What Happens if a Broker Goes Out of Business?
Every time, when a registered brokerage firm goes bankrupt, the securities and cash that you have deposited at the firm remain to be safe. Client
assets are usually moved and transferred to another registered brokerage firm as soon as the authorities find a brokerage firm is in trouble,
facing liquidity problems, or has already filed for bankruptcy protection in bankruptcy court.
U.S. securities firms and brokerage houses are
required not only meet minimum standards of financial requirements (including net capital, liquidity standards, etc) but are also required to
register with and be members of the SIPC, also known as the Securities Investor Protection Corporation.
When a brokerage firm is registered and a member of the SIPC, it carries what is essentially an insurance policy for its client's deposits. Today,
the SIPC will insure client's accounts that are held at a brokerage firm to upwards of $500,000.
On top of the SIPC's automatic $500,000 per account insurance, many Wall Street firms will go out of their way to purchase additional insurance
through the likes of Lloyds of London. The firms that carry additional insurance often carry it to levels as high as $5,000,000 or even $10,000,000 per client. The brokerage firms that carry additional insurance will usually provide the details of all additional account insurance to their clients upon demand.
Safest Brokerage Firms
Sooner or later for many clients the amount in their brokerage or IRA account is going to go above the limit covered by insurance. Therefore, it makes sense
to keep money at the safest brokerage firm in the industry or split your account into two or more accounts. We recommend choosing companies that have been in
business for decades and have never been in financial trouble or taken a bailout. Two of the largest brokerage firms in the United States by size
fit that description perfectly: TD Ameritrade (learn more) and
JP Morgan Chase (learn more).
What Happens to Client's Money if a Broker Goes Bankrupt?
Due to the rarity of a brokerage firm going bankrupt, each circumstance is handled differently. During the banking crisis of 2008, the
brokerage firm Bear Stearns went bankrupt and was bought by J.P. Morgan.
In the case of Drexel Burnham Lambert in 1990, this firm decided to self-liquidate. When this takes place, securities regulators, such as the
SEC (Securities and Exchange Commission) and FINRA, are assigned to the case to make the
smoothest transition of the client's assets from the bankrupt firm to a pre-determined SIPC-protected brokerage firm or multiple SIPC-protected
brokerage firms as needed to handle the quantity of client accounts.
If My Brokerage (TD Ameritrade, Vanguard, Etrade, etc) goes Bankrupt, What Should I do?
As soon as you hear that your brokerage firm is in financial trouble, you should contact both the firm, FINRA
and the SIPC. Follow any and all instructions they give you, especially those given by FINRA and the SIPC. They will guide you through the process of your account/asset transfer to the transferee brokerage firm.
Top Brokers
Brokerage Firm Liquidation: What Happens
As soon as your brokerage firm goes bankrupt and it is determined that a SIPC Liquidation will take place, a letter will be sent out to all client account holders. The letter will state that the brokerage firm has closed its doors and official procedures for the SIPC to begin a "Direct Payment Procedure" (the liquidation proceedings in court) have begun. If your brokerage firm goes bankrupt, and the “Direct Payment Procedure” letter is sent out by the SIPC, you will be advised that you promptly get together all facts surrounding your accounts at the troubled firm. This would include all brokerage records, monthly and quarterly statements, and any/all trade confirmations of securities bought and sold in the account. Other steps to take are to confirm that the statements factually show all of your deposits of cash and securities into the account.
Additionally, check all canceled checks and other cash withdrawal records. Locate canceled checks and correspondence with your brokerage firm. It is especially important to mark and record any withdrawals and/or transactions that you did not authorize.
Lastly, it is of utmost importance to follow all instructions and time limits set forth by the SIPC. The Federal bankruptcy court will require all claims to be filed by a set date – after that date; no other claims will be allowed to be made against the brokerage firm. Because of this rule, it is best to file all paperwork as quickly as possible in order to assure a smooth transition to the new SIPC insured brokerage firm.
How Long Does It Take?
Most client accounts will see the asset transfer process complete in one to three months, start to finish. The time to complete the process can be sped along if the brokerage firm records are complete and accurate when sent in to the SIPC.
It is best to keep in mind that clients may not be able to execute any trades during the SIPC sponsored liquidation process. Also, if the liquidating firm is large, the firm's liquidation my affect other firms including and of the firm's customers including what are known as introducing firms. If this happens, the overall process will continue, but at a longer time frame from start to finish.
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What Does the SIPC Cover?
If your brokerage firm is SIPC Insured, the SIPC Insurance will cover the securities and cash that are held in the account. It will also include up to $500,000 worth
of these securities including up to $250,000 in cash.
What Does the SIPC Not Cover?
If your brokerage firm is insured by the SIPC and goes bankrupt, the SIPC will not cover any losses due to the upward or downward movement of the market. It will also not include any losses due to lost investment opportunities, nor will it cover any losses due to poor investment decisions.
What about Alternative Investments?
The SIPC will not cover any investments in futures investments, including commodity futures. Other
investments not covered are cryptocurrencies, fixed annuities, currency investments, hedge funds, or limited partnerships (LPs) that are not registered with the SEC.
Lastly, any accounts of any directors, officers, partners, or others with significant beneficial interest to the troubled brokerage firm will not be covered by the SIPC.
Stay Informed, Follow Instructions, File on Time
The final instruction to those who hold accounts at a brokerage firm that may or already is going bankrupt is three fold:
- Stay Informed: Keep ahead of the situation. Contact FINRA, the SIPC, and the firm as soon as you hear any news of a potential failure of the brokerage firm.
- Follow Instructions: Once you have received your instructions from the SIPC, gather all of your information and follow all instructions to the letter.
- File on Time: It is utmost important to file all given SIPC paperwork on or before the required due date. Bankruptcy proceedings have clear cut off dates, and any claims after this date will not be included in the transfer proceedings.
Chad Morris is a financial writer with more than 20 years experience
as both an English teacher and an avid trader. When he isn’t writing
expert content for Brokerage-Review.com, Chad can usually be found
managing his portfolio or building a new home computer.
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