SEC Launches Inquiry Into Abuses by Stockbrokers
The Securities and Exchange Commission has begun an inquiry into whether several of Wall Street’s biggest investment houses are failing to weed out stockbrokers who repeatedly cheat individual investors.
Seven brokerage firms confirmed Friday that they have received official letters of inquiry from the SEC, which took the action following a series of stories in The Times earlier this month on abuses in the retail brokerage industry.
The SEC letters ask for extensive information on brokers who have records of multiple customer complaints and lawsuits or arbitration cases filed against them. The SEC also requested detailed information on the firms’ hiring practices and internal policies for reviewing and disciplining brokers.
The firms that acknowledged receiving the letters are Shearson Lehman Bros., PaineWebber, Prudential Securities, Merrill Lynch, Dean Witter Reynolds, Kidder Peabody and Smith Barney. Industry sources said the letters were sent to at least nine firms, all mainline Wall Street companies that have large networks of retail brokers.
The inquiry marks the first time in recent years that the SEC has systematically focused on potential abuses by the big, prestigious firms in dealings with individual--mainly small--investors. Most of the SEC’s enforcement efforts over the last decade have centered on insider trading and big securities fraud and stock manipulation cases--as epitomized by the high-profile investigations of Michael Milken’s junk bond operation and Ivan F. Boesky’s speculation in takeover stocks--or on violations by smaller firms that specialize in penny stocks.
The SEC inquiry comes at a time when low interest rates on savings accounts and certificates of deposit have driven huge numbers of small investors to put their nest eggs in the stock market. Many have turned to prestigious brokerage firms with well-known names in the belief that these firms closely monitor and discipline their brokers.
It is understood that the SEC hasn’t yet opened a formal investigation into any of the individual firms or brokers receiving the letters. The SEC is expected to decide what action, if any, to take after getting answers to the letters.
The four-page, single-spaced letters are dated July 16 and were signed jointly by William R. McLucas, the SEC’s enforcement chief, and William H. Heyman, director of the SEC’s division of market regulation. The Times obtained a copy of one of the letters from a non-SEC source.
The letters ask for a response by Sept. 14 and focus on whether firms are keeping on “large producers”--brokers who bring in big commissions for their firms--despite evidence that they repeatedly cheat customers. Among other things, the letters ask for information on brokers who “have been or are the subject of multiple customer complaints, lawsuits or arbitrations alleging various sales practice problems, such as churning, unsuitable recommendations, unauthorized trading, or misappropriation of funds or securities.”
Churning is an industry term that refers to the rapid purchase and sale of securities in a customers’ account solely to generate sales commissions.
The SEC letters contain 12 specific requests for information. They ask the firms to identify their 50 largest revenue-producing brokers, as well as the 50 brokers who have the largest numbers of written customer complaints filed against them. It also asks the firms to identify the branch offices that have generated the most customer complaints, and to give details of all internal investigations into sales-practice abuses that the firms have carried out.
McLucas declined to comment on the letters or elaborate on what action the SEC may take.
The seven firms that confirmed receiving the letters all said they will comply fully with the SEC’s requests.
A spokeswoman for Merrill Lynch, the nation’s largest brokerage, said in a prepared statement: “We are extremely proud of our compliance record, which is due to the fact that we deal quickly and definitively with complaints when they are made. Merrill Lynch is responding fully to the SEC’s request and believes that regulatory interest in exploring these issues is appropriate and will enhance investor protection to the long-term benefit of the industry.”
The Times’ five-part series on the retail brokerage industry, which appeared July 1-5, focused on brokers at the top-ranked Wall Street firms who were hired and kept on despite lengthy records of disciplinary action, judgments against them and customer complaints. The series raised questions about whether the firms, as well as the stock exchanges and the SEC, were adequately enforcing laws against so-called sales-practice abuses.
