A segregated account is a financial account that legally separates money or assets belonging to clients from the operating funds of the institution holding them. Broker-dealers, futures firms, insurance companies, attorneys, and escrow agents all use segregated accounts so that if the institution fails, client assets remain protected and available for return rather than being pulled into the firm’s bankruptcy. The legal framework varies by industry, but the underlying principle is the same everywhere: your money is yours, and it should not sit on the firm’s balance sheet as if it were the firm’s to spend.
How the Separation Actually Protects You
When an institution holds money that legally belongs to someone else, segregation prevents what regulators call commingling: the mixing of client funds with the firm’s own capital. The firm opens a separate account, keeps distinct records, and treats those assets as belonging to clients rather than to the company. In a bankruptcy, the firm’s general creditors have no claim on those funds because the assets never belonged to the firm to begin with.
Under the Securities Investor Protection Act, for example, “customer property” is defined to include cash and securities a broker-dealer holds from customer accounts, plus any proceeds from transfers of that property.1Office of the Law Revision Counsel. 15 USC 78lll – Definitions In a liquidation, customer property is allocated to customers before anything goes to general creditors.2Office of the Law Revision Counsel. 15 USC 78fff-2 – Special Provisions of a Liquidation Proceeding In the futures market, the Commodity Futures Trading Commission uses a parallel rule: customer segregated funds “may not be used to meet the obligations of the FCM or any other person, including another customer.”3Futures Industry Association. Protection of Customer Funds Frequently Asked Questions
Segregation does not protect you from bad investment decisions or from market losses. What it protects is the identity of the assets: it keeps them yours in a legal sense, so that a failed firm’s creditors cannot treat them as part of the estate.
Segregation in a Brokerage Account
The most detailed segregation rules in the United States apply to broker-dealers. SEC Rule 15c3-3, known as the Customer Protection Rule, requires broker-dealers to keep client cash and securities separate from the firm’s own trading and operating assets.4eCFR. 17 CFR 240.15c3-3 – Reserves and Custody of Securities
For securities, the rule requires the firm to promptly obtain and maintain physical possession or control of all fully paid securities and excess margin securities in customer accounts. “Control” means holding the securities in an approved location, such as a clearing corporation or a custodian bank that has acknowledged in writing the securities are free of any lien.4eCFR. 17 CFR 240.15c3-3 – Reserves and Custody of Securities The result is that the firm can return your securities on demand without competing claims getting in the way.
Cash works a little differently. Rather than earmarking individual dollars, the broker-dealer computes a Customer Reserve Requirement using a formula that captures the net amount the firm owes all customers combined. It then deposits cash or qualified securities equal to or exceeding that amount into a Special Reserve Bank Account for the Exclusive Benefit of Customers, kept separate from the firm’s other bank accounts.4eCFR. 17 CFR 240.15c3-3 – Reserves and Custody of Securities Most firms compute this reserve weekly. Firms with average total credits of $500 million or more will have to perform the computation daily; the SEC extended the compliance deadline for that daily requirement to June 30, 2026.5Federal Register. Extension of Compliance Date for Required Daily Computation of Customer and Broker-Dealer Reserve
If a broker-dealer fails despite these requirements, the Securities Investor Protection Corporation steps in. SIPC does not cover investment losses, but it protects customers when a brokerage becomes insolvent and customer assets are missing, up to $500,000 per customer including a $250,000 sublimit for cash.6SIPC. What SIPC Protects Coverage is calculated by “separate capacity,” so an individual account, a joint account, an IRA, and a trust account at the same firm each get their own limit.7SIPC. Investors with Multiple Accounts
Segregation in Futures Accounts
The futures industry has its own framework. Futures commission merchants must keep customer funds in separate accounts, clearly labeled as customer money, and must maintain enough in those accounts at all times to cover total obligations to all customers. Funds can only be deposited with banks, trust companies, derivatives clearing organizations, or other registered futures commission merchants.8eCFR. 17 CFR 1.20 – Futures Customer Funds to Be Segregated and Separately Accounted For
Money for foreign futures trading, called the “foreign futures or foreign options secured amount,” is handled under CFTC Regulation 30.7. It also has to be held separately, but the list of allowable depositories is broader, including foreign banks with more than $1 billion in regulatory capital and clearing organizations of foreign exchanges. Accounts must be titled to clearly identify the funds as belonging to customers.9eCFR. 17 CFR 30.7 – Treatment of Foreign Futures or Foreign Options Secured Amount Before opening a segregated account, the firm has to obtain a written acknowledgment from the depository confirming the arrangement, and must conduct due diligence on every institution where customer funds sit.8eCFR. 17 CFR 1.20 – Futures Customer Funds to Be Segregated and Separately Accounted For
Insurance Separate Accounts
Life insurance companies use a version of segregation they call a “separate account.” It is an administratively distinct account that records the assets and liabilities of specific products apart from the insurer’s general account, most commonly variable annuities and variable life insurance policies.10NAIC. Separate Accounts
The general account backs the insurer’s guaranteed obligations. The separate account holds assets whose investment risk the policyholder has chosen to bear. When a separate account is “insulated” under state law, its assets are legally protected from the claims of the insurer’s general account creditors, so a policyholder does not lose those assets if the insurer becomes insolvent.10NAIC. Separate Accounts Not every separate account product is insulated, though, so the label alone does not tell you what protection applies. Hybrid products that combine traditional insurance guarantees with separate account portfolios can leave the general account on the hook for some obligations even where the underlying investments sit in the separate account.
