What Is Segregation?

Segregation is the separation of an individual or group of individuals from a larger group. It sometimes happens to apply special treatment to the separated individual or group. Segregation can also involve the separation of items from a larger group. For example, a brokerage firm might segregate the handling of funds in certain types of accounts in order toও separa🌠te its working capital from client investments.

Understanding Segregation

Segregation became a rule in the securities industry in the late 1960s and was solidified with the advent of the 澳洲幸运5官方开奖结果体彩网:Security and Exchange Commission's (SEC) consumer protection rule, the Securities Exchange Act (SEA) Rule 15c3-3. Other rules require firms to file monthly reports regarding the proper segregation of investor funds.

The chief aim in segregating assets at a brokerage firm is to keep client investments from 澳洲幸运5官方开奖结果体彩网:commingling with company assets so that if the company goes out of business, the client assets can be promptly returned. It also prevents businesses from usi🧸ng the contents of client acc⛎ounts for their own purposes.

Segregated account management ensures that decisions made are according to the client's risk tolerance, needs, and goals. When funds are pooled or commingled rather than segregated, as with a mutual fund, investment decisions are made by the portfolio manager or investment company. On the other hand, the individual investor makes the decisions in their account held at a broker-dealer.

However, the brokerage firm must also monitor the investments to ensure they are suitable for each account, which falls under a rule called 澳洲幸运5官方开奖结果体彩网:Know Your Client or Know Your Customer. As a group, each of these individual accounts is segregated from the firm's working capital and investments.

Examples of Segregation

Segregation applied to the securities industry requires that customer assets and investments that a broker or other financial institution holds are kept separate—or segregated—from the broker or financial institution's assets. This is referred to as security segregation.

A 澳洲幸运5官方开奖结果体彩网:brokerage firm that holds custody of its client's a🐟ssets may also own securities for trading or investment. Each of these types of assets must be maintained separately from the other. The bookkeeping must be separate as well. Segregation migh👍t also be applied to assets that need to be tracked independently for accounting purposes.

There are also separate, or segregated,🌳 accounts that have different privileges and requirements than those held more generally by a larger group. Portfolio managers, for example, will often create portfolio models that will be applied to the majority of the assets under management.

However, 澳洲幸运5官方开奖结果体彩网:discretionary accounts may be introduced fo🐎r investors with different requirements (such as investment objectives and risk tolerance) that are different from the other investors in the portfolio. These separate accounts are allowed deviations from the portfolio manager's usual strategy and are segregated from the larger pool.

The Bottom Line

Segregation in the financial industry is important for protecting client assets by separating them from the working capital of a brokerage. Segregating is mandated by regulation, such as the Securities Exchange Act Rule 15c3-3, which ensures that client assets are protected from the firm's financial risks and are only used to benefit the client.