contract valued at 40,000. What is the total combined amount protected under FDIC and SIPC coverage limits for this investor?

  1. $720,000Answer
  2. B
    $740,000
  3. C
    $750,000
  4. D
    $640,000

Answer

$720,000 is the maximum combined protection available under FDIC and SIPC coverage limits.
The option specifying 720,000correctlyappliesFDICdepositlimits(720,000 correctly applies FDIC deposit limits ( 250,000 max on 270,000totalsinglebankdeposits)andSIPCcoveragerules(270,000 total single bank deposits) and SIPC coverage rules ( 470,000 total on eligible stocks, bonds, and cash, excluding the non-covered commodity futures contract).

Step-by-Step Solution

1
Calculate FDIC protection for bank deposits.
FDIC coverage is capped at 250,000perdepositorperinsuredbankforsingleownershipaccounts.Thecombinedbalanceofchecking(250,000 per depositor per insured bank for single ownership accounts. The combined balance of checking ( 160,000) and CD (110,000)is110,000) is 270,000, so FDIC protects $250,000.
FDIC aggregates all single accounts owned by the same individual at one insured institution.
2
Identify eligible SIPC assets and calculate SIPC protection.
Covered assets consist of 210,000inequity,210,000 in equity, 180,000 in municipal bonds, and 80,000inuninvestedcash,totaling80,000 in uninvested cash, totaling 470,000. Commodity futures (40,000)arenotcoveredbySIPC.Since40,000) are not covered by SIPC. Since 470,000 is below the 500,000SIPClimitandthe500,000 SIPC limit and the 80,000 cash is below the 250,000cashsub−cap,thefull250,000 cash sub-cap, the full 470,000 is protected.
SIPC protects cash and securities against broker-dealer failure up to 500,000total(includingupto500,000 total (including up to 250,000 for cash), but excludes commodity futures, currencies, and fixed annuities.
3
Sum FDIC and SIPC coverage amounts.
250,000(FDIC)+250,000 (FDIC) + 470,000 (SIPC) = $720,000.
FDIC and SIPC are independent protection regimes covering commercial bank deposits and broker-dealer securities accounts respectively.

Key Concept

SIPC protects customer cash and securities against broker-dealer insolvency up to 500,000(witha500,000 (with a 250,000 cash sub-cap) excluding commodity futures, while FDIC protects deposit accounts at commercial banks up to $250,000 per depositor per bank.
Estimated Time:1m 30s
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SIPC vs. FDIC Protection and Coverage Limits

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