Understanding Securities Firm Bankruptcy

As a former Stockbroker and Investment Advisor, I am often asked “what happens in Securities Firm Bankruptcy?”

Suffice to know, there is no investor protection mechanism against investment losses in a financial market decline. Risk is associated in everything we do in the investment world. These risks can range from stock market risk, interest risk, currency risk, social, political risks and so on. However, all investors are protected through two agencies as follows: Canadian Investor Protection Fund (CIPF) and the Mutual Fund Dealers Association (MFDA).

The Canadian Investor Protection Fund, set up in 1969, does not cover a loss in market value of shares / stocks. All CIPF’s members are investment dealers (full-service brokers and the discount brokers) who belong to the Investment Industry Regulatory Organization of Canada (IIROC). The Mutual Fund Dealers Association of Canada (MFDA) set up in 2005, includes financial planning and wealth management firms. MFDA Plan does not apply in Quebec, which has its own compensation fund. Both the CIPF and the MFDA are funded through fees paid by the member firms. The Canadian Investor Protection Fund and the Mutual Fund Dealers Association of Canada’s investor Protection Corporation (IPC) are designed to protect investors against the bankruptcy of an investment firm.

The CIPF and the MDFA investor protection plan covers investors for total assets of as much as $2 million with $1 million for covering “general accounts” and another $1 million for covering “separate accounts” such as RSPs and RIFs. Any multiple accounts at any firm are aggregated and considered as a “single account”. However, “exempt-dealers” who sell hedge funds to high-net worth individuals, albeit the sophisticated investors and the “portfolio managers” who look after investments for high-net worth families and pension funds are not covered by insolvency protection plans. At risk if the securities firm goes bankrupt, is primarily the cash in an individual investment account unless it is held separate and apart in a trust account.

Pursuant to s.254 of the Bankruptcy and Insolvency act, R.S.C. 1985, c. B-3 (the BIA), all of the provisions of the BIA apply to securities firm bankruptcies, with such modifications as the circumstances may require. However, to the extent of any conflicts between the provisions of Part XII of the BIA, which governs securities firm bankruptcies and the other provisions of s.255 – 266 of the BIA provides that the provisions of Part XII shall prevail.

Thus Part XII of the Bankruptcy and Insolvency Act prescribes a procedural framework for the administration of securities firm bankruptcies. Customers of a bankrupt securities firm obtain a “priority” over the claims of other creditors through what is called the “customer pool fund” that includes all securities owned by a bankrupt securities firm plus all securities and cash held by or for account of the securities firm and each customer of the securities firm other than“customer name securities”which are securities held by or on behalf of a securities firm for the account of a customer and are registered in the name of the customer (including those in the process of being registered). These type of securities are not negotiableby the securities firm without a power of attorney and must be returned to the customer in whose name the securities are registered. A securities firm has actual or ostensible authority to trade all other securities held by or on behalf of the securities firm.

The steps to securities firm bankruptcies are addressed in Part XII of the Bankruptcy and Insolvency Act s.253. For more details contact MNP Ltd. as we would be happy to clarify any questions or concerns you may have regarding Securities Firm Bankruptcies.

To learn more about how MNP Debt can help you, contact our local office at 416.515.3921.