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Category: Bankruptcy Law
Satisfied Customers: 17252
Experience:  14 years exp., CH 7 AND 13 Bankruptcy cases, AFL-CIO UNION PLUS, UFT NYSID AND ALL MAJOR UNIONS
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How would a bankruptcy or "bank bail-in" affect client asset

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How would a bankruptcy or "bank bail-in" affect client assets held at a brokerage?

The first scenario is pretty straightforward. A client has assets at a brokerage firm which goes bankrupt.

Regarding the latter scenario, please watch this video to understand exactly what I'm talking about.

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Customer: replied 4 years ago.
Thanks. I'll wait.

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Hello I am a bankruptcy attorney and can provide some information for you regarding this matter, Most brokerages are members of the SIPC, the SIPC is a non-profit corporation created pursuant to the Securities Investor Protection Act of 1970 (SIPA) to (1) establish and administer procedures for the liquidation of failed broker-dealers that are SIPC members and (2) provide limited financial protection to customers of failed broker-dealers out of SIPC funds When a SIPC member firm fails, it ordinarily is liquidated under SIPA, not the Bankruptcy Code. SPIC generally steps in immediately and asks a federal court to appoint a trustee to liquidate the firm and protect its customers. Normally, the trustee will first try to have some or all customer accounts transferred from the failed broker-dealer to another SIPC member broker-dealer. Customers whose accounts are transferred are notified promptly and permitted to deal with the new firm or subsequently transfer their accounts to firms of their own choosing. If the trustee is unable to transfer customer accounts, the trustee satisfies claims on an individual basis after the customer files his or her claim with the trustee. There are a number of factors that may affect the timing of the liquidation process, including how quickly and completely claims are filed and the quality of the failed firm’s books and records. SIPA substantially alters the rights of unsecured creditors, giving customers with unsecured claims priority over other unsecured creditors in distributions of customer property.1 (SIPA generally does not alter the rights of secured creditors who have rights under the Bankruptcy Code.) While customers have a preferential claim to customer property, they rank pari passu with general creditors as to the distribution of other assets of the failed firm. Customers of a failed brokerage firm will get back all securities that are registered in their name or are in the process of being registered (customer name securities. If for some reason the brokerage is not a member, the brokerage was to separate clients accounts from the corporate accounts, so the clients money should still be protected.

Customer: replied 4 years ago.
Thank you for your thorough reply. I'm writing an article about this. Would you like to be recognized in it for your input? If so, please reply with your name, firm name and URL.

So, the botXXXXX XXXXXne is that client assets (stocks, bonds, etc) held at a brokerage firm remain in the ownership/title of the client at all times and do not become the broker's asset like in a bank deposit transaction, right?

This sounds much safer than bank deposits, but like gold in 1932, brokerage assets could theoretically be subject to confiscation I guess, but that's another matter.

Under what circumstance would a brokerage client be at risk of losing their assets at a broker? For instance, if they are holding cash in the account, is that considered a deposit? What else could lead to brokerage client loss from a bankruptcy or bail-in do you think? Thank you.
When a brokerage firm fails and cash or securities appear to be missing from customer accounts, the SIPC will oversee an orderly liquidation of brokerage customer accounts, providing up to $500,000 in coverage for missing cash and securities, including a $250,000 limit for missing cash. The cash limit was increased from $100,000, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama last July.

The real problem in these cases is the investment decisions, of the failed brokerage, for example if a client has 1 million in an account that is managed by a broker, that broker can use the clients funds for investments, and if the investments fail the clients assets are gone.

Cash would be protected as it is not being invested, typically these accounts would be moved to another broker.

Also, if fraud was involved the SIPC would try to remedy the matter, with the insurance amounts listed above.
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Customer: replied 4 years ago.

Thanks again. I want to make sure I fully understand the legal implications of a client holding securities at a brokerage firm.


So client securities held at a brokerage firm remain in the ownership/title of the client at all times and do not become the broker's asset like in a bank deposit transaction, right?

right, they are placed is separate accounts.
Category: Bankruptcy Law
Satisfied Customers: 17252
Experience: 14 years exp., CH 7 AND 13 Bankruptcy cases, AFL-CIO UNION PLUS, UFT NYSID AND ALL MAJOR UNIONS
WALLSTREETESQ and 2 other Bankruptcy Law Specialists are ready to help you
Customer: replied 4 years ago.