Released October 2, 2008

AUBURN UNIVERSITY, Ala. -- Given the turbulence affecting the financial services industry these days, including recent announcements concerning Lehman Brothers, consumers may be wondering what would happen to their securities account if their brokerage firm closed its doors.

“In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm,” says Bernice Wilson, an urban resource management specialist with the Alabama Cooperative Extension System.

“Multiple layers of protection safeguard investor assets. For example, registered brokerage firms must keep their customers' securities and cash segregated from their own so that, even if a firm fails, its customers' assets will be safe,” she says.

Brokerage firms are required to meet minimum net capital requirements to reduce the likelihood of insolvency, and to be members of the Securities Investor Protection Corp. (SIPC), which insures customer securities accounts up to $500,000. SIPC is used in those rare cases of firm failure where customer assets are missing because of theft or fraud. In other words, SIPC is the last course of action in the unlikely event that the other customer protections have failed.

Concerning Lehman Brothers Holdings Inc., which filed for protection under Chapter 11 bankruptcy laws on Sept. 15, the firm's U.S. regulated broker-dealer subsidiaries, Lehman Brothers, Inc. and Neuberger Berman, LLC, are still solvent and functioning. The broker-dealer subsidiaries have not filed for bankruptcy and are expected to close only after the orderly transfer of customer accounts to another registered and SIPC-insured broker-dealer. Customers of Lehman who have questions about their accounts or the liquidation and transfer process, should contact their financial adviser or visit the firm's Web site for updates and additional information.

While the customer safeguards are extensive and the track record of making investors whole in the aftermath of a financial crisis is strong, not all investor assets may be covered.

Brokerage firms are required to follow certain rules that are designed to minimize the chances of financial failure and, more importantly, to protect customer assets if they do fail. For example, the Securities Exchange Commission’s Rule 15c3-1, the Net Capital Rule, requires brokerage firms to maintain certain levels of their own liquid assets. The minimum net capital a firm must have on hand depends on its size and business.

In addition, the SEC's Rule 15c3-3, the Customer Protection Rule, requires brokerage firms that have custody of customer assets to keep those assets separate from their own accounts. In other words, customers' cash must be placed in a special, separate "reserve" account; fully paid customer securities must be kept separate from firm and customer margin securities.

To understand how these rules work, it is helpful to understand the difference between clearing and carrying firms and introducing firms, says Wilson.

When you open an account with a brokerage firm that is a carrying firm, the firm not only handles your orders to buy and sell securities, but it also maintains custody of your securities and other assets, such as cash in your account. With an introducing firm, the brokerage firm accepts your orders but it will have an arrangement with a carrying firm to maintain custody of your securities account. Because they have custody of customer assets, carrying firms must maintain higher levels of net capital than introducing firms, and they are responsible for segregating the customer funds and securities in their custody.

Additional rules require firms doing business with public customers to have their financial statements audited by an independent accounting firm annually. All brokerage firms must file financial statements with the SEC, and those that are publicly traded must file quarterly, annual and other periodic reports with the SEC.

Historically, brokerage firms that have faced financial insolvency have handled the crisis in different ways. Some have been able to find a buyer to stave off insolvency. Bear Stearns, for example, was bought by J.P. Morgan in 2008.

Other firms self-liquidate, as did Drexel Burnham Lambert in 1990. When a brokerage firm self-liquidates, securities regulators work with the firm to make sure that customer accounts are protected. That is what is currently happening in connection with Lehman Brothers, Inc.

On Sept. 15, Lehman's parent company, Lehman Brothers Holdings Inc., announced that it had filed for protection under Chapter 11 of the bankruptcy laws. None of the holding company's broker-dealer subsidiaries, including Lehman Brothers, Inc. or Neuberger Berman LLC, are included in the bankruptcy petition. Nevertheless, the bankruptcy filing will likely lead to the winding down of these brokerage firm subsidiaries.

SEC and Financial Industry Regulatory Authority (FINRA) staff are working on-site at Lehman Brothers to oversee the orderly transfer of customer assets to one or more SIPC-insured brokerage firms. In the meantime, Lehman Brothers Inc. is open for business to facilitate customer orders.

The failure of a brokerage firm will cause some anxiety for the firm's customers. The first thing you should do is avoid panic. When customers hear that their firm is in financial trouble, they should contact the firm to see what procedures to follow. For example, there may be a window of time when customers cannot trade or transfer their accounts.

In the specific case of Lehman Brothers, the firm announced on Sept. 15 that customers may continue to trade or take other actions with respect to their accounts.

If you are a customer of Lehman and have questions about your account or the liquidation and transfer process, contact your financial adviser or visit the firm's Web site for updates and additional information. You may also contact FINRA at (301) 590-6500 or send an e-mail to the SEC at help@sec.gov.

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http://www.aces.edu/department/extcomm/npa/newsline/archives/003781.php

Contact: Bernice Wilson, (256) 372-4969.