What Happens When a
Investment Dealer or Broker Files Bankruptcy?
Investors need to bear certain amount of risk while making investments and it is possible to take right decisions only by consulting a financial advisor with required knowledge and experience. A financial advisor can guide you in the right direction and prevent you from investing in products which do not match your investment goals and risk profile. However, a situation may arise where your investment dealer/broker files bankruptcy. What happens in such situation? Do you lose your money? Let us find it out.
Investors and Investment Dealer/Broker Bankruptcy
In case your investment dealer/broker files bankruptcy then in such situation Canadian Investor Protection Fund or CIPF would be taking steps for transfer of your account (as well as all the associated assets) to some other solvent firm. The main aim of CIPF is ensuring that all your assets get transferred and any associated expenditures are covered. Minimum coverage of $1,000,000 is provided to investors for their investment securities that are held by any CIPF member filing bankruptcy. All the investors automatically get this minimum coverage while opening account with CIPF member investment dealers/brokers. Let us now look at some of the loss which are covered and not covered by CIPF.
Losses which are Covered
- Cash balances
- Future contracts
- Segregated insurance funds acquired, received or help in any account by CIPF member on your behalf.
Losses which are not Covered
- Losses incurred because of unsuitable investments, changes in securities market values or default by any of the issuers of these securities.
- In case you as a customer do not file claim with bankruptcy trustee or the CIPF within a maximum of 180 days from insolvent investment broker's date of insolvency.
- Segregated funds or securities which CIPF member is not holding or not recorded in the accounts as held by the broker.
Consolidated and Separate Coverage
All your investment accounts are generally combined to be considered as one account to calculate coverage you will get. As for instance, if you have non registered investment accounts such cash account, option account, and margin account then their values will be summed to ascertain the total coverage you will be getting.
In addition to it, in case you have following investment accounts then separate coverage is provided for those accounts and such accounts will not be consolidated together. These account are:
- All registered retirement plans combined together like RRSPs, RRIFs, LIFs, LIRSPs or LIRSs, and LRIFs.
- Registered Education Savings Plans
- Trust accounts such as trusts enforce by law, inter vivos trusts and testamentary trusts
- Partnership and joint accounts
- Unincorporated organizations or associations
Thus, apart from coverage of $1 million for your non registered accounts, you will also get separate coverage for registered accounts.
A Final Note
Although bankruptcy of investment dealers/brokers is not something which happens on regular basis, it would certainly be reassuring for investors to know that their interest is protected by CIPF in case a investment broker does file bankruptcy.