I'll preface this by saying that I know nothing at all about securities law, and precious little about bankruptcy. So forgive me if my question is a little open-ended.
With all of the news about the tenuous financial condition of banks and other financial institutions, I've been pondering the question of what recourse investors would have in the event of a systemic meltdown. It occurred to me that while I work with concepts of "ownership," "interests," "rights," and "liabilities" all day, I really don't have a clue what the legal relationships are when it comes to my investments or how things would unwind if the music stopped and there weren't enough funds to go around.
Let's say that I have an account with Vanguard, and through Vanguard's brokerage I buy 100 shares of the Prudent Global Income Fund, one of the funds offered by Prudent Bear Funds, Inc. My 100 shares are immediately transferred to my account with Vanguard, which is maintained by Pershing, LLC, the clearing agent for Vanguard and the "holder" of my funds. That's four separate entities that stand between me and my funds. There might be additional entities to worry about if one of them gets cute and lends my shares for short-selling or uses them as collateral.
What is the nature of my legal relationship to the shares? Do I "own" them in the same way that I would if I were holding the certificates?
Which of these entities, if any, might have a claim over the assets represented by my shares in the event that it became insolvent? Would my shares be deemed segregated and identified to me, such that they would never become part of the bankruptcy estate at all?
Let's assume, for the sake of argument, that there's no such thing as SPIC insurance.
Any thoughts? Martha?
With all of the news about the tenuous financial condition of banks and other financial institutions, I've been pondering the question of what recourse investors would have in the event of a systemic meltdown. It occurred to me that while I work with concepts of "ownership," "interests," "rights," and "liabilities" all day, I really don't have a clue what the legal relationships are when it comes to my investments or how things would unwind if the music stopped and there weren't enough funds to go around.
Let's say that I have an account with Vanguard, and through Vanguard's brokerage I buy 100 shares of the Prudent Global Income Fund, one of the funds offered by Prudent Bear Funds, Inc. My 100 shares are immediately transferred to my account with Vanguard, which is maintained by Pershing, LLC, the clearing agent for Vanguard and the "holder" of my funds. That's four separate entities that stand between me and my funds. There might be additional entities to worry about if one of them gets cute and lends my shares for short-selling or uses them as collateral.
What is the nature of my legal relationship to the shares? Do I "own" them in the same way that I would if I were holding the certificates?
Which of these entities, if any, might have a claim over the assets represented by my shares in the event that it became insolvent? Would my shares be deemed segregated and identified to me, such that they would never become part of the bankruptcy estate at all?
Let's assume, for the sake of argument, that there's no such thing as SPIC insurance.
Any thoughts? Martha?