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Difficulty: MediumSIPC vs. FDIC Protection and Coverage Limits

A retail customer holds a single brokerage account at a SIPC-member firm that enters liquidation. The account contains 300,000inequitysecurities,300,000 in equity securities, 100,000 in cash, and $150,000 in physical gold bullion commodity holdings. Under Securities Investor Protection Corporation (SIPC) coverage rules, what is the maximum dollar amount of protection this customer will receive?

  1. $400,000Answer
  2. B
    $500,000
  3. C
    $550,000
  4. D
    $250,000

Answer

$400,000
SIPC protects customer accounts against broker-dealer insolvency up to 500,000perseparatecustomer,withasublimitof500,000 per separate customer, with a sublimit of 250,000 for cash. Covered assets include stocks, bonds, mutual funds, and cash balances. However, commodities, commodity futures contracts, and physical precious metals are not covered. Here, the eligible assets are 300,000inequitysecuritiesplus300,000 in equity securities plus 100,000 in cash, totaling 400,000,whichisfullycoveredsinceitisbelowthe400,000, which is fully covered since it is below the 500,000 overall limit and the cash portion is under the $250,000 cash cap.

Step-by-Step Solution

1
Identify assets eligible for SIPC protection
Equity securities (300,000)andcash(300,000) and cash ( 100,000) are covered. Physical gold commodities ($150,000) are excluded from SIPC protection.
SIPC protects cash and securities held in customer accounts at insolvent member broker-dealers, but specifically excludes commodities, commodity futures contracts, and fixed annuities.
2
Apply cash sublimit and overall coverage limits
Cash claim of 100,000isfullywithinthe100,000 is fully within the 250,000 cash sublimit. Total eligible claims equal 300,000+300,000 + 100,000 = $400,000.
SIPC provides coverage up to 500,000perseparatecustomer,ofwhichnomorethan500,000 per separate customer, of which no more than 250,000 may be for cash balances.
3
Determine total protected amount
Since 400,000isbelowthe400,000 is below the 500,000 maximum overall cap, the customer is protected for the full $400,000.
The entire eligible balance of securities and cash is under the maximum overall threshold.

Key Concept

SIPC coverage limits and excluded asset classes
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Topics

SIPC vs. FDIC Protection and Coverage Limits

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