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Difficulty: Very hardSIPC vs. FDIC Protection and Coverage Limits

A wealth management compliance team is evaluating the scope of protection provided by the Securities Investor Protection Corporation (SIPC) and the Federal Deposit Insurance Corporation (FDIC) across various account capacities and asset types. Which of the following statements accurately describe SIPC and FDIC coverage rules and limits?

  1. A client maintaining both an individual cash account and an individual margin account at the same insolvent broker-dealer is treated as a single customer for SIPC coverage, combining both accounts under one $500,000 protection cap.Answer
  2. B
    If an insolvent broker-dealer experiences financial failure during a market downturn, SIPC insurance reimburses investors for unrealized portfolio losses incurred due to dropping share prices prior to liquidation.
  3. Commodity futures contracts and physical gold bullion held in a customer's brokerage account are excluded from SIPC coverage because they are not classified as securities.Answer
  4. D
    FDIC insurance extends to money market mutual funds held by retail depositors in bank sweep accounts up to $250,000 per depositor per bank.

Answer

The correct statements state that individual cash and margin accounts at the same firm are combined as one separate customer under SIPC protection, and that commodity futures contracts and physical gold bullion are excluded from SIPC coverage.
The statement regarding combining individual cash and margin accounts is correct because SIPC evaluates coverage based on separate customer ownership capacity; multiple accounts held by the same person at the same broker-dealer in the same capacity are aggregated up to the statutory $500,000 ceiling. The statement excluding commodity futures and physical gold bullion is also correct because SIPC protection is limited to cash and securities, explicitly excluding commodities, futures contracts, physical metals, and fixed annuities.

Step-by-Step Solution

1
Analyze SIPC separate customer capacity rules for cash and margin accounts under identical ownership.
Accounts owned by the same individual in the same capacity at a single broker-dealer are combined into one 'separate customer' with a total limit of 500,000(max500,000 (max 250,000 cash).
SIPC rules define separate customers by registration capacity (e.g., individual, joint, IRA, trust), not by the number of underlying sub-accounts.
2
Determine the eligibility of commodity futures contracts and physical gold bullion under SIPC coverage.
Commodities, futures contracts, currencies, and fixed annuities are non-securities and are excluded from SIPC protection.
SIPC protection applies strictly to customer cash and securities held at a failing member firm.
3
Evaluate claims regarding SIPC protection against market losses.
SIPC does not indemnify investors against market price declines or investment losses.
SIPC acts as a custodian safety net for missing customer assets resulting from firm failure, not a market value guarantee.
4
Evaluate FDIC coverage scope regarding money market mutual funds.
Money market mutual funds are securities and are not insured by the FDIC, regardless of bank sweep programs.
FDIC coverage is restricted to bank deposit products, whereas mutual funds are non-deposit investment securities.

Key Concept

SIPC vs. FDIC Protection Limits and Exclusions
Estimated Time:3m 0s
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SIPC vs. FDIC Protection and Coverage Limits

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