SEC releases statement on protection of customer assets

One of the major questions right now from both hedge fund investors and hedge fund managers is how safe are their assets.  I will be writing an article detailing the answer to this question over the next couple of days.

In the interim, the SEC has released a statement and so has FINRA.  I have posted a brief portion of the FINRA statement which can be found here.  I have also posted the entire SEC statement which can be found here.

FINRA Statement

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, and to be members of the Securities Investor Protection Corp (SIPC), which insures customer securities accounts up to $500,000. SIPC is used in those rare cases of firm failure where customer assets are missing because of theft or fraud. In other words, SIPC is the last course of action in the unlikely event that the other customer protections have failed.

SEC Statement

Statement of SEC Division of Trading and Markets Regarding the Protection of Customer Assets
FOR IMMEDIATE RELEASE
2008-216

Washington, D.C., Sept. 20, 2008 — The Securities and Exchange Commission’s Division of Trading and Markets today issued the following statement:

In recent days, Securities and Exchange Commission staff have received a number of questions from investors regarding the protection of their assets held by broker-dealers.

Customers of U.S. registered broker-dealers benefit from the extensive protections provided by the Commission rules, including the Customer Protection Rule, as well as protection by the Securities Investor Protection Corporation (SIPC). The Commission’s Customer Protection Rule requires a broker-dealer to segregate customer cash and securities from a broker-dealer’s own proprietary assets. More specifically, the rule requires that a broker-dealer keep customer cash and fully paid securities free of lien and in a safe location.

Any person who has deposited funds or securities in a securities account at a broker-dealer is a “customer” under the Customer Protection Rule. Securities customers of U.S. broker-dealers are not permitted to opt out of the protections afforded by the Customer Protection Rule. There is a technical exception for affiliates of the broker-dealer, but this exception would not affect the protections generally extended to a customer’s funds and securities deposited at the broker-dealer.

In addition to the Commission’s rules that protect securities customers, SIPC also protects securities customers up to $500,000 per customer, including a maximum of $100,000 for cash claims. To determine if your broker-dealer is a member of SIPC, or to learn more about the SIPC protections, you can check the SIPC website at www.sipc.org.

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