Segregated account: Overview, definition, and example
What is a segregated account?
A segregated account is a financial account that is kept separate from other funds to ensure that assets are not mixed. This type of account is commonly used in banking, investment, and business transactions to protect client funds, ensure regulatory compliance, and maintain financial transparency.
For example, a brokerage firm may hold customer investments in segregated accounts to keep them separate from the firm’s own operational funds. This ensures that client money is protected, even if the firm experiences financial trouble.
Why is a segregated account important?
A segregated account is important because it helps prevent financial mismanagement, fraud, and the unauthorized use of funds. By keeping assets separate, businesses and financial institutions can ensure that client money is safeguarded and can be returned when needed.
Regulatory bodies often require segregated accounts for businesses handling client funds, such as insurance companies, investment firms, and payment processors. This helps protect clients in cases of insolvency or disputes.
Understanding segregated accounts through an example
A hedge fund manages investments on behalf of multiple clients. Instead of pooling all funds into a single company account, the hedge fund maintains segregated accounts for each client. This ensures that individual client funds remain protected and are not used for other business activities.
In another example, an online payment processor receives money from customers on behalf of merchants. To comply with financial regulations, it holds customer funds in a segregated account rather than in its operational account. This ensures that if the payment processor faces financial difficulties, the merchants' funds are still secure and accessible.
An example of a segregated account clause
Here’s how a segregated account clause might appear in a contract:
“The Company shall maintain all client funds in a segregated account, separate from its general operating funds. Client funds shall not be commingled with Company assets and shall only be used for the purposes specified in this Agreement.”
Conclusion
A segregated account is a critical financial safeguard that ensures funds are kept separate for legal, regulatory, and risk management purposes. By maintaining segregation, businesses protect client assets, reduce financial risk, and ensure compliance with industry standards. Having a clear contractual clause for segregated accounts helps set expectations and provides transparency in financial transactions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.