Difficulty: Hard

Average Score: 47%

In which of the following scenarios does SIPC provide coverage?

Rationale

An investor holds $250,000 cash in an account at a SIPC member firm that recently failed.

SIPC provides coverage to protect customers against the loss of cash and securities held at a member firm that fails, specifically up to $500,000, with a limit of $250,000 for cash. Therefore, the scenario where the investor holds $250,000 cash is covered under SIPC's protections.

A (An investor holds $250,000 cash in an account at a SIPC member firm that recently failed.) CORRECT

This scenario is covered by SIPC, as it pertains to cash held in a brokerage account at a firm that has collapsed. SIPC's insurance protects up to $250,000 in cash per customer, making this a valid situation for SIPC coverage.

B (An investor experiences losses of $250,000 in one calendar year at a SIPC member firm that is still in business.) YOUR ANSWER

SIPC does not provide coverage for investment losses due to market fluctuations or poor investment decisions. The protection is limited to the failure of a SIPC member firm and does not extend to losses incurred while the firm remains operational.

C (An investor holds $500,000 in cash at a bank that has recently failed.) YOUR ANSWER

SIPC coverage does not extend to banks; it specifically applies to brokerage firms. Therefore, cash held at a bank does not qualify for SIPC protection, regardless of the amount or the bank's failure status.

D (An investor holds $500,000 worth of commodities and futures contracts at a SIPC member firm that has recently failed.) YOUR ANSWER

SIPC coverage primarily applies to cash and securities, not to commodities and futures contracts. As such, this investor's holdings would not be protected under SIPC in the event of the firm's failure.

Conclusion

SIPC serves to protect investors against losses related to the failure of member brokerage firms, specifically for cash and securities held within those accounts. Among the scenarios presented, only the situation involving $250,000 cash at a failed SIPC member firm qualifies for SIPC coverage, while the others either involve non-qualifying assets or scenarios that do not meet SIPC's criteria. Understanding SIPC's limitations is essential for investors to safeguard their assets effectively.

Related Questions

View all

Related Quizzes

View all

No related quizzes currently available.

PREMIUM

Unlock Everything

✓ 500+ Practice Questions
✓ Detailed Explanations
✓ Progress Analytics
✓ Exam Simulations

Get Premium Access →