Attorney Trust and Escrow Accounts
Any professional who holds money belonging to a client or a third party in a transaction typically has to use a segregated account. Attorneys are the clearest example. Every state adopts some version of ABA Model Rule 1.15, which requires lawyers to hold client property separately from their own funds, keep complete records, and preserve those records for at least five years after the representation ends.11American Bar Association. Rule 1.15 – Safekeeping Property Advance fees and expense deposits sit in the trust account and are only withdrawn as fees are earned or expenses incurred. Mishandling a trust account is one of the leading causes of attorney disbarment.
Small or short-term client deposits that would not generate meaningful interest for any single client are pooled into an Interest on Lawyers’ Trust Account. The interest on the pooled balance flows to state IOLTA programs, which fund civil legal services for people who cannot afford a lawyer; more than 90 percent of IOLTA grants go to legal aid offices and pro bono programs.12American Bar Association. Commission on Interest Lawyers’ Trust Accounts Overview
Escrow accounts follow the same logic. In a real estate or business transaction, the escrow agent holds funds in a segregated account pending completion of contractual conditions like a closing. The agent is a neutral fiduciary, cannot use the money for operating expenses, and in most states must post a surety bond as an additional layer of protection.
Deposit Insurance on Segregated Accounts at Banks
When client funds sit in a segregated account at an FDIC-insured bank, coverage is not automatic in the way it is for a personal checking account. The FDIC offers “pass-through” insurance, which applies to each underlying owner of the funds rather than to the institution that opened the account. Each beneficial owner can receive up to $250,000 in coverage, as if they had deposited the money directly.
Pass-through coverage kicks in only if three conditions are met. The funds must actually belong to the beneficial owners, not to the third party that set up the account. The bank’s records must indicate the fiduciary or custodial nature of the account. And records maintained by the bank, the depositing institution, or another party in the ordinary course of business must identify each beneficial owner and their ownership interest.13FDIC. Pass-Through Deposit Insurance Coverage
Miss any one of those, and the insurance collapses. Instead of every client getting separate coverage, all the money in the account is insured as a single deposit in the name of the institution that opened it, capped at $250,000 in total.13FDIC. Pass-Through Deposit Insurance Coverage For a law firm trust account holding funds for dozens of clients, that would be a devastating gap. Proper account titling and recordkeeping are what make the insurance work.
When Segregation Fails
The rules only work if the firm follows them. The 2011 collapse of MF Global, a major futures commission merchant, is the standard cautionary example. During its final week of operations, MF Global used $1.212 billion in customer segregated funds to prop up its own proprietary trading and the operations of its affiliates.14CFTC. Customers of MF Global Inc. to Begin Receiving Final Restitution The firm failed to tell the CFTC when it knew customer accounts were running deficits and filed false reports concealing the shortfalls.
A federal court eventually ordered MF Global to pay full restitution of $1.212 billion plus a $100 million civil penalty, with the penalty payable only after customers and priority creditors were made whole.14CFTC. Customers of MF Global Inc. to Begin Receiving Final Restitution Customers ultimately got their money back, but many waited years for full distribution.
The lesson is that segregation is only as strong as the compliance behind it. The rules on paper were clear. The firm broke them anyway.
What to Check as a Client
If you are placing significant assets with a broker-dealer, futures firm, insurer, or attorney, the segregation framework is doing most of the work for you, but there are a few things worth confirming. Is the institution actually registered with the relevant regulator, and does it have a clean recent history with that regulator? For bank-held funds, is the account properly titled to make pass-through FDIC coverage available? For an insurance separate account, is the specific product insulated under state law? For a trust or escrow account, does the professional carry a surety bond or maintain the reconciliations their rules require? Segregation is a strong protection, but it protects you fully only when the firm treats it as more than paperwork.