Saturday, March 29, 2008

What Happens to Bear Stearns' Client Accounts?

With the demise of Bear Stearns, many investors are rightfully asking what happens to client accounts held at the firm. Client accounts are segregated from the assets of the firm and insured by the Securities Investor Protection Corporation (SIPC) for $500,000 in securities per account. Only $100,000 in cash is insured. If the firm were to file for bankruptcy, the client accounts would be transferred to another broker/dealer. However, in the case of Bear Stearns, the firm's client accounts will more than likely remain with Bear as a division of JP Morgan Chase.

The SIPC doesn't insure against losses in the value of securities, but rather against loss due to malfeasance. As is usually the case with securities firms that run into difficulty, SIPC insurance is rarely utilized. Instead, the securities held by clients are generally transferred to another broker/dealer that agrees to purchase the client accounts. Since client accounts are a valuable asset, there is usually no problem finding another broker/dealer ready to step in to service those accounts. This usually doesn't take long, as evidenced by the case of MJK Clearing, a Minneapolis brokerage firm that failed in 2001. Within a week, most clients were able to access their accounts after the assets were transferred to another firm.

In the case of our firm, Transamerica, client accounts are held by a third party clearing firm. The name of that firm is Pershing. The accounts are segregated from the assets of Transamerica and held in the client's name. Should there ever be any problem with the solvency of Transamerica, as in the case of MJK Clearing, client assets would continue to be held at Pershing until another broker/dealer stepped in to service those accounts. Protection of the client is of utmost importance to all of us in the securities industry, because client confidence is paramount to our success and survival.

John Kaighn

Jersey Benefits Advisors

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