What Happens if My Brokerage Firm Fails?
“When E.F. Hutton Talks…”
Who?
Brokerage Firms do fail. But don’t panic.
E.F. Hutton was one of the most respected financial firms and was for decades the second largest brokerage firm in the US. There was a commercial about Hutton that had the tag line: “When E.F. Hutton Talks…People Listen.”
People stopped listening in 1987 after the October stock market crash. Hutton agreed to be acquired by Shearson Lehman American Express on December 3, 1987
The tale of Hutton is a familiar one; Greed, mismanagement, greed, a firm run by an autocrat, greed, committing fraud and thinking they would never get caught, greed, you get the idea.
E.F. Hutton was founded in 1904. The company survived the San Francisco earthquake, two World Wars, and the Depression. If you had an account at Hutton, your account and securities were transferred to Shearson Lehman American Express.
Bear Stearns
Bear Stearns was one of the most respected firms on Wall Street, Founded in 1923, it survived the Great Depression and a second World War. It did not survive the financial crisis of 2008-2010.
“It served corporations, institutions, governments, and individuals. The company’s business included corporate finance, mergers and acquisitions, institutional equities, fixed income sales & risk management, trading and research, private client services, derivatives, foreign exchange and futures sales and trading, asset management, and custody services. Through Bear Stearns Securities Corp., it offered global clearing services to broker dealers, prime broker clients and other professional traders, including securities lending.[6]””
Unlike E.F. Hutton, the failure of Bear Stearns stemmed from the overuse of leverage, over exposure to mortgage-backed derivatives, and loss of confidence by investors.
Bear Stearns was acquired by JP Morgan Chase on Friday March 14, 2008.
If you had an account with securities and cash, your account was transferred to JP Morgan Chase.
Lehman Brothers
Lehman Brothers was founded in 1847 by Henry, Emanuel, and Mayer Lehman. The brothers emigrated from Bavaria and settled in Montgomery, Alabama. Originally a dry goods store, the brothers began accepting raw cotton in payment for goods. Eventually they began trading cotton, and their business grew into commodities trading and brokerage.
The center of cotton trading moved from Alabama to New York prior to the American Civil War beginning in 1861.
On September 15, 2008, Lehman Brothers declared bankruptcy. A company that survived the Civil War, the Great Depression, and two World Wars did not survive the financial crisis of 2008. In a move that stunned the global financial community, there were no viable buyers to acquire the firm.
Other notable acquisitions:
- Bank of America acquires Merrill Lynch in 2008
- Morgan Stanley acquires Smith Barney in 2009
What happened to the retail clients? If you had an account at any of these firms, were you insured?
There are several types of insurance. The FDIC insures cash up to $250,000.00 per eligible account and eligible accounts at different banks.
The Securities Investor Protection Corporation (SIPC) protects customers if their brokerage firm fails.
If your brokerage firm is acquired, SIPC steps in to make sure that the transfer of your account and securities goes smoothly. Your account and securities are transferred to another SIPC brokerage firm.
SIPC insurance comes into play if a brokerage firm fails and assets are missing.
Says FINRA*: “In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm.
“Multiple layers of protection safeguard investor assets. For example, registered brokerage firms must keep their customers’ securities and cash segregated from their own so that, even if a firm fails, its customers’ assets will be safe. Brokerage firms are also required to meet minimum net capital requirements to reduce the likelihood of insolvency.”
What you need to know:
To be eligible for SIPC coverage your account must be at a SIPC member broker-dealer.
There are investments that SIPC does not cover, for example nonregistered REITS, commodity futures contracts, foreign currency, gold, and silver coins. The list of qualified securities under SIPC can be found through the link below SIPC Investor FAQ’s.
SIPC covers cash and securities up to $500,000.00 with a maximum cash limit of $250,000.00.
“SIPC was created under the Securities Investor Protection Act as a non-profit membership corporation. SIPC oversees the liquidation of member firms that close when the firm is bankrupt or in financial trouble, and customer assets are missing. In a liquidation under the Securities Investor Protection Act, SIPC and the court-appointed Trustee work to return customers’ securities and cash as quickly as possible. Within limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only).”
The key word is “missing”. When a brokerage firm fails or is merged with another brokerage firm your securities and accounts are transferred to the new SIPC insured firm.
There is a difference between securities and cash missing versus securities and cash being transferred to another firm.
Present Day
“Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever. Although not every investor or transaction is protected by SIPC, no fewer than 99 percent of persons who are eligible get their investments back with the help of SIPC. From its creation by Congress in 1970 through December 2020, SIPC advanced $3.1 billion in order to make possible the recovery of $141.8 billion in assets for an estimated 773,000 investors.”
Resources:
SIPC – History and Track Record
SIPC – Lehman Brothers Inc.’s 14-Year Liquidation Successfully Concludes
*FINRA is the Financial Industry Regulatory Authority
This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.
