Brokerage Accounts in a Default

The biggest contrast between a Trust account and a brokerage account occurs in the event of a default by the firm. When a Trust bank is in default, client accounts are available to the account owner typically within 24 hours of entering receivership by the FDIC, following bankruptcy. In the case of a brokerage defaulting, the goal is to treat brokerage client accounts the same as trust client accounts, but this does not always happen. For example, in the Lehman default, it took several years before some clients had access to their accounts following the default. No trading was allowed in many accounts until the accounts were transferred. Lehman is not a unique event in the brokerage world.

Securities in a Trust account are held in the account owner’s name. This is electronic rather than through security certificates.

Securities in a brokerage account are held in what is called street name, but the securities are owned by the account owner. The term street name is used because the brokerage house holds the securities on behalf of the client. This is for the convenience of the client because it avoids the need for a physical certificate of ownership by the client.

Since the account owner owns the securities, they will always own the securities and the brokerage house is not allowed to comingle client assets with brokerage assets. Thus, the brokerage house cannot use the client assets for business purposes even though the brokerage house holds the security certificate.