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Home Uncategorised

What happens when a broker goes bankrupt?

by Ram Balakrishnan
February 3, 2010
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Many eons ago, I wrote a post wondering why the Government bothers to sell Canada Savings Bonds when so many competing options are available. The post elicited this interesting comment:

Canada Savings Bonds are definitely attractive. In the last 6 months we have discovered that banks and brokerages can easily collapse. Government bonds held for you at a brokerage still depend on the broker in several ways: you trust that there is no fraud and the broker actually holds a bond for YOU; you trust that the bond is not being loaned out in securities lending; you trust that if the bank/broker collapses, CIPF will speedily process an insurance claim and get your bond back to you. With Canada Savings Bonds you aren’t exposed to any of this middleman risk. In most cases with CSB, you are the certified owner of the bond and you directly hold the bond. This is worth something. I am an expert in bond markets and I still hold CSB (mostly because I don’t trust the banks, brokerages, or CIPF).

Subsequently, another reader suggested checking out the Bankruptcy and Insolvency Act (BIA) and the Marlow case. A quick search brought up this excellent article titled When Securities Firms Fail: An Inside Look at the Marlow Group Bankruptcy. The article points out that when a broker goes bankrupt, only securities registered in customers’ names will be returned to customers and all other securities will be put in a common pool to be distributed pro rata to customers. Since it is common for brokerage assets to be held in street name, it is worth asking: how do we protect our investments if our broker goes bankrupt?

Related posts:

  1. Finding a Financial Advisor, Part 1
  2. Carnival of Debt Reduction # 19
  3. The Income Tax Cut is Better
  4. This and That
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