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Difficulty: HardSIPC vs. FDIC Protection and Coverage Limits

A financial adviser is evaluating investor protection rules for a client holding assets at both an FDIC-insured commercial bank and a SIPC-member broker-dealer that has entered bankruptcy liquidation. Which of the following statements regarding SIPC and FDIC coverage rules and limits are CORRECT?

  1. FDIC insurance covers deposit accounts such as checking and certificates of deposit up to $250,000 per depositor per bank, but does not cover money market mutual funds even if purchased through an insured commercial bank.Answer
  2. SIPC coverage provides protection up to 500,000perseparatecustomerfornetequity,includingamaximumof500,000 per separate customer for net equity, including a maximum of 250,000 for uninvested cash claims, but explicitly excludes commodity futures contracts and market value losses.Answer
  3. C
    SIPC coverage guarantees investors against losses caused by market value declines resulting from fraudulent investment recommendations up to $500,000 per separate customer.
  4. D
    An investor who maintains an individual cash account and an individual margin account at the same broker-dealer is treated as two separate customers, receiving up to $500,000 of SIPC protection for each account.

Answer

The correct statements are that FDIC insurance covers traditional bank deposit accounts up to 250,000perdepositorperbankwhileexcludingmutualfunds,andSIPCprovidesupto250,000 per depositor per bank while excluding mutual funds, and SIPC provides up to 500,000 total coverage (with a $250,000 cash sublimit) per separate customer while excluding commodity futures and market losses.
FDIC covers traditional deposit accounts up to 250,000perdepositorperbankandexcludesinvestmentfunds.SIPCcoversnetequityupto250,000 per depositor per bank and excludes investment funds. SIPC covers net equity up to 500,000 per separate customer (max $250,000 cash) upon broker-dealer insolvency, excluding commodities and market losses.

Step-by-Step Solution

1
Analyze FDIC scope and limitations.
FDIC protects traditional bank deposits (checking, savings, CDs) up to $250,000 per depositor per bank. Investment products like money market funds are excluded.
FDIC insurance applies strictly to bank deposit accounts, not investment securities.
2
Analyze SIPC limits and excluded assets.
SIPC covers up to 500,000perseparatecustomer,ofwhichnomorethan500,000 per separate customer, of which no more than 250,000 can be for cash. Commodity futures, fixed annuities, and market value losses are not covered.
SIPC replaces missing securities and cash in broker insolvency; it is not market loss insurance.
3
Evaluate separate customer registration capacities.
Multiple accounts owned by the same individual in the same capacity (e.g., individual cash and individual margin) at the same broker-dealer are combined as one separate customer.
SIPC limits apply per separate customer capacity, not per individual account.

Key Concept

SIPC vs. FDIC Protection Limits and Coverage Capacities
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SIPC vs. FDIC Protection and Coverage Limits

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