Security segregation, in the context of the
securities industry, refers to
regulatory rules requiring that customer
assets held by a
financial institution (generally a
brokerage firm) be held separate from assets of the brokerage firm itself in a segregated account.
Thus, for example, in the United States the law (in particular, the SEC's customer protection rule, Rule 15c3-3) generally requires that a broker must take steps to hold separately, in separate (segregated) accounts on the broker's books, securities it holds for its customers from securities of the broker itself.
["WHAT HAPPENS WHEN A BROKER-DEALER FAILS?; A SUMMARY OF CERTAIN KEY BANKRUPTCY CODE AND SIPA-RELATED ISSUES"]
/ref>"Security Futures—Know Your Risks, or Risk Your Future,"
FINRA["SEC Proposes Amendments to its Financial Responsibility Rules for Broker-Dealers"]
/ref> The purpose of the rule is: a) to limit the broker's use of customer securities to support the broker's own business activities; and b) to facilitate the prompt return of customer securities in the event of the broker's insolvency.creditor
A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...
s during a liquidation
Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistrib ...
and must be returned to the customers directly.
This securities segregation requirement was developed due to problems in the U.S. stock market
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...
s towards the end of the 1960s. At the time, there was not any requirement that brokers segregate client securities from the firm's own assets on the firm's books and records.[">"What Happens When A Stock Broker Goes Bust?"]
/ref> When brokers went bankrupt, therefore, they were unable to return securities to their clients, inasmuch as they had not maintained accurate books and records of their clients' holdings.
See also
* Ponzi scheme
A Ponzi scheme (, ) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. Named after Italian businessman Charles Ponzi, the scheme leads victims to believe that profits are comin ...
* Deposit insurance
Deposit insurance or deposit protection is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due. Deposit insurance systems are one component of ...
* Trust account A custodial account is a financial account (such as a bank account, a trust fund or a brokerage account) set up for the benefit of a beneficiary, and administered by a responsible person, known as a legal guardian or custodian, who has a fiduciar ...
* Securities account
References
Securities (finance)
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