SEC May Create a ‘Smoke Detector’ to Spot Brokerage Ills

Federal securities regulators voted Thursday to consider creating “the corporate equivalent of a smoke detector” to head off potential financial troubles at big brokerage firms such as the one that sank Drexel Burnham Lambert Inc.

The Securities and Exchange Commission agreed to seek public comment on proposed changes in the net capital rule, which requires broker-dealers to maintain minimum amounts of cash and assets easily converted into cash to offset the risk of the securities they trade.

But last February’s sudden collapse of the parent company of junk bond giant Drexel Burnham has raised concerns that regulators are not getting enough advance notice when the parent companies of Wall Street firms withdraw large amounts from capital reserves.

While financially sound itself, the Drexel brokerage business was a victim of money woes at its parent Drexel Burnham Lambert Group. DBL Group filed for bankruptcy court protection after defaulting on $100 million in short-term debt. The SEC and the New York Stock Exchange refused to allow it to draw down cash from the brokerage to repay its debt.