1

Recently I was considering opening a new brokerage account and found the following troubling clause in the account agreement:

enter image description here

The transcription, with my emphasis added:

You authorize us and we have the right, at our sole discretion, to require additional collateral at any time. If a petition in bankruptcy or appointment of a receiver is filed by or against you, or if an attachment is levied against any Account in which you have an interest, or in the event of your death, we have the right, at our sole discretion, to sell any or all assets in your Account, whether carried individually or jointly with others, to buy any and/or all assets which may be short, to cancel any open orders, and to close any or all outstanding contracts, all without notice of sale or purchase or other notice or advertisement. Any such sales or purchases may be made at our discretion on any exchange or other market, or at public auction or private sale, and we may be the purchaser(s) for our own account. It is understood that a prior demand, call, or prior notice of the time and place of such sale or purchase shall not be considered a waiver of our right to sell or buy without demand or notice as provided in this Agreement. After deducting all costs and expenses of the purchase, buy-in and/or sale and deliveries, including, but not limited to commissions and transfer and stamp taxes, we shall apply the residue of the proceeds to the payment of any and all of your liabilities to us. You will remain liable for any deficiency.

According to another clause, the laws of Illinois govern.

I understand that some holdings (particularly options) can be time-sensitive, and the broker might have to take action to protect the account value much more quickly than probate would resolve, and possibly more quickly than credentials could be created for a named beneficiary. But this clause appears to include long equity and fund holdings as well, which are under no such time pressure, and it doesn't appear to require preserving the account value.

If the broker conducts the sale privately, do they have to value everything at market price, or can they sell to themselves at a pittance, basically seizing the account assets? Conversely, cause they cause the account to close short positions by buying from themselves for an inflated (above market) price (in which case the account could incur unlimited debt)?

Is there a law or FINRA association rule that would protect the estate and beneficiaries of the account holder if this clause were invoked?

  • The sequence of events in the case of death is given in FINRA's When a Brokerage Account Holder Dies - What Comes Next?. – Nick R Apr 14 at 0:06
  • @NickR: Thanks for that link, unfortunately it doesn't seem to consider the case where the broker transacts on the account under a clause such as this. – Ben Voigt Apr 14 at 0:09
  • If one does all of the necessary filings, then the assets belong to the estate or its beneficiaries. I would assume that the discretionary clause allowing for disposal of assets would only apply if the account holder dies intestate - i.e., without a will. – Nick R Apr 14 at 0:12
  • 1
    @NickR: Whether the authority given by the account holder survives his death (whether this qualifies as a durable power of attorney) is definitely related -- but I don't think they would throw that "or in the event of your death" phrase in if it can never ever apply. (Having an estate is not mutually exclusive with dying without a will, so "the assets now belong to the estate or heir" covers 100% of cases, and that line of reasoning would give the clause no effect at all) – Ben Voigt Apr 14 at 0:17

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.