|
Online accounts protected?
|
 |
April 19, 2001: 3:21 p.m. ET
What happens to investors if their online brokerage firm goes under?
By Staff Writer Shelly K. Schwartz
|
NEW YORK (CNNfn) - The stock market has yet to find its footing in the wake of a yearlong slide. Policy-makers are worried about an economic recession. And the death knell continues to sound for dot.com firms that once defined the "new economy."
Yet, there you sit with your nest egg tied up in an online brokerage firm that is struggling to meet its quarterly estimates, slashing its marketing budget and laying off workers.
How safe are your dollars? And what do you do if your brokerage firm goes belly up?
"I suspect that in two or three years there are going to be far fewer brokerage firms out there, either as a result of bankruptcy, insolvency or consolidation," said John Lawrence Allen, a securities litigation attorney in New York. "I also suspect that given the trillions of dollars we've seen wiped out in the tech bubble that we'll start to see trading volumes drop significantly, which will also hurt these companies' bottom lines."
A turbulent history
It's a legitimate concern.
According to the Securities Investor Protection Corp. (SIPC), some 291 brokerage firms have been liquidated during the last 30 years.
The most notable brokerage house to run into trouble recently was Sunpoint Securities Inc. of Longview, Texas, which filed for bankruptcy last summer. The firm had its assets frozen by a federal court after regulators alleged it had stolen $25 million from customers.
| |
|
|
| |
|
|
| |
The typical reason that a firm fails and goes into bankruptcy is that the firm has misappropriated customer assets.
|
|
| |
|
|
| |
|
|
| |
|
|
| |
Steve Harbeck, SIPC |
|
Another notable filing was made by Denver-based Blinder Robinson & Co. in 1990, then the largest penny stock brokerage in the country. The company's founder, Meyer Blinder, was convicted of securities fraud racketeering and money laundering two years later, according to reports.
Steve Harbeck, general council for the SIPC, notes that none of the brokerage firms to have filed for bankruptcy so far have been strictly online trading operations, though some no doubt had online trading capabilities. He stressed, too, there is no clear correlation between market conditions and bankruptcy activity.
"We have never been able to track market conditions as a cause of brokerage failures," he said. "These [bankruptcies] tend to be random events and they don't follow a pattern. The typical reason that a firm fails and goes into bankruptcy is that the firm has misappropriated customer assets."
To protect and serve
Luckily for investors, lawmakers on Capitol Hill are way ahead of them.
The SIPC, created by the Securities Investor Protection Act of 1970, is designed to provide customer protection if a brokerage firm becomes insolvent.
In the case of Sunpoint's bankruptcy filing, for example, the SIPC reportedly stepped in to pay a record $31 million to restore stocks and cash to some 9,700 investors nationwide to make their accounts whole.
The nonprofit, membership group is funded by its member securities broker-dealers. It is neither a government agency nor a regulatory authority.
But according to Harbeck, membership in the SIPC is not voluntary. All brokerage firms registered with the SEC are required to be members.
"In the event of a brokerage firm failure, we'd place the firm in liquidation proceedings and then attempt to transfer the investor's accounts to a solid brokerage firm if we can find one ready and willing," he said, noting the procedure is the same for online and traditional brokerages. "That's what would happen in the case of most large brokerage firms."
Each customer or investor would then receive a claim form in the mail which they would use to demonstrate how much was in their account.
| |
|
|
| |
|
|
| |
If SIPC goes in and tries to resurrect the ashes of this defunct brokerage company, your money could be tied up for weeks, months or even longer. So, if you are an active trader, you could be waiting a long time before making any trades based on the funds you have deposited with that firm.
|
|
| |
|
|
| |
|
|
| |
|
|
| |
John Lawrence Allen
Securities attorney |
|
Investors, of course, no longer receive stock certificates to prove they own shares. But John Heine, a spokesman for the Securities and Exchange Commission, said the burden of proof is almost never an issue.
"The brokerage firms are supposed to have good records that indicate who owns what and [the SEC] has extensive regulations on our books as to how companies must keep their records," he said. "But if there is a question, investors would have confirmation slips and account statements in their files to provide that they had an account there."
As for margin accounts, a riskier proposition in which investors borrow money from their brokerage firm to buy securities, Harbeck of the SIPC said there are a number of scenarios that could unfold if the firm went under – and all of them protect the investor.
The investor's account, including securities and any margin debt they owe, could be transferred to a new brokerage firm.
If the SIPC were unable to transfer the account because it failed to meet the new brokerage firm's margin requirements, the customer could then either pay off the margin they owe, in which case they would receive all of their securities or they could choose to not pay if off, in which case the amount of the margin debt owed would be deducted from the other securities in their account.
Cover yourself
Despite consumer protection laws, however, Allen said some investors could still face an opportunity cost during bankruptcy proceeding.
"Your money will be protected by the SIPC, but that doesn't mean you'll get your hands on it right away," Allen said. "If SIPC goes in and tries to resurrect the ashes of this defunct brokerage company, your money could be tied up for weeks, months or even longer. So, if you are an active trader, you could be waiting a long time before making any trades based on the funds you have deposited with that firm."
Allen notes, too, that it's wise for investors to double-check their brokerage firm is indeed registered with the SIPC. That's especially true when dealing with a smaller upstart firms, he said.
"They are supposed to be registered, of course, but in this electronic age there are always a lot of lose ends in just handling the deluge of new upstart online brokerage companies," he noted.
Weathering the storm
As for the online trading industry, brokerage houses who specialize in electronic trades their financial outlook is mixed.
Some analysts say the industry has weathered the worst of the financial market storm and that the nation's top online brokerage houses, including Charles Schwab & Co (SCH: Research, Estimates)., Ameritrade Holding Co. (AMTD: Research, Estimates), Fidelity Investments, E*Trade Group, and TD Waterhouse Group (TWE: Research, Estimates), are poised for growth later this year.
Others say the smaller players, in particular, are likely to get bought out, slash their marketing budgets, and rein in margin lending. And some may go bankrupt in the process.
"It's a very trying environment," said Justin Hughes, a senior analyst for Robertson Stephens. "We need to see the equity markets firm up and then we need to see the retail investments in particular pick back up again."
Until that happens, even the larger players will be forced continue cutting costs.
Top U.S. online and discount brokerage Charles Schwab Corp. plans to cut up to 13 percent of its work force, and E*Trade Group Inc. this week said it cut its first-quarter advertising budget by 48 percent to cope with falling revenue.
Schwab, the nation's largest online broker, announced late last month it was laying off 11 percent to 13 percent of its work force, or between 2,750 and 3,400 jobs, to reduce operating costs.
The company also reported its first-quarter profit fell 63 percent as a prolonged stock market slump dissuaded customers from placing trades. Schwab posted earnings of 8 cents a share, in line with analysts' estimates, compared with 23 cents a share in the year-earlier period.
Other online brokers also have reduced staff including New York-based TD Waterhouse Group Inc., the nation's No. 2 discount broker, which said last month it also plans to cut employees through attrition.
And Ameritrade lowered its revenue outlook for 2001, saying it now expects revenue of between $470 million and $600 million, well below the $570 million-to-$650 million it previously forecast for fiscal 2001.
That being said, Hughes noted, "Investors don't have anything to worry about" when it comes to the protection of their investments – especially if their accounts are held with the larger online brokerage firms. 
|
|
|
|
|
 |
|
