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Difficulty: MediumSIPC vs. FDIC Protection and Coverage Limits

An investor maintains a single individual account at a broker-dealer undergoing SIPC liquidation. At the time of filing, the account holds 150,000inmunicipalbonds,150,000 in municipal bonds, 110,000 in corporate stocks, 285,000incashbalances,and285,000 in cash balances, and 45,000 in commodity futures contracts. What is the maximum total coverage amount provided to this investor by the Securities Investor Protection Corporation (SIPC)?

  1. $500,000Answer
  2. B
    $510,000
  3. C
    $545,000
  4. D
    $250,000

Answer

The maximum total coverage amount provided by SIPC is $500,000.
The correct answer is 500,000becauseSIPCprotectscustomeraccountsagainstbroker−dealerfailureupto500,000 because SIPC protects customer accounts against broker-dealer failure up to 500,000 total per separate customer, of which up to 250,000canbeforcash.Theaccountholds250,000 can be for cash. The account holds 260,000 in eligible securities (150,000municipalbonds+150,000 municipal bonds + 110,000 stocks) and 285,000incash.Cashcoverageiscappedat285,000 in cash. Cash coverage is capped at 250,000, bringing eligible assets to 510,000(510,000 ( 260,000 + 250,000).However,theaggregateSIPClimitcapstotalrecoveryat250,000). However, the aggregate SIPC limit caps total recovery at 500,000. Commodity futures ($45,000) are not securities and are completely excluded from SIPC protection.

Step-by-Step Solution

1
Identify eligible assets under SIPC coverage
Securities (150,000municipalbonds+150,000 municipal bonds + 110,000 corporate stocks = 260,000)anduninvestedcash(260,000) and uninvested cash ( 285,000) are eligible. Commodity futures ($45,000) are excluded from SIPC protection.
SIPC covers cash and securities held at broker-dealers but excludes commodity futures, fixed annuities, and currency positions.
2
Apply the SIPC cash sub-limit
Cash coverage is capped at 250,000(reducing250,000 (reducing 285,000 cash claim to $250,000 protected cash).
SIPC limits cash coverage to a maximum of $250,000 per separate customer.
3
Calculate aggregate eligible protection and apply the overall SIPC limit
260,000(securities)+260,000 (securities) + 250,000 (cash) = 510,000.Applyingthemaximumaggregatelimityields510,000. Applying the maximum aggregate limit yields 500,000.
SIPC protects up to $500,000 in total value per separate customer account.

Key Concept

SIPC Coverage Limits and Eligible Assets
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Topics

SIPC vs. FDIC Protection and Coverage Limits

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