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Difficulty: MediumSIPC vs. FDIC Protection and Coverage Limits

An investor holds an individual account at Pinnacle Clearing Services, a SIPC-member broker-dealer undergoing financial liquidation. At the time of the firm's failure, the investor's account contains 340,000inequitysecurities,340,000 in equity securities, 180,000 in uninvested cash, and $60,000 in physical gold spot commodity contracts. What is the maximum total coverage amount SIPC will provide for this account?

  1. $500,000Answer
  2. B
    $520,000
  3. C
    $580,000
  4. D
    $250,000

Answer

$500,000
SIPC provides protection against broker-dealer insolvency up to 500,000perseparatecustomer,includingamaximumsub−limitof500,000 per separate customer, including a maximum sub-limit of 250,000 for cash claims. In this scenario, the investor has 340,000inequitysecuritiesand340,000 in equity securities and 180,000 in cash, totaling 520,000ineligibleassets(the520,000 in eligible assets (the 180,000 cash is fully eligible since it is below the 250,000cashcap).GoldcommoditycontractsareexcludedfromSIPCprotection.Becausetheeligibleclaimof250,000 cash cap). Gold commodity contracts are excluded from SIPC protection. Because the eligible claim of 520,000 exceeds the maximum overall coverage cap of 500,000,SIPCprovidesexactly500,000, SIPC provides exactly 500,000 in protection.

Step-by-Step Solution

1
Identify eligible assets under SIPC protection
Equity securities (340,000)anduninvestedcash(340,000) and uninvested cash ( 180,000) are eligible. Physical gold commodity contracts ($60,000) are non-securities and excluded from SIPC protection.
SIPC protects cash and securities; commodity contracts, futures, and fixed annuities are excluded from coverage.
2
Apply SIPC cash coverage sub-limit
The uninvested cash balance of 180,000isfullycoveredbecauseitdoesnotexceedthe180,000 is fully covered because it does not exceed the 250,000 cash sub-limit.
SIPC limits cash protection to $250,000 within the overall coverage envelope.
3
Calculate total eligible assets and apply maximum coverage cap
340,000(securities)+340,000 (securities) + 180,000 (cash) = 520,000totaleligibleclaims.ApplyingtheSIPCmaximumlimityields520,000 total eligible claims. Applying the SIPC maximum limit yields 500,000.
SIPC limits total protection per separate customer to $500,000 across cash and securities combined.

Key Concept

SIPC Coverage Limits and Exclusions
Estimated Time:1m 15s
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Topics

SIPC vs. FDIC Protection and Coverage Limits

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