Security segregation or client funds, in the context of the securities industry, refers to regulatory rules requiring that customer assets held by a financial institution (generally a brokerage firm) be held separate from assets of the brokerage firm itself in a segregated account and that there is no commingling.
[3] In many jurisdictions segregated accounts cannot be used to pay creditors during a broker's liquidation and must be returned to the customers directly.
This securities segregation requirement was developed due to problems in the U.S. stock markets towards the end of the 1960s.
[4][1] In the crisis of the late 1960s, a good portion of the net worth (capital) of brokerage houses was held in highly speculative common stocks which were owned by individual partners.
When the bear market occurred, alongside contraction of these speculative common stock quotations, the net worth of these brokerage firms declined drastically hence leading to bankruptcy.