Blocked Investments: Broker Liability and Asset Protection

Sanctions restrictions led to the freezing of foreign securities in the accounts of Russian intermediaries, as well as Russian assets registered in foreign financial institutions. Many investors lost the ability to manage their investments, receive payments, and conduct transactions.

In such circumstances, the question of the distribution of liability between brokers, depositories, and securities issuers arises. The ability to recover damages depends on the reasons for the blocking, the nature of the violations, and the actions of each participant in the investment chain.

What is a broker responsible for to the client?

As a general rule, a broker does not guarantee investment returns and is not liable for ordinary market losses. Changes in the price of securities, exchange rates, or the general market situation do not, in and of themselves, constitute grounds for making a claim against the broker.

At the same time, the broker is obliged to execute orders in good faith, act in the interests of the client, comply with the terms of the agreement, ensure proper accounting of assets and provide the necessary information about risks.

Grounds for liability may arise if the intermediary:

• failed to carry out an order without sufficient grounds;
• violated the established rules for conducting operations;
• did not warn about the impossibility of fulfilling the order;
• allowed improper accounting or segregation of client assets;
• provided false information about an investment product or the risks associated with it;
• allowed a conflict of interest that influenced the outcome of the operation.

In such cases, the client may claim compensation for damages if he can prove the breach of obligations by the intermediary and the connection between this breach and the losses that arose.

When the broker is not responsible for blocking assets

Sanction restrictions have an independent legal nature. If securities transactions become impossible due to decisions by foreign governments, depositories, or financial institutions, this does not automatically imply liability for the Russian broker.

To recover damages, it is necessary to establish that the damages arose specifically as a result of the actions or inactions of the intermediary. If the intermediary was fulfilling its obligations and the blocking was the result of external restrictions, there may be no grounds for recovering the full value of the assets.

When considering such disputes, consideration is also given to whether the investor retains ownership of the securities and whether there are alternative means of disposing of them. Therefore, the inability to sell assets or receive compensation is not always recognized as sufficient grounds for compensation of their market value.

However, external restrictions do not absolve the intermediary of liability for their own violations. If they accepted an order but failed to execute it and failed to promptly notify the client of any obstacles that arose, this may be grounds for filing claims.

Blocking situations vary depending on where the securities are listed and at what stage the restrictions arose.

Russian securities in foreign accounts.

In this case, foreign depositories and banks may refuse to process transactions and transfer payments. For certain categories of Russian securities, special mechanisms for receiving income through the Russian financial infrastructure are in place.

However, their use requires confirmation of rights to assets and the provision of necessary documents. If a Russian company obligated to pay income on securities fails to fulfill its obligations, the investor may consider legal recovery.

Foreign securities in the accounts of Russian depositories.

Restrictions may apply to shares, bonds, coupon and dividend payments, and proceeds from redemption of securities. The investor may retain rights to the assets but may not be able to dispose of them freely.

In such circumstances, claims may be made against foreign depositories. In this case, the recovery of unpaid income and the recovery of the full value of the blocked securities are considered separately. If ownership is retained and the ability to dispose of the assets is not completely lost, the court may deny compensation for their full value.

What protection methods are available to investors?

Litigation is not the only means of protection. Depending on where the assets are held and the nature of the restrictions, several mechanisms may be used.

Administrative Unblocking. An investor can apply for special permission from a foreign regulator. For assets blocked in Euroclear, the relevant procedures involve Belgian jurisdiction, and for assets blocked in Clearstream, Luxembourg jurisdiction. When reviewing the application, it is necessary to confirm the rights to the securities, the origin of the assets, and compliance with the established requirements.

Appealing a Denial. If a regulator has denied a permit, the possibility of challenging the decision in the national court of the relevant country can be considered. It is important to consider the procedural requirements and timeframes for appeal.

Judicial recovery. Depending on the circumstances, claims may be brought against the broker, the depository, or the Russian company obligated to pay income on the securities. The grounds and scope of the claims must be determined based on the nature of the violation. Recovery of bond debt, coupon income, and losses from the broker’s actions are separate categories of dispute.

Investment arbitration. In certain cases, international arbitration under investment protection treaties may be considered. The prospects for this approach depend on the investor’s status, the nature of the investment, applicable international treaties, and the availability of grounds for protection.

What to check before applying for protection

To select the appropriate protection method, it is necessary to establish the reasons for the blocking and determine which participant is responsible for the resulting restrictions or losses.

In particular, you should collect documents confirming:

• acquisition of securities and rights to them;
• movement of assets between brokers and depositories;
• the content of the instructions and the results of their execution;
• the fact of blocking and known reasons for restrictions;
• presence of unpaid income;
• appeals to financial institutions and responses received;
• attempts to use administrative unblocking procedures.

It is also worth checking whether there are alternative ways to dispose of assets: over-the-counter sales, using securities as collateral, or participating in payout procedures.

Blocking securities does not automatically obligate the Russian broker to compensate for their value. If restrictions arose as a result of external sanctions and the broker did not violate its obligations, there may be no grounds for recovery of damages.

At the same time, the broker retains liability for improper execution of orders, violations of asset accounting rules, and provision of false information.

The choice of protection method depends on the reasons for the blocking, the location where the securities are registered, and the nature of the violated rights. In some cases, it may be appropriate to seek administrative unblocking, while in others, it may be appropriate to recover unpaid income or challenge the actions of the financial intermediary. There is no one-size-fits-all mechanism for all situations: the strategy must be determined based on the specific circumstances and available legal procedures.