Liquidation Process and SIPC Insurance

[Jonathan]

In regards to Liquidation priority, one practice test question says this…

Wages and Taxes

Secured Creditors (Bondholders)

Debentures

Subordinated Debentures

Preferred Stock

Common Stock

But in the reading material it also says this…

Liquidation priority

1. Unpaid wages

2. Unpaid taxes

3. Secured creditors

4. Unsecured creditors

5. Junior unsecured creditors

6. Preferred stockholders

7. Common stockholders

I understand Debentures are “Unsecured Creditors.” Does this mean that Junior Unsecured Creditors are also “ Subordinated Debentures” ?

My other question is about SIPC insurance. I’m just not connecting with the math on these questions.

Here is the question one of the practice exams:

“Question: In the event of broker-dealers failure, SIPC insurance can be utilized. How much coverage does a customer receive if they have an account with 675,000 of securities and 255,000 of cash?

Answer: 250K in Cash and 250K in securities.”

I understand that SIPC coverage is up to 500K, and no more than 250K towards cash priority first. But why the 250K towards securities? How does it come to that amount?

Thanks!

[Justin]

Hey Jonathan,

Does the answer Brandon posted in your other thread answer these questions?

Statutory and Cumulative

@Jonathan - thanks for reaching out! Yes, junior unsecured creditors are also known as subordinated debentures. Good observation! For the second question, you’re right about the $500,000 total coverage and the fact that cash is the priority. So, the first $250,000 of coverage is specifically for cash. That’s all the coverage the cash is provided. Now, the remaining $250,000 of coverage is specifically for securities. That’s how you want to approach SIPC questions. Cash is first priority, up to …

[Jonathan]

Hi Justin,

Yes. He did answer. I did reach out on that thread, but hadn’t heard back. Figured he was just away or busy. So posted here. Thanks!