SIPC

A customer holds a certificate of deposit at her bank and a stock portfolio at her brokerage firm. Which organization insures the CD if the bank fails?

1. A.The SECThe SEC enforces securities laws; it does not insure anyone's money.
2. B.The MSRBThe MSRB writes municipal securities rules — it provides no insurance of any kind.
3. C.SIPCSIPC covers customers of failed brokerage firms — bank deposits are outside its scope.
4. D.The FDICCorrect — CDs are bank deposits, insured by the FDIC up to 250,000 dollars per depositor, per bank, per ownership category.

Why: Bank deposits — checking, savings, and CDs — are insured by the FDIC up to 250,000 dollars per depositor, per bank, per ownership category. SIPC protects brokerage customers, not bank depositors.

What risk does the Securities Investor Protection Corporation protect a brokerage customer against?

1. A.A decline in the market value of securities held in the customer's account.Wrong. Market risk is the risk the customer knowingly accepted, and no coverage removes it.
2. B.Default by the issuer of a bond or preferred stock the customer holds in the account.Wrong. Issuer credit risk belongs to the investment itself and is not the intermediary failure being covered.
3. C.The failure of the customer's broker-dealer, restoring cash and securities up to the statutory limits.Correct. What is covered is the disappearance of the intermediary rather than any loss on the investments.
4. D.Unauthorised trading by a registered representative in the customer's account.Wrong. That is a claim against the firm and its representative, pursued through arbitration rather than this coverage.

Why: SIPC exists to address the failure of a broker-dealer, restoring customers' cash and securities up to the statutory limits when a member firm becomes insolvent and customer property is missing. It is not insurance against investment loss, so a customer whose shares fall in value has suffered exactly the risk he agreed to bear when he bought them. The distinction matters because it identifies whose failure is being covered: the intermediary's, not the issuer's and not the market's. A customer whose firm fails while holding a portfolio that has collapsed in value gets the collapsed portfolio back, not the price he paid for it.

Reading the legend on her account statement, Philippa asks her representative what SIPC would cover if the broker-dealer holding her account failed. The correct description of the protection is:

1. A.The full value of her account, since SIPC coverage is unlimited for registered investment company shares.There is no unlimited coverage and no special fund carve-out.
2. B.Up to 500,000 dollars per customer for securities plus a separate 250,000 dollars for cash, for 750,000 dollars in all.The cash figure sits inside the 500,000 dollar ceiling; the two do not add.
3. C.Any loss in the value of her fund shares, whatever the cause.Market losses are never covered. SIPC addresses missing property when a firm fails.
4. D.Up to 500,000 dollars per customer for securities and cash, of which no more than 250,000 dollars may be for cash.Correct. 500,000 dollars total with a 250,000 dollar cash sub-limit.

Why: SIPC protects customers of a failed broker-dealer up to 500,000 dollars per customer for securities and cash, of which no more than 250,000 dollars may be for cash claims. It restores missing property in a liquidation. It is emphatically not insurance against a fund losing value, and it does not cover a customer whose complaint is that an investment performed poorly or was unsuitable.

What is the maximum total SIPC protection available to a single separate customer of a failed broker-dealer?

1. A.250,000 dollars, of which no more than 100,000 dollars may be cashThis borrows the FDIC deposit limit and applies it to SIPC. The SIPC ceiling is twice as large.
2. B.500,000 dollars in cash plus 500,000 dollars in securitiesThe 500,000 dollars is a combined ceiling, not a limit that applies separately to each asset type.
3. C.Unlimited, because SIPC is backed by the full faith and credit of the United StatesSIPC is funded by member assessments and is not a government guarantee. Coverage is capped.
4. D.500,000 dollars, of which no more than 250,000 dollars may be cashCorrect — 500,000 dollars is the overall ceiling and 250,000 dollars is the cash sublimit inside it.

Why: SIPC protects up to 500,000 dollars per separate customer. Within that ceiling, no more than 250,000 dollars may be claims for cash.