[ by Howard Haykin ] Nearly 10 months into the federal investigation of the MF Global collapse - seeking conclusive explanations for the firm's collapse and for the related disappearance of $1 billion or so in customer funds - we learn of indications that no criminal charges will likely be filed against any MF Global executives. No explanations, no customer funds, no culpable individuals. That would leave the bankruptcy process and distribution of available assets to creditors and possibly customers as the only open items on the checklist - in addition to numerous lawsuits. Reaction to the fact that mysteries remain unsolved is not especially significant.  Whether that leaves a bad taste in people's mouths or ruffles some feathers in Washington, D.C. - particularly since no executive will be held responsible for customers' devastating losses - those of us who are outside of the investigation must accept the findings that are provided. We have no any information to refute the investigators' findings, and so we must (grudgingly, if necessary) accept the current conclusion that no crimes were committed - unless and until, of course, new evidence is found to prove otherwise. Addressing the Gaps for Safeguarding Customer Property. Without a doubt, we have credible proof that customer assets held and handled by broker-dealers are not necessarily safe and secure - regardless of what rules and regulations are on the books.   It's time to seriously rethink how broker-dealers handle and safeguard customer property. With, yet, $200 million more in customer funds disappear from futures broker Peregrine under the 'watchful' surveillance of federal regulators, we cannot afford to sit around waiting for a third such incident. NY Times reporter Peter Luben, writing in Dealbook, ponders out loud the following thoughts or suggestions.

In theory, customer property at a brokerage firm should be even more secure than money in a bank, because banks use fractional reserves, meaning that by design they have "used" a large part of the deposits, while customer property at a brokerage firm is supposed to be segregated in a special fund at a third-party custodian bank.  Yet, somehow, it never works out that way.

Since the Great Depression, banks have overcome the inherent weakness of fractional reserves with insurance from the FDIC.  Brokerage accounts are insured, as well, although to a more limited degree - SIPC insurance applies only to securities, defined essentially as plain-vanilla investments (stocks, bonds, mutual funds).  Commodities and futures traders are left totally unprotected.

So, might it be appropriate to extend SIPC insurance to all types of investments.  Or is this too simplistic a solution?  After all, bank account insurance comes with bank regulation.  The FDIC and either a state or federal bank regulator oversee the bank. And by bank here, Mr. Luben refers to the actual subsidiary of the holding company that provides bank accounts.

Brokerage firms are regulated, to be sure, but it's not quite the level of oversight that regulators have with depository banks.  And the insurer, SIPC, has no regulatory role at all.

Handing out insurance to brokerage firms without simultaneously ramping up the degree of oversight is a great way to prop up shaky brokerage firms at taxpayer expense. But that is probably not quite the point of providing insurance to brokerage accounts.

For further details, go to:  [Dealbook, 8/16/12].