My Brokerage Firm Failed—What Do I Do Now?

When you invest with a brokerage firm, you expect the firm to last. You expect it to help you grow an investment portfolio that will allow you to live comfortably in retirement, and you expect it to be there to help you manage your funds in retirement when the time comes.

So, what happens if your brokerage firm fails?

While this is a question that most investors never consider, it is a very real concern. Brokerage firms can—and do—fail, and when they fail, they don’t always put investors’ interests first. While there are safeguards that are designed to protect investors in this scenario, investors will often need to take legal action to recover their funds after their brokerage firms fail.

The (Limited) Safeguards that Protect Investors When Brokerage Firms Fail

The Financial Industry Regulatory Authority (FINRA) recently published an article discussing investors’ rights when a brokerage firm closes its doors. As FINRA explains, “[m]ultiple layers of protection safeguard investor assets” when they invest with a registered brokerage firm. These layers of protection include:

• Brokerage firms must segregate customers’ cash and securities from their own, and they must not use customer assets for operating expenses.
• Brokerage firms must continuously meet minimum net capital requirements in order to avoid insolvency and the risk of shutting down.
• Brokerage firms must be members of the Securities Investor Protection Corporation (SIPC).

As FINRA goes on to explain, “SIPC provides limited coverage to investors on their brokerage accounts if their brokerage firm becomes insolvent.” Despite the requirement for registered brokerage firms to maintain sufficient capital reserves to avoid insolvency, failures still happen. When a member firm fails, the SIPC provides coverage of up to $500,000 per investor, with a $250,000 limit for cash-only claims.

However, this coverage is only available when an investor’s losses result from theft, conversion or unauthorized trading—in other words, when a brokerage firm uses investors’ funds for prohibited purposes. The SIPC does not cover market losses, and, crucially, it only covers SEC-registered securities. This means that investment assets such as fixed annuities and unregistered hedge funds and investment contracts are not eligible for reimbursement if a brokerage firm fails.

In limited circumstances, the SIPC will also initiate a liquidation proceeding in order to seek to recoup investors’ assets from a failed brokerage firm. As FINRA notes, this typically only happens in cases involving suspected fraud or theft of customer assets. If an SIPC liquidation results in the recovery of assets, investors can then file with the SIPC to claim a portion of the recovered funds. In this scenario, the amount individual investors can recover depends on their losses, the amount recovered by the SIPC, the total number of investors who file claims and various other factors.

Filing a Claim Against a Failed Brokerage Firm

For many investors, SIPC insurance isn’t enough. Additionally, even if SIPC initiates a liquidation, most investors won’t want to take a wait-and-see approach to see if they will have the opportunity to file a claim for recovery. Additionally, a wait-and-see approach often isn’t the best option, as lots of things can happen between the time a brokerage firm fails and the time the SIPC liquidation process is complete.

As a result, it will be in many investors’ best interests to take action on their own.

Investors can—and often should—take action to recover their losses from failed (or failing) brokerage firms. In many cases, investors will be able to recover their assets by hiring a law firm to engage with their brokerage firm directly. While distressed brokerage firms may ignore investors’ attempts to contact them about withdrawing their funds, getting a law firm involved can be enough to achieve a favorable resolution in some cases.

If this is not enough, then investors’ next option may be to pursue FINRA arbitration. Registered brokerage firms are subject to FINRA’s Rules. These Rules establish numerous requirements that address everything from internal documentation to the management of customers’ assets. Brokerage firms are also subject to federal laws and regulations that protect investors from fraud, theft and other types of misconduct.

FINRA arbitration provides a venue for aggrieved investors to assert their legal rights without going to court. If a failed (or failing) brokerage firm has misused or is refusing to return investors’ assets, investors can engage counsel to hold the firm accountable in arbitration. All registered brokerage firms are required to submit to FINRA arbitration for the resolution of investor disputes, and FINRA arbitration awards can be enforced in court if necessary.

In many cases, when a brokerage firm has failed publicly, there are still things going on behind the scenes. The firm will still have assets in its possession, and it will be working to find ways to mitigate its losses. When this is the case, taking action promptly can improve investors’ chances of recovery.

With this in mind, if you read in the news that your brokerage firm filed for bankruptcy, if you received a letter from your brokerage firm stating that the firm is closing, or if you have concerns about your investment portfolio for any other reason, it is in your best interests to speak with a lawyer promptly. While you may still have options available, the longer you wait to take action, the more difficult it could become to get your assets back from your brokerage firm. A lawyer who has experience advising investors in this situation will be able to determine what you should do next, and your lawyer will be able to file for arbitration on your behalf if necessary.

Speak with a Lawyer at Zamansky LLC to Learn More

Did your brokerage firm fail? Or, do you have concerns that your brokerage firm may be on the brink of failure? If so, we encourage you to contact us promptly for more information. To discuss your options with a lawyer at Zamansky LLC in confidence, please call 212-742-1414 or request a free initial consultation online today.