Watchdog Wingdings : State Securities Regulators Party on the Tab of Brokerages They May Have to Take to Task

Most of the time, America’s securities firms consider state regulators a headache. But when the regulators’ annual convention rolls around, the brokerages are glad to help the watchdogs become party animals.

From the strolling banjo player to the chefs purveying authentic Cajun cooking to the three dance bands to the five well-stocked bars pumping quarts of free liquor, Merrill Lynch has thrown the most lavish brokerage-sponsored party so far, but five such bashes are scheduled during the five-day convention, which ended Wednesday.

Regulators said they see no conflict between partying at the expense of the regulated and the official theme of this year’s North American Securities Administrators Assn. convention: “Ethics.”

At a time when both state and federal regulators have been under fire for not doing enough to protect individual investors, the state officials are here to decide issues of vital concern to Wall Street firms, from imposing new rules on “wrap fee” accounts, the hottest new growth business for brokerages, to deciding whether to file disciplinary cases against big firms for violating state rules.

State regulators are often individual investors’ last line of defense. They license stockbrokers and impose regulations that go beyond the minimum required under federal law.

Big Wall Street firms view state regulators as a major annoyance. Once the firms resolve a problem with federal regulators, they often face a multiplicity of state actions on the same issues.

At the convention, for example, several states were meeting to consider joint legal action against Salomon Bros. for its Treasury bond scandal, a matter which Salomon resolved months ago with federal authorities. But some states are tougher than others on the industry.

“Why the hell are these guys taking lunch, breakfast and dinner from the guys they’re supposed to regulate?” asked Lionel Glancy, a private securities lawyer who attended last year’s NASAA convention in San Diego. “It’s bizarre to see such a close nexus between the regulators and those who are regulated.”

As he stood at the Merrill ball with a Miller Lite in one hand and a heaping plate of Creole dessert in the other, North Dakota Securities Commissioner Glenn Pomeroy took offense at the suggestion that regulators might be subtly swayed by the firms’ hospitality.

“It’s insulting to suggest that somebody can be influenced by a plate of hors d’oeuvres,” Pomeroy said.

Among the other bashes, Prudential Securities hosted an elegant poolside jazz brunch. And Shearson Lehman Bros. on Sunday threw a soiree honoring NASAA’s 75th birthday, emphasizing the theme with a clown and balloons and a big birthday cake, as well as plenty of free food and drink.

Nell Brothers, wife of NASAA’s outgoing president, Lewis W. Brothers Jr., a regulator from Virginia, said the traditional brokerage firm bashes had their origin years ago at a convention that opened in a state where liquor couldn’t be dispensed on a Sunday.

She said a well-supplied Shearson executive invited regulators up to his suite for drinks. So many showed up that the next year Shearson officials persuaded NASAA to let it host an official party.

This year Merrill, the nation’s biggest retail broker, was not to be outclassed. The firm rented historic Gallier Hall, once the seat of New Orleans government and a spacious example of 19th-Century Greek Revival architecture, and filled its high-ceilinged rooms with food, drink and music.

Jared Silverman, chief of New Jersey’s Division of Securities, said the party “won’t influence me the next time I have a matter regarding Merrill Lynch. But will I recognize better some names? The answer is yes.”

In another room, where Don Duet and His Cajun Pals played foot-stomping music as couples danced, North Carolina regulator Richard H. Carlton said no amount of free entertaining could influence him.

“We’re very ethical in North Carolina,” he said.

At the entryway, near a Dixieland band, senior Merrill executives in Merrill Lynch blazers greeted arrivals as busloads of regulators and lobbyists came marching in.

O. Ray Vass, Merrill’s compliance director, declined to comment on why the firm hosts the parties. “If you’re working, I’m not,” he said, adding that he resented a reporter intruding on the party atmosphere with questions.

But his boss, Merrill Vice Chairman and General Counsel Stephen L. Hammerman, himself a former federal regulator, said there was nothing wrong with a little well-intentioned entertaining. The party cost Merrill $32,000, hardly material to the giant firm’s earnings.

Hammerman denied any attempt to influence regulators, but he admitted that the get-togethers could be useful to the firm. “You’ll never get a favor from somebody, but you’ll get an understanding,” he said. He said he meant that informal meetings help the firm understand better what’s on regulators’ minds. Scott Stapf, a NASAA consultant in charge of the convention, said ethical concerns prompted the organization to change the rules two years ago. Previously only regulators were allowed to attend. Now firms are required to let in anyone who paid to attend the convention. At the Merrill party, lobbyists, lawyers and officials from investment firms outnumbered the regulators