If a brokerage firm fails, investors can pursue claims against brokers who violate regulations or breach their duties. They can seek compensation from brokerage insurers or securities industry protection funds like SIPC. Alternatively, they can file arbitration cases or lawsuits to recover damages.
A broker misconduct lawyer can investigate allegations, calculate total losses, and fight to maximize an investor’s recovery through negotiation, arbitration, or court representation. They give investors a chance to obtain the compensation they deserve after suffering losses due to wrongdoing or mishandling of their accounts and assets.
Your Options to Salvage Your Stock if a Brokerage Firm Fails
If your brokerage firm fails or goes bankrupt, there are a few potential scenarios for how your stock and investment accounts could be handled.
Transfer to New Brokerage
Often, another solvent financial firm will agree to purchase the failed brokerage’s assets and client accounts. In this situation, depending on the circumstances, your accounts may transfer over to the new custodian brokerage with little to no interruption in access.
SIPC Coverage
The government provides insurance protection known as SIPC (Securities Investor Protection Corporation) coverage. This covers up to $500,000 worth of securities or $250,000 of cash held at a brokerage firm that fails.
The SIPC aims to recover and return to investors the full account value they held at the time of the brokerage failure. However, it does not cover any investment losses due to normal market declines of individual securities. The qualifying circumstances to recover money under SIPC are extremely narrow. In our experience, most claims filed through SIPC are denied.
Filing a Claim
To receive coverage from SIPC, investors must file a valid brokerage firm investment loss claim after witnessing their brokerage firm fail. The claim allows the SIPC to pursue recovering your account assets.
Account Transfer or Liquidation
Typically, the SIPC will first try to locate another brokerage firm willing to receive the transfer of customer accounts from the failed brokerage. If this is not possible, the failed brokerage firm will be liquidated.
In a liquidation, the SIPC will return to investors either physical certificates for any stocks they held or a cash payment for the last calculated market value of those shares.
Bankruptcy Proceedings
In some cases, a failed brokerage firm may undergo normal bankruptcy proceedings rather than SIPC liquidation. This could occur if the SIPC does not initiate steps to protect customers or if a court determines investors do not require SIPC protection.
While the failure of a brokerage can be unsettling, investors have some safeguards and resources available to recover their assets and securities holdings through the SIPC’s protection and resolution processes.
Laws That Come Into Play When Brokerage Firms Fail
There is a multi-tiered safeguard system in place to protect investor assets and shield clients in the event of a brokerage firm failure that results in the loss of client funds . This system includes critical regulations that brokerage firms must follow, designed to minimize the likelihood of a complete collapse while also providing protections for clients if a failure does occur.
SEC’s Net Capital Rule (Rule 15c3-1)
One key safeguard is the SEC’s Net Capital Rule (Rule 15c3-1), which mandates that brokerages maintain a prescribed minimum level of liquid capital reserves. This capital cushion helps ensure brokerages have sufficient resources to operate safely and meet their obligations.
Customer Protection Rule (Rule 15c3-3)
Additionally, the Customer Protection Rule (Rule 15c3-3) requires brokerage firms to segregate client cash and securities into separate accounts, distinctly apart from the firm’s own assets. This account separation prevents client assets from becoming intermingled with the brokerage’s funds, avoiding confusion.
If a brokerage does ultimately fail despite these safeguards, the protections help facilitate an orderly transfer or recovery of investor assets and accounts.
How a Broker Misconduct Attorney Can Help
When investors suffer losses due to broker misconduct or a brokerage firm’s failure, a broker misconduct attorney can help in the following ways.
Investigating Claims
A lawyer can launch a thorough investigation to uncover evidence of any wrongdoing, violations of industry rules/regulations, excessive risk-taking, misrepresentation of investments, or mishandling of client assets by the broker or firm. This builds the foundation for potential claims.
Navigating Regulatory Processes
The investment world has its own complex laws, regulations, and governing bodies like FINRA. A broker misconduct attorney understands how to work through the required regulatory channels to file claims, seek remedies, and ensure client rights are protected.
Filing Arbitration Claims
Many brokerage contracts require disputes to go through mandatory arbitration instead of court. A lawyer knows the specific procedures to initiate and argue an arbitration case against the broker or brokerage firm before the appropriate arbitration panel.
Seeking Recovery Options
A lawyer’s role is to maximize the potential recovery for the investor’s losses. This could include filing a claim with the brokerage’s insurer, pursuing compensation from SIPC, or taking legal action directly against the brokerage firm’s principals.
Calculating Damages
Calculating total investment damages from broker negligence or deception can be complicated, especially in cases of excessive trading, unsuitability, or unauthorized transactions. A financial lawyer can account for all applicable damages.
Call Meyer Wilson to Learn More About What Happens to Your Stock if a Brokerage Firm Fails
There’s a reason why you hired a brokerage firm to handle your stocks. The market is confusing and ever-changing. When a brokerage firm fails, you can pursue justice by hiring a brokerage misconduct lawyer from Meyer Wilson. Our attorneys have secured more than $350 million for our clients. Now, we want to help you salvage your investment.
Contact us now for a free consultation. We can explore your options and explain more about what happens to your stock if a brokerage firm fails.