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Difficulty: MediumSIPC vs. FDIC Protection and Coverage Limits

An investor maintains an individual account at Apex Securities, a SIPC-member broker-dealer currently undergoing financial liquidation. At the time of liquidation, the account holds 190,000inexchange−listedstocks,190,000 in exchange-listed stocks, 80,000 in corporate bonds, 210,000inuninvestedcashheldforpurchasingsecurities,210,000 in uninvested cash held for purchasing securities, 45,000 in commodity futures contracts, and $35,000 in a fixed annuity contract. What is the total dollar amount protected by SIPC for this account?

Answer: 480000 $

Answer

The total dollar amount protected by SIPC for this account is $480,000.
SIPC provides protection up to 500,000totalperseparatecustomer,includingamaximumof500,000 total per separate customer, including a maximum of 250,000 for cash claims. In this scenario, the investor has 270,000incoveredsecurities(270,000 in covered securities ( 190,000 stocks + 80,000bonds)and80,000 bonds) and 210,000 in cash. Because the 210,000cashbalanceisunderthe210,000 cash balance is under the 250,000 cash cap, the entire cash balance is protected. The total claim is 270,000+270,000 + 210,000 = 480,000,whichisbelowtheoverall480,000, which is below the overall 500,000 maximum cap. Commodity futures (45,000)andfixedannuities(45,000) and fixed annuities ( 35,000) are not covered by SIPC.

Step-by-Step Solution

1
Categorize account assets as covered or non-covered under SIPC protection rules.
Stocks (190,000),bonds(190,000), bonds ( 80,000), and cash (210,000)arecovered.Commodityfutures(210,000) are covered. Commodity futures ( 45,000) and fixed annuities ($35,000) are non-covered exclusions.
SIPC protects equity and debt securities as well as cash balances intended for purchasing securities, but excludes commodities, futures contracts, and insurance products such as fixed annuities.
2
Calculate the total value of covered securities.
190,000+190,000 + 80,000 = $270,000.
SIPC covers securities claims up to the overall account limit.
3
Apply SIPC cash protection limits to the cash balance.
210,000cashbalanceisfullyeligible(since210,000 cash balance is fully eligible (since 210,000 is less than or equal to the $250,000 cash sub-limit).
SIPC covers up to $250,000 for cash claims as part of the overall protection limit.
4
Sum protected securities and protected cash, and verify against the $500,000 maximum overall SIPC limit.
270,000+270,000 + 210,000 = $480,000 total protection.
The calculated total of 480,000doesnotexceedthemaximumtotalSIPClimitof480,000 does not exceed the maximum total SIPC limit of 500,000 per separate customer.

Key Concept

SIPC Coverage Limits and Exclusions
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Topics

SIPC vs. FDIC Protection and Coverage Limits

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