A Note from SIPC's General Counsel

I received the following email this morning from Josephine Wang, the General Counsel for SIPC (Securities Investor Protection Corp.), a nonprofit group funded by the financial-services industry, in response to my column “If Your Broker Goes Belly Up: Part II,” that ran at the end of December.  Barron’s readers have been asking some questions as a result of my work. 

Here is her email, which I publish here in an attempt to get the word out, as Ms. Wang requests. 

Dear Ms. Carey:  SIPC has received some inquiries relating to the article “If Your Broker Goes Belly Up: Part II.” From the questions received, there seems to be some confusion over how assets are distributed in a liquidation proceeding under the Securities Investor Protection Act ("SIPA").  Certain investors apparently believe that if their brokerage fails, their only recourse is against the funds advanced by SIPC.  Because this is incorrect, we would appreciate if you would share the following with your readers:

“In a SIPA proceeding, there are two kinds of property as to which customers have preferred treatment: “customer name securities” and the fund of “customer property.” Customer name securities are identifiable to particular customers because they are registered in the customer’s name and can be negotiated only by the customer.  If in the possession or under the control of the failed broker when the broker is placed in liquidation, customer name securities are returned outright to their owners irrespective of value.  All other property (cash and street name securities) held by the broker for its customers becomes part of a “fund of customer property.” Customer property is distributed pro rata among customers.  To the extent of any shortfall in customer property, SIPC makes up the difference, within certain limits.

To illustrate:

Q.:  Assume that a customer is owed $1 million in customer name securities, and $1 million in securities held by the broker in street name.  Assume also that 10% of customer property is missing.  What does the customer get?

A:  The customer receives:
(i) $1 million in customer name securities.
(ii) $1 million in securities of which $900,000 will come from customer property and $100,000 from SIPC.”

If you have any questions, I will be happy to try to answer them.  If there is another method for passing this information on to your readers (e.g., a letter to the Editor), please let me know.

Thank you for your help.


Posted by on 02/08 at 10:19 AM






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