What Happens If Fidelity Goes Out of Business?

Fidelity is one of the largest and most well-known brokerage firms, managing trillions in assets for individual investors. While it is financially stable, some may wonder what would happen to their investments if Fidelity were to go out of business.

Understanding investor protections can help ease concerns about potential losses or disruptions.

Regulatory Safeguards

Investor protection measures ensure that brokerage clients do not lose their investments if a firm fails. These include insurance coverage, rules requiring firms to keep customer assets separate from company funds, and a process for handling claims.

Insurance

Fidelity customers are covered by the Securities Investor Protection Corporation (SIPC), which insures up to $500,000 per account, including a $250,000 limit for cash balances. This applies if the brokerage fails and cannot return client assets. However, SIPC does not cover investment losses due to market declines or poor trading decisions.

Fidelity also provides excess insurance through Lloyd’s of London, offering additional protection for high-net-worth investors. While this extra coverage helps safeguard assets, it does not guarantee the value of securities—only that customers will receive their holdings if the brokerage fails.

Asset Segregation

Brokerage firms must keep client assets separate from company funds under SEC Rule 15c3-3, known as the Customer Protection Rule. This ensures that even if Fidelity encounters financial trouble, customer securities and cash are held in custodial accounts and cannot be used to pay the firm’s debts.

Fidelity registers investments in “street name,” meaning assets are held under the brokerage’s name but still belong to the client. This structure allows for easier transfers to another brokerage if needed. Regular audits and regulatory oversight help enforce these rules. If a firm misuses client funds, regulators such as the SEC and FINRA can step in to impose penalties and recover assets.

Claims

If a brokerage firm fails and cannot return client assets, investors may need to file a claim with SIPC. A court-appointed trustee oversees the liquidation process, and customers receive claim forms to document their holdings. These must be submitted within a deadline, typically 60 days after notification.

SIPC works to return securities or reimburse cash balances within coverage limits. If a customer’s assets exceed SIPC’s protection, they may become a general creditor in the firm’s bankruptcy, meaning they could recover additional amounts depending on asset liquidation outcomes. While this process can take time, most claims are resolved within months.

Bankruptcy Proceedings for a Brokerage

If a brokerage like Fidelity were to fail, the legal process would follow the Securities Investor Protection Act (SIPA). Unlike typical corporate bankruptcies, brokerage insolvencies prioritize returning customer assets rather than liquidating them to pay creditors. SIPC would petition a federal court to appoint a trustee to oversee the firm’s wind-down.

The trustee’s main responsibility is to return customer securities and cash. This involves reviewing the firm’s records to determine client holdings and ensuring they are distributed correctly. If discrepancies arise, forensic accountants may investigate financial records and locate missing funds. In cases involving fraud or mismanagement, legal actions may be pursued to recover assets, potentially leading to clawbacks from executives or counterparties.

Unsettled trades could also be affected. Under SEC Rule 15c6-1, most securities transactions settle within two business days (T+2), meaning trades that have been executed but not finalized may be impacted. The trustee would work with clearinghouses and counterparties to determine whether these trades can be completed or if funds need to be returned to investors.

Margin accounts add another layer of complexity. Outstanding loans secured by securities holdings may need to be closed out, potentially forcing the liquidation of positions. Margin account holders may have to repay loans or adjust their portfolios to meet new terms set by a receiving brokerage.

Transfer and Access to Your Investments

If Fidelity were to cease operations, investors would need to transfer their holdings to another brokerage. This is typically handled through the Automated Customer Account Transfer Service (ACATS), operated by the National Securities Clearing Corporation (NSCC). ACATS transfers generally take six business days, but in a brokerage failure, the timeline could be extended due to administrative backlogs or regulatory reviews.

Investors with retirement accounts such as IRAs must ensure that their new brokerage maintains the same tax-advantaged status. Rolling over an IRA incorrectly could trigger tax liabilities, including early withdrawal penalties if the account holder is under 59½. To avoid this, investors should initiate a direct trustee-to-trustee transfer rather than withdrawing and redepositing funds, which could be treated as a taxable event if not completed within 60 days.

For those holding fractional shares, the transfer process can be more complicated. Not all brokerages accept fractional shares, meaning investors may need to sell these holdings before initiating a transfer. This could result in capital gains taxes if the shares have appreciated in value. Checking how a receiving brokerage handles fractional shares can help investors avoid unexpected tax consequences or forced liquidations.

Effects on Different Account Types

The impact of a brokerage failure varies by account type. Taxable brokerage accounts, including individual and joint accounts, are generally the easiest to transfer, but investors should be aware of potential disruptions to dividend reinvestment plans (DRIPs) or automatic investment programs. If these services are interrupted, investors may need to re-establish them at a new brokerage, which could result in delays or missed investment opportunities.

Margin accounts present additional challenges. Outstanding loans secured by securities holdings may need to be repaid or liquidated if a brokerage fails. If margin debt is transferred to another brokerage, loan terms may change, including interest rates and margin requirements, which could impact an investor’s ability to maintain leveraged positions. Investors using margin should monitor account maintenance levels and be prepared for potential margin calls if their account is reassessed under new terms.