Found another article which explains why Margin Agreements are bad in your stock brokerage account.
http://blogs.marketwatch.com/greenberg/2008/03/17/
Contained in virtually every brokerage firm?s standard Account Agreement (generally a Margin Account) is a provision that allows your brokerage to register all your securities in street name, meaning their own. Every security you buy, even if you pay for it in full, might technically belong to your brokerage firm. It could be that all you really own is a claim on the firm for those stocks and bonds. When securities in your account are held in street name, says Eric Brunstad, Visiting Lecturer in Bankruptcy Law at Yale Law School, it?s really not your property. It?s like depositing money in a bank account. Your cash isn?t sitting in the vault in a box with your name on it. You are simply a creditor of the bank. Maybe you should have read the fine print, after all.
For many years, virtually all securities have been held and registered electronically. The elegantly-engraved paper certificates you might remember are largely historical curiosities. Rather, most securities have been dematerialized, and exist only on the electronic books of the issuer and an electronic depository house known as DTCC. The securities industry has promoted this practice of holding in street name as good for investors for a variety of reasons. They will tell you that it makes buying and selling much easier for you, collecting interest payments more timely and simple, and even protects you against the loss or theft of those nettlesome stock or bond certificates, while reducing the costs associated with transfers and deposits. These things are all true.
As is typical with most things brokerage firms and their regulators tell you, however, there is far more to this than meets the eye. In fact, when your securities are held in the name of your brokerage or bank, they, not you, have most the rights of ownership. The issuer corresponds only with them, and sends them interest and dividend payments, and the forms to vote on corporate issues.
The broker then passes these communications on to you, in the form of envelopes you likely never open or ignore. (Do you fill out every proxy vote request you receive from your brokerage in the mail?) If you don?t vote your proxy, by the way, your broker can cast those votes on some matters, or possibly lend the stock and the right to cast the votes to someone else (say a hedge fund making a takeover offer.) Basically it?s as when you didn?t vote in a Presidential election, your political party?s bosses got to cast your vote! Your broker can do a lot of far more nettlesome things with your securities than just vote, though.
THE FINE PRINT
Those fine print of an account agreement generally includes one clause that reads something like this:
All securities, commodities and other property held, carried or maintained by you in your possession in any of my accounts may be pledged and repledged by you from time to time, without notice to me, either separately or in common with other such securities, commodities and other property for any amount due in my accounts or for any greater amount, and you may do so without retaining in your possession or control for delivery a like amount of similar securities, commodities and/or other property. (Arvest Securities Account Agreement)
This means your broker, subject to SEC rules, can lend your stock (and charge a hefty fee) to short sellers, hedge funds, corporate raiders and buyout funds and possibly even give them voting rights and control for key periods, and not have offsetting collateral in house. In short, they can mine these vast holdings of other people?s securities for all sorts of fees and income ? earnings that run into the billions every year. Your broker generally keeps all this money. As the Bear Stearns Clearing agreement puts it, ?As a result of such activities?the Clearing Agent Group may receive and retain certain benefits to which you will not be entitled.?
And if a broker fails? Again, Mike:
If a brokerage were to be taken over by the Securities Investor Protection Corp (SIPC - the governing authority) for insolvency, says Brunstad, first, customer name securities are distributed back to their owners. Securities held in street name, (the vast majority) however, would likely be included in the pot of customer property, which is later distributed ratably to customers. This could make it difficult for you to recover all of your securities, in some instances possibly tying them up for several years, according to the U.S. General Accounting Office (GAO-03-811 , Report to Congress: (Securities Investor Protection, July 2003, pp. 23.)
