What Happens When a Stock Broker Goes Bust?


Triston Martin

Jan 09, 2024

Direct stock market trading might be quite daunting. What if there was an intermediary who could link investors and traders to the ever-shifting stock market? That's what brokers are for, of course! Investing and trading is made easier and more secure with their assistance, which they provide in exchange for a small brokerage charge. This guide will assist you with what happens when a stock broker goes bust.

Traders employ brokers because of their convenience in making trades. There is, however, a downside to every advantage. To put it another way, the greatest danger you face as a client is a brokerage company going out of business or, even worse, defrauding you. What, therefore, should a trader do in this situation? To know the solution to this question, you'll have to keep reading.

What Do Brokers Do, And Who Are They?

As regulated by the Securities and Exchange Board, brokers or brokerage companies act on behalf of investors (long-term traders) or traders to engage in the market (frequent buyers and sellers of shares). Traders who want to trade establish accounts under the supervision of brokers and allow them to trade on their behalf.

However, even if they have a license, be sure to examine their trading records and keep a close watch on the broker. It is common for brokers to trade without the permission of investors or traders in order to gain additional income. In order to prevent these kinds of rumors, it is important to verify the broker's credentials before proceeding carefully.

Your Investments' Safety Net

It's comforting to know that investors' money is safe in the hands of brokerage companies. In order to lessen the likelihood of a brokerage going under, a slew of rules and authorities have been put in place.

Customers' money is protected under the SEC's Customer Protection Rule, which states that businesses must keep their assets separate from their clients; doing so would be a fraud. Firms must maintain a certain level of liquid assets, known as the Net Capital Rule, depending on their size.

FINRA checks compliance with these as well as other requirements. Additionally, investors' assets are safeguarded by the Securities Investor Protection Corp (SIPC), a non-profit organization that provides insurance for investments and manages the liquidation of its member companies when they collapse.

How SIPC Can Assist

When a financial institution is in financial distress, the SIPC steps in to safeguard its customers' cash and assets. Of the $500,000 that the SIPC will safeguard, $250,000 may come in cash. Companies sometimes carry supplementary insurance to protect customer assets in the case of a firm's insolvency.

What the SIPC Doesn't Do

The SIPC protects securities such as stocks and bonds, but not everything. SIPC does not cover commodity contracts, hedge funds, limited partnerships, or fixed annuity contracts. SIPC doesn't cover market losses, bad investments, or lost opportunities. That remains your duty, and it's all a part of the uncertainty of making investments.

What Happens If a Stockbroker Goes Bust?

After the beginning of the liquidation process, the court will appoint a trustee to handle the affairs of the broker-dealer. Office hours have been shut down while the trustee and employees review all paperwork and books. SIPC is in charge of keeping an eye on things. Customers' accounts will be transferred to another brokerage company if the records of the defunct brokerage business are confirmed to be accurate by SIPC and the trustee.

Customers are informed that their accounts have been transferred to a new broker and that they can continue with the new broker or select a new one. Once a consumer notices that their account has been transferred, they should claim with their trustee. Don't forget that SIPC is not responsible for protecting clients who do not make a claim.

The SIPC may use a direct payment method in specific cases. For this to be an out-of-court proceeding, all client claims must fall under the SIPC protection limitations (i.e., they cannot exceed $250,000 per aggregate). In these situations, no trustee is appointed, or a judicial process is required.


Although stockbroker businesses are very uncommon, some do go out of business. Investors should do thorough research before choosing a stockbroker, including verifying that the broker is SIPC-compliant. Ensure your records are in order before you begin trading or purchasing financial items. The SIPC will have a lot simpler time processing an insurance claim if standard practices are followed, such as retaining either a physical copy or electronic record for holdings, financial records, and transaction confirmations.


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