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Difficulty: Very hardSIPC vs. FDIC Protection and Coverage Limits

An investor maintains three separate financial accounts across two insolvent institutions. At Apex Brokerage, a SIPC-member broker-dealer undergoing liquidation, the investor holds an Individual Cash Account containing 210,000inequitysecurities,210,000 in equity securities, 270,000 in uninvested cash, and 60,000incommodityfuturescontracts.Atthesamebroker−dealer,theinvestoralsoholdsaJointCashAccountwiththeirspousecontaining60,000 in commodity futures contracts. At the same broker-dealer, the investor also holds a Joint Cash Account with their spouse containing 310,000 in municipal bonds and 180,000incash.Additionally,atFirstNationalBank,anFDIC−insuredcommercialbankundergoingfailure,theinvestorholdsanIndividualDepositAccountwitha180,000 in cash. Additionally, at First National Bank, an FDIC-insured commercial bank undergoing failure, the investor holds an Individual Deposit Account with a 190,000 Certificate of Deposit (CD) and $110,000 in a savings account. Assuming no general creditor recoveries occur, what is the maximum combined total payout the investor will receive from SIPC and FDIC coverage across these accounts?

  1. $1,200,000Answer
  2. B
    $1,220,000
  3. C
    $1,240,000
  4. D
    $1,250,000

Answer

The maximum combined total coverage protected across all three accounts by SIPC and FDIC is $1,200,000.
The correct answer of 1,200,000accuratelyappliesthespecificprotectionstatutorylimitsandrulesforbothSIPCandFDIC.UnderSIPCrules,individualandjointaccountsareseparatecustomercapacities,eachreceivingupto1,200,000 accurately applies the specific protection statutory limits and rules for both SIPC and FDIC. Under SIPC rules, individual and joint accounts are separate customer capacities, each receiving up to 500,000 total coverage with a 250,000caponcashclaims.CommodityfuturesarecompletelyexcludedfromSIPCcoverage.Thus,theindividualbrokerageaccountreceives250,000 cap on cash claims. Commodity futures are completely excluded from SIPC coverage. Thus, the individual brokerage account receives 460,000 (210,000equities+210,000 equities + 250,000 capped cash), and the joint brokerage account receives 490,000(490,000 ( 310,000 bonds + 180,000cash).UnderFDICrules,depositaccountsinsingleownershipcapacityataninsuredbankarecombinedandcappedat180,000 cash). Under FDIC rules, deposit accounts in single ownership capacity at an insured bank are combined and capped at 250,000 total protection. Summing 460,000+460,000 + 490,000 + 250,000yields250,000 yields 1,200,000.

Step-by-Step Solution

1
Calculate SIPC coverage for the Individual Cash Account at Apex Brokerage.
Protected amount = $460,000.
SIPC provides up to 500,000totalcoverageperseparatecustomer,withacashsublimitof500,000 total coverage per separate customer, with a cash sublimit of 250,000. Commodity futures are not securities and are excluded from SIPC coverage (0).Thecashclaimiscappedat0). The cash claim is capped at 250,000 (leaving 20,000cashunprotected).Equitysecurities(20,000 cash unprotected). Equity securities ( 210,000) + protected cash (250,000)=250,000) = 460,000, which is below the overall $500,000 SIPC account limit.
2
Calculate SIPC coverage for the Joint Cash Account at Apex Brokerage.
Protected amount = $490,000.
A joint account is recognized as a separate customer capacity from an individual account. Cash (180,000)isfullycoveredbecauseitisbelowthe180,000) is fully covered because it is below the 250,000 cash sublimit. Municipal bonds (310,000)+cash(310,000) + cash ( 180,000) = 490,000,whichiswithinthe490,000, which is within the 500,000 overall SIPC cap.
3
Calculate FDIC coverage for the bank accounts at First National Bank.
Protected amount = $250,000.
FDIC insurance covers deposit accounts (such as CDs and savings accounts) up to 250,000perdepositor,perinsuredbank,forsingleownershipaccounts.Totaldepositsequal250,000 per depositor, per insured bank, for single ownership accounts. Total deposits equal 190,000 + 110,000=110,000 = 300,000. FDIC coverage caps protection at 250,000(leaving250,000 (leaving 50,000 uninsured).
4
Sum the total protected amounts across all accounts.
Total combined protection = $1,200,000.
460,000(IndividualSIPC)+460,000 (Individual SIPC) + 490,000 (Joint SIPC) + 250,000(IndividualFDIC)=250,000 (Individual FDIC) = 1,200,000.

Key Concept

SIPC coverage limits (500,000totalperseparatecustomercapacityincludingupto500,000 total per separate customer capacity including up to 250,000 in cash; commodity futures excluded) versus FDIC insurance coverage limits ($250,000 per depositor per bank for single ownership deposit accounts).
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SIPC vs. FDIC Protection and Coverage Limits

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