Monday, 13 August 2012

When a Broker Goes Bankrupt Your Securities May Not be Yours to Take

The latest article by Independent Investor What if your investment dealer went bust gave me a fright. Probably like many others, I have gone along believing that since my holdings with my discount broker are segregated and in effect held in trust, I would get my securities back automatically and promptly. Oops, bad assumption, as Independent Investor explains: "... the assets of all customers generally fall into a single, common pool, and the rights of the customers become financial claims to be dealt with uniformly by the trustee. In other words, customer assets that are fully paid for and fully segregated are not separately and directly returned to those customers."

It is true that the Canadian Investor Protection Fund is there to step up and make up any deficiency up to $1 million per customer per dealer but a problem remains - how long will this take? Going through courts and insolvency proceedings is likely to take "some time" as they say. Meantime, what are people who need access to the holdings e.g. for retirement income, supposed to do?

An obvious tactic to deal with this danger would seem to be to split assets amongst several brokers. Another tactic, admittedly harder and more constantly complicated to carry out, is to assess and monitor the solidity of the broker, which for most Canadians, is a subsidiary of one of the big six banks. I look forward to what Independent Investor has to say in his promised follow-up article on who is most at risk and on possible preventative steps to minimize the risk.

1 comment:

CMA said...

Nice insight.

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