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Difficulty: MediumSIPC vs. FDIC Protection and Coverage Limits

An investor maintains accounts at Crestview Financial, a SIPC-member broker-dealer undergoing financial liquidation. At the time of failure, the investor's individual account holds 300,000incorporatestocksand300,000 in corporate stocks and 100,000 in uninvested cash. The investor also maintains a separate commodity futures trading account valued at 50,000atthesamefirm,aswellasa50,000 at the same firm, as well as a 200,000 Certificate of Deposit (CD) at an FDIC-insured bank. Under SIPC rules, what total dollar amount of the investor's balances at Crestview Financial is protected?

  1. A
    $250,000
  2. $400,000Answer
  3. C
    $450,000
  4. D
    $600,000

Answer

The total SIPC-protected amount at the broker-dealer is $400,000.
SIPC provides protection up to 500,000perseparatecustomerforclaimsofcashandsecurities,withcashcoveragecappedat500,000 per separate customer for claims of cash and securities, with cash coverage capped at 250,000. At Crestview Financial, the investor holds 300,000insecuritiesand300,000 in securities and 100,000 in cash. Because the cash portion (100,000)isbelowthe100,000) is below the 250,000 cash sub-limit and the total (400,000)iswithinthe400,000) is within the 500,000 total limit, the entire $400,000 balance is protected. Commodity futures are not covered by SIPC, and the CD at the commercial bank is insured separately by the FDIC.

Step-by-Step Solution

1
Identify eligible securities and cash balances at the insolvent broker-dealer.
Equity stocks (300,000)anduninvestedcash(300,000) and uninvested cash ( 100,000) at Crestview Financial total $400,000.
SIPC covers securities and cash held in customer accounts at registered broker-dealers upon insolvency.
2
Evaluate coverage caps and exclusions for broker-dealer balances.
SIPC limits protection to 500,000totalperseparatecustomer,includingupto500,000 total per separate customer, including up to 250,000 for cash. The 400,000total(400,000 total ( 300,000 securities + 100,000cash)isfullywithinboththe100,000 cash) is fully within both the 500,000 total limit and the $250,000 cash limit.
Cash coverage does not exceed 250,000,andoverallclaimdoesnotexceed250,000, and overall claim does not exceed 500,000.
3
Filter out non-covered items and external bank balances.
Commodity futures contracts (50,000)areexplicitlyexcludedfromSIPCprotection.The50,000) are explicitly excluded from SIPC protection. The 200,000 CD is at a commercial bank protected by the FDIC, not SIPC.
SIPC does not cover futures contracts or assets held at separate banking institutions.

Key Concept

SIPC Coverage Limits and Exclusions
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Topics

SIPC vs. FDIC Protection and Coverage Limits

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