Q: I've been getting a lot of questions from my clients recently about SIPC and what happens if a brokerage firm goes out of business. Can you give me some information that I can pass on to my clients?
—B.L., New York

A: Brokerage firms that have had financial problems handle their situations in different ways. Some find a buyer to avoid bankruptcy, while others self-liquidate. When a brokerage firm liquidates, securities regulators, including the Securities and Exchange Commission and FINRA, work with the firm to make sure that customer accounts are protected. When a brokerage firm ceases to operate, customers' assets are usually safe and are typically transferred into another brokerage firm. There are safeguards in place to ensure protection of customers' assets. For example, brokerage firms must keep their customers' securities and cash segregated from their own so that, even if a firm fails, the customers' assets will be safe. Brokerage firms are also required to be members of the Securities Investor Protection Corporation (SIPC), which insures customer securities accounts up to $500,000. But, the SIPC generally doesn't apply in cases where a firm simply shuts its doors or files for bankruptcy. SIPC normally is used only in those rare cases of firm failure where customer assets are missing because of theft or fraud. SIPC does not cover ordinary market losses; investments in commodity futures, fixed annuities, currency, hedge funds or investment contracts (such as limited partnerships) that are not registered with the SEC; or the accounts of partners, directors, officers or anyone with a significant beneficial ownership in the failed firm. SIPC coverage of $500,000 is extended to each "legal customer." For example, if a customer has three accounts at a firm with one being an individually held account in the customer's name only, another being a joint account with a spouse, and a third being an IRA account in the customer's name, each account is considered a separate "legal customer." And each will be eligible for full SIPC coverage. Investors should be aware that they may be unable to transfer accounts or execute trades during the liquidation process. Furthermore, if a clearing firm is in financial trouble or in liquidation, this may affect customers of introducing firms that clear through the troubled firm, including their ability to trade, liquidate their securities positions or transfer holdings to another firm.

Q: I was recently involved in an arbitration where the arbitrators gave an award to the customer. Neither I, the firm's attorney nor even the customer's attorney can figure out how the arbitrators arrived at their decision since they did not provide any explanation. My attorney said we can't ask the arbitrators to explain their decision. Is he right?
—B.D., Illinois

A At present, there is nothing that requires an arbitration panel to explain how or why it arrived at its decision. FINRA Rule 12904(f) merely says that the award "may" contain a rationale underlying the award. Therefore, if the parties ask for an explanation—even after the award has been rendered—the panel may decide to give them one. They often will not, but it never hurts to ask. It should be noted that FINRA has recently proposed a rule change (SR-FINRA-2008-051) that would require arbitrators to provide a rationale for their decision if requested to do so by all parties.

Alan J. Foxman, Esq., is an attorney with the law firm of Lavalle, Brown, Ronan & Mullins, P.A., in Boca Raton, Fla. His comments are not intended to be legal advice. He can be reached at afoxman@lavallebrown.com.