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Difficulty: HardSIPC vs. FDIC Protection and Coverage Limits

An investor maintains two accounts in their own name at a broker-dealer that is a member of the Securities Investor Protection Corporation (SIPC). The broker-dealer enters financial failure and liquidation proceedings under SIPC. At the time of filing, the investor's account balances are as follows:

* Individual Cash Account: 210,000inequitysecuritiesand210,000 in equity securities and 270,000 in uninvested cash
* Individual Margin Account: 140,000inequitysecuritiesand140,000 in equity securities and 50,000 in commodity futures contracts

Under the Securities Investor Protection Act, what is the maximum total coverage amount SIPC will provide for this investor's holdings, and what amount remains as an unsecured general creditor claim?

  1. 500,000coveredbySIPC,with500,000 covered by SIPC, with 120,000 remaining as a general creditor claimAnswer
  2. B
    600,000coveredbySIPC,with600,000 covered by SIPC, with 70,000 remaining as a general creditor claim
  3. C
    520,000coveredbySIPC,with520,000 covered by SIPC, with 150,000 remaining as a general creditor claim
  4. D
    500,000coveredbySIPC,with500,000 covered by SIPC, with 170,000 remaining as a general creditor claim

Answer

SIPC will provide 500,000intotalcoverage,leaving500,000 in total coverage, leaving 120,000 as an unsecured general creditor claim.
Under SIPC guidelines, all accounts owned by the same individual at a single member firm (including cash and margin accounts) are combined into a single customer capacity. Total eligible securities equal 350,000(350,000 ( 210,000 + 140,000)andtotalcashequals140,000) and total cash equals 270,000, bringing total eligible customer claims to 620,000.Commodityfutures(620,000. Commodity futures ( 50,000) are not covered by SIPC. Applying the cash sublimit (250,000)yields250,000) yields 600,000, which is restricted by the absolute SIPC coverage cap of 500,000perseparatecustomer.Theunrecoveredeligibleclaimof500,000 per separate customer. The unrecovered eligible claim of 120,000 (620,000−620,000 − 500,000) leaves the investor as an unsecured general creditor of the failed broker-dealer.

Step-by-Step Solution

1
Determine ownership capacity and combine accounts.
Both the cash and margin accounts are held in the investor's individual name, so they are aggregated into ONE separate customer capacity.
SIPC rules define a 'separate customer' by registration capacity; multiple accounts owned by the same individual are combined.
2
Categorize eligible vs. ineligible assets.
Eligible securities = 210,000+210,000 + 140,000 = 350,000.Eligiblecash=350,000. Eligible cash = 270,000. Ineligible assets = $50,000 commodity futures.
SIPC covers cash and securities; commodity futures contracts are specifically excluded from SIPC protection.
3
Apply SIPC cash sublimit and overall coverage limit.
Cash coverage is capped at 250,000outof250,000 out of 270,000. Total tentative coverage (350,000+350,000 + 250,000 = 600,000)iscappedattheoverallSIPClimitof600,000) is capped at the overall SIPC limit of 500,000 per customer.
SIPC protects up to 500,000perseparatecustomer,ofwhichnomorethan500,000 per separate customer, of which no more than 250,000 may be for cash claims.
4
Calculate unrecovered balance for general creditor status.
Total SIPC-eligible claims of 620,000(620,000 ( 350,000 securities + 270,000cash)minus270,000 cash) minus 500,000 SIPC coverage = $120,000 general creditor claim.
The portion of eligible customer claims exceeding SIPC limits becomes a general claim against the bankrupt firm's liquidation estate.

Key Concept

SIPC Separate Customer Limits & Asset Eligibility
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Topics

SIPC vs. FDIC Protection and Coverage Limits

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