NASAA Series 63Communication with Customers and ProspectsHard
A broker-dealer's website includes a section with frequently asked questions (FAQs). One FAQ states, 'Is my money protected if the broker-dealer goes out of business?' and the answer provided is, 'Yes, client accounts are fully insured up to $500,000 by the Securities Investor Protection Corporation (SIPC).' Which of the following is an essential disclosure that should accompany this statement to prevent it from being misleading?
- AThe broker-dealer's Central Registration Depository (CRD) number.
- BA statement that the $500,000 limit includes up to $250,000 for cash.
- CNotification that SIPC is a governmental agency.
- DA disclaimer that SIPC insurance does not protect against market losses.
Show answer & explanationAnswer & explanation
Correct answer: D. A disclaimer that SIPC insurance does not protect against market losses.
While the SIPC coverage amount is accurate, stating that accounts are 'fully insured' can be misleading because SIPC protects against broker-dealer failure, not against fluctuations in market value. The most crucial disclosure is that SIPC does not protect against market losses, which is a common misconception.
Why the other options are wrong
- A. A CRD number is for regulatory identification, not a disclosure for SIPC insurance.
- B. While true, this detail is secondary to the primary misconception about market loss protection.
- C. SIPC is a private, non-profit corporation, not a governmental agency, so this would be an inaccurate statement.
SIPC Disclosure Requirements
When discussing SIPC coverage, firms must clearly state that SIPC protects against broker-dealer failure, not against market losses or declines in the value of securities.
- SIPC is not FDIC.
- Protects securities and cash up to limits.
- Does NOT cover market risk.
Memory trick: SIPC protects against broker failure, not market swings; clarify the 'not'.