SIPC vs. FDIC Practice Questions for the SIE

Answer: $500,000 total, of which no more than $250,000 may be cash

SIPC protection, established under the Securities Investor Protection Act of 1970, is $500,000 per customer per separate capacity, and no more than $250,000 of that total may be cash. Choice A applies the FDIC's $250,000 bank-deposit limit to a brokerage failure — the two programs are frequently confused (FDIC insures bank deposits; SIPC protects brokerage customers). Choice B treats the cash sublimit as an extra layer on top of $500,000; in fact it sits inside the $500,000 total. Choice D reverses the figures — the $250,000 sublimit restricts cash, not securities.

The Trap: fdic-limit-confusion

• $500,000 in cash and $250,000 in securities: Misconception: reversing the sublimit — the $250,000 cap applies to cash, not securities.
• $250,000 per customer: Misconception: applying the FDIC's $250,000 bank-deposit insurance limit to a brokerage-firm failure (SIPC vs. FDIC limit swap).
• $500,000 in securities plus an additional $250,000 in cash: Misconception: treating the $250,000 cash sublimit as an extra layer on top of the $500,000 total (implying $750,000) rather than a cap inside it.

Verified against: Securities Investor Protection Act of 1970 (SIPC) — $500,000 total / $250,000-cash sublimit per customer per separate capacity

Answer: A certificate of deposit held at an insured bank

The FDIC, a federal government agency, insures bank deposits — checking and savings accounts, CDs, and money market deposit accounts — up to $250,000 per depositor, per insured bank, per ownership category. A CD held at an insured bank is a classic covered deposit. Mutual funds (A), brokerage securities (C), and annuities (D) are not deposits and are not FDIC-insured, even when purchased at a bank branch — a required disclosure point precisely because customers assume anything bought at a bank is insured. A helpful screen: if the product can lose market value, FDIC insurance does not apply. Securities held at a broker-dealer instead fall under SIPC custody protection if the firm fails.

The Trap: bank-lobby-insurance

• Securities held in a brokerage account: Misconception: SIPC/FDIC swap — securities at a broker-dealer fall under SIPC custody protection, not FDIC deposit insurance.
• Shares of a stock mutual fund purchased at a bank branch: Misconception: anything sold in a bank lobby is FDIC-insured — mutual funds are securities and are not deposits, regardless of where they are sold.
• A variable annuity purchased through a bank's investment desk: Misconception: annuities are FDIC-insured when bought at a bank — annuities are not deposits and the FDIC does not cover them.

Verified against: bank-lobby misconception pair)

Answer: Securities missing from a customer's account after the customer's brokerage firm fails and is liquidated

SIPC steps in when a member broker-dealer fails and customer cash or securities are missing from the accounts the firm was holding — it is custody protection, restoring up to $500,000 per customer per separate capacity (including up to $250,000 for cash), with a court-appointed trustee handling customer claims. It does not reimburse declines in market value (B) — the most heavily tested misconception about SIPC — nor losses caused by poor or unsuitable recommendations (C), which customers must pursue through arbitration or the courts instead. Commodity futures contracts (D) are among the products SIPC excludes, along with currency/forex positions, precious metals, and fixed annuity contracts not registered with the SEC. Remember: SIPC replaces what the failed broker lost from your account, not what the market took.

The Trap: market-loss-coverage

• A decline in the market value of a customer's stock during a downturn: Incorrect. SIPC does not protect against market losses — the single most commonly tested SIPC trap. A drop in a stock's value is investment risk, not a custody failure.
• Losses in a customer's commodity futures contracts when the firm fails: Incorrect. Commodity futures contracts are on SIPC's exclusion list, along with currency/forex positions, precious metals, and fixed annuity contracts not registered with the SEC.
• Losses caused by a representative's unsuitable investment recommendation: Incorrect. SIPC does not reimburse losses from bad or unsuitable advice; those claims are pursued through arbitration or litigation, not through SIPC.

Verified against: market-loss misconception pair)

Answer: A nonprofit membership corporation, funded by its broker-dealer members, that protects customers when a member firm fails

SIPC is a nonprofit membership corporation created by the Securities Investor Protection Act of 1970 and funded by assessments on its broker-dealer members. It is not a federal agency — that description fits the FDIC (A). It is not an SRO like FINRA (B): SIPC writes no conduct rules and conducts no examinations. Nor is it a division of the SEC (C), although the SEC oversees it. Keep the pairing straight: FDIC = government agency insuring bank deposits; SIPC = industry-funded nonprofit protecting brokerage customers, up to $500,000 (including $250,000 cash), when a member firm fails.

The Trap: sipc-as-government-agency

• A federal government agency that insures brokerage accounts against losses: Misconception: SIPC is a government agency like the FDIC — it is not; and 'insures against losses' smuggles in the market-loss trap.
• A division of the SEC that examines broker-dealer finances: Misconception: SIPC is part of the SEC — it is a separate corporation, although the SEC oversees it.
• A self-regulatory organization that writes conduct rules for broker-dealers: Misconception: confusing SIPC with an SRO such as FINRA — SIPC writes no conduct rules and examines no firms.

Verified against: Securities Investor Protection Act of 1970 — SIPC as a nonprofit, member-funded membership corporation (not a government agency)

Answer: "No — a money market fund is a security and is not FDIC-insured, but as a security held at our firm it falls within SIPC custody protection if the firm were to fail."

A money market mutual fund is a security — an investment company product that seeks a stable value but carries no government guarantee — so it is not FDIC-insured (making A and C wrong), no matter where it is purchased. The accurate response is B: as a security held in a brokerage account, the fund shares are within SIPC custody protection if the member firm fails. D overcorrects — while SIPC will not cover a decline in the fund's value, it does protect the customer's shares if the firm collapses. Contrast this with a money market DEPOSIT account, which is a bank deposit insured by the FDIC — the near-identical names make this a deliberate exam trap.

The Trap: mmf-vs-mmda

• "Yes — money market funds are insured up to $250,000, just like a bank deposit.": Misconception: money market MUTUAL FUND vs. money market DEPOSIT account — only the bank deposit account is FDIC-insured.
• "No — money market funds carry no protection of any kind.": Misconception: overcorrection that denies SIPC custody protection — the fund shares are covered custody property if the member firm fails (though SIPC still would not cover a drop in the fund's value).
• "Yes, but only if the fund shares were purchased through a bank.": Misconception: purchase location creates FDIC coverage — securities are not FDIC-insured even when sold at a bank.

Verified against: Securities Investor Protection Act of 1970 (SIPC) — custody protection for securities, including money market mutual fund shares

Answer: The CD is covered by FDIC deposit insurance; the stock is protected by SIPC if the broker-dealer fails

Match the product to the protector: the CD is a bank deposit, insured by the FDIC up to $250,000 per depositor, per insured bank, per ownership category; the stock is a security held at a broker-dealer, protected by SIPC — up to $500,000 per customer per capacity, including a $250,000 cash sublimit — if the firm is liquidated. B swaps the two programs. C extends FDIC insurance to securities, which it does not cover. D looks almost right but smuggles in the market-loss trap: SIPC restores custody of the shares if the firm fails; it does not protect their market value. One related nuance: even a brokered CD purchased through a broker-dealer generally keeps FDIC insurance on the underlying bank deposit — the coverage passes through the custodian to the investor when the CD is properly titled — while SIPC's role is limited to protecting custody of that position if the broker-dealer itself fails.

The Trap: sipc-fdic-swap

• The CD is FDIC-insured; the stock is protected by SIPC against both firm failure and market declines: Misconception: SIPC protects against market losses — it protects custody of the shares at a failed firm, not their market price.
• The CD is covered by SIPC; the stock is insured by the FDIC: Misconception: straight SIPC/FDIC swap — assigning each protector to the wrong institution type.
• Both holdings are insured by the FDIC, up to $250,000 each: Misconception: FDIC covers everything financial — it insures bank deposits and does not cover securities.

Verified against: bank CD vs. brokered CD); investor.gov Brokered CDs Investor Bulletin + FINRA NtM 02-69 (pass-through FDIC insurance on brokered CDs)

Answer: Neither SIPC nor FDIC — the annuity depends on the insurer's claims-paying ability, with state insurance guaranty associations as the typical backstop

A fixed annuity is an insurance contract — it is not a security, so SIPC does not cover it (eliminating B and D on one side), and it is not a bank deposit, so FDIC insurance does not apply either (eliminating A and D on the other), even when the purchase happens in a bank lobby. The guarantee rests on the issuing insurance company's claims-paying ability, and state insurance guaranty associations generally serve as the backstop if an insurer fails. "Fixed annuity — covered by neither SIPC nor FDIC" is a heavily tested point, and the bank-lobby setting is added specifically to bait the FDIC answer.

The Trap: fixed-annuity-covered-by-neither

• FDIC insurance, because the annuity was purchased at a bank: Misconception: bank-lobby coverage — the FDIC insures deposits only; annuities are not deposits regardless of where they are sold.
• SIPC protection, because the annuity was sold through a broker-dealer: Misconception: SIPC covers every product a broker-dealer sells — fixed annuities are insurance products on SIPC's exclusion list.
• Both FDIC and SIPC apply, because both a bank and a broker-dealer were involved in the sale: Misconception: coverage stacks based on the sales channel — neither program covers an insurance contract, no matter who sold it.

Verified against: State insurance guaranty association system (e.g., NOLHGA) for fixed annuities — not covered by SIPC (SIPA 1970) or FDIC insurance

Answer: Virtually all SEC-registered broker-dealers are required by law to be SIPC members

Under the Securities Investor Protection Act of 1970, virtually all SEC-registered broker-dealers are required to be SIPC members, and member assessments fund the protection. Membership is mandatory, not an optional premium service (A). It is not limited to clearing or carrying firms (B) — introducing firms must be members as well, even though customer cash and securities are typically held at the clearing firm. Banks themselves (C) are outside SIPC; deposit insurance for banks is the FDIC's role, and it is a bank's affiliated broker-dealer — not the bank — that carries SIPC membership. Related disclosure point: FINRA Rule 2266 requires member firms to tell customers how to obtain SIPC information, including the SIPC brochure.

The Trap: membership-optional

• Only clearing and carrying firms that hold customer assets are required to be members: Misconception: conflating the membership requirement with the introducing-vs-clearing custody split — introducing firms must be members too.
• Membership is optional, and firms that join may advertise it as a premium service: Misconception: SIPC protection is an elective perk — membership is mandated by law for nearly all registered broker-dealers.
• FDIC-insured banks must also join SIPC before selling any securities products: Misconception: mixing the bank and brokerage regimes — banks are FDIC territory; SIPC membership attaches to registered broker-dealers.

Verified against: Securities Investor Protection Act of 1970 (mandatory SIPC membership for SEC-registered broker-dealers); FINRA Rule 2266 (SIPC information disclosure)

Answer: Commodity futures contracts

SIPC's exclusion list is a favorite test topic: commodity futures contracts, currency/forex positions, precious metals, fixed annuities, and unregistered investment contracts are not protected. Everything else listed here is covered custody property. Street-name stock (A) is precisely what SIPC restores when a member firm fails. Cash awaiting investment (C) is covered up to the $250,000 cash sublimit within the $500,000 total. Corporate bonds held at the firm (D) are covered securities just like stocks. A quick screen: if the product is not a security under the Securities Investor Protection Act — futures, forex, precious metals, and fixed annuities or other insurance contracts not registered as securities — SIPC does not cover it. By contrast, a variable annuity is a registered security, so it IS covered.

The Trap: excluded-products

• 500 shares of an exchange-listed stock held in street name: Misconception: street-name shares belong to the firm and are lost in a failure — restoring street-name securities is exactly what SIPC custody protection does.
• Corporate bonds the firm holds for the customer: Misconception: only stocks qualify — bonds and other securities in the firm's custody are covered property.
• $50,000 in cash awaiting investment: Misconception: SIPC covers only securities, not cash — cash held at the failed firm is covered up to the $250,000 sublimit.

Verified against: Securities Investor Protection Act of 1970 (SIPC) — coverage exclusions (commodity futures, forex, precious metals, fixed annuities)

Answer: $500,000 — the entire account, because the total is within the $500,000 limit and the cash is within the $250,000 cash sublimit

Work the two limits in order: total SIPC protection is $500,000 per customer per capacity, and cash within that total is capped at $250,000. Here, $400,000 of securities plus $100,000 of cash equals exactly $500,000, and the cash is comfortably under its sublimit — so the entire account is protected. B applies the FDIC bank-deposit limit to a brokerage failure. C reflects the mistaken belief that SIPC ignores cash — cash held at the failed firm is covered, up to $250,000. D misapplies the $250,000 sublimit to securities; it restricts only cash. For claim purposes, SIPC values securities at market as of the date the liquidation proceeding is filed.

The Trap: sublimit-misapplication

• $350,000 — because securities coverage is capped at $250,000: Misconception: flipping the sublimit — the $250,000 cap applies to cash, not to securities.
• $250,000: Misconception: applying the FDIC's $250,000 deposit-insurance limit (or the cash sublimit) as if it were SIPC's overall maximum.
• $400,000 — the securities only, because cash held at a broker-dealer is not covered: Misconception: SIPC covers only securities — cash at the failed firm is covered up to $250,000 within the total.

Verified against: filing-date valuation)