What MF Global's Customers Can Expect, also about SPIC

SpringMountain

NEW YORK (TheStreet) -- Large creditors like Deutsche Bank and JPMorgan Chase may not be alone in facing losses from failure of MF Global , if speculation of missing client funds turns out to be correct.

MF Global filed for Chapter 11 bankruptcy on Monday, after negotiations of a rescue deal with Interactive Brokers Group were terminated, with various media reports that Interactive Brokers got cold feet because client funds were missing.

JPMorgan is MF Global's largest creditor with $1.2 billion in exposure according to the bankruptcy petition, and Deutsche is the failed brokerage firm's second largest creditor with over $1 billion in claims.

The Wall Street Journal on Wednesday reported that MF Global admitted to federal regulators that customer money was missing, citing an unnamed federal official, and also said that the Commodity Futures Trading Commission (CFTC) would issues subpoenas to MF Global and that the FBI was planning to investigate as well.

The Securities Investor Protection Corp. (SIPC) on Monday quickly initiated the liquidation of brokerage customer accounts at MF Global, with a federal judge appointing James W. Giddens as trustee for the liquidation.


Brokerage Firm Failures and SIPC Coverage

When a brokerage firm fails and cash or securities appear to be missing from customer accounts, the SIPC will oversee an orderly liquidation of brokerage customer accounts, providing up to $500,000 in coverage for missing cash and securities, including a $250,000 limit for missing cash. The cash limit was increased from $100,000, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama last July.

It is, of course, too early to say whether the SIPC will discover any cash or securities missing from MF Global's customer accounts. If any brokerage client assets are found to be missing, the trustee will go through the process of gathering information to determine how much coverage will apply to each customer.

The SIPC protection does not cover MF Global's commodities futures contracts that fall outside the brokerage umbrella. Those fall under the umbrella of the CFTC, which does not have an insurance fund similar to the SIPC.
SIPC protection also doesn't cover unregistered investment contacts, fixed annuity contracts or currency contracts.

If a failed brokerage firm's records are found to be accurate, the trustee and SIPC may simply arrange to move brokerage accounts to other firms, while notifying customers of the transfer and their option to move to another brokerage firm of their choice.

It's a good idea to make sure that your brokerage firm is a member of the SIPC. For member firms, "Member SIPC" appears in all in all signs and advertisements.


Filing Claims

If your broker fails and securities are missing from customer accounts, the trustee will send you a claim form and instructions with a deadline for placing a claim, which is usually 30 to 60 days from the filing date, which is the date the SIPC petitions a court to appoint a trustee to liquidate a failed brokerage firm's accounts.

You will need to supply proof of what the broker owes you, which shows how important it is to save your statements. If you receive or have access to electronic statements, save the electronic files and maintain printed copies as well. Most customers receive their property back within one to three months.

If your claim is made after the deadline, the SIPC says the claims will be "subject to delayed processing and, possibly, limited payment." Federal law bars any claim from being made more than six months past the deadline.

It'd a good idea to review the SIPC's investor protection brochure for more information on how to protect yourself from investment fraud, and you may also wish to see how well you score on the Investor Survival Quiz.

-- Written by Philip van Doorn in Jupiter, Fla.

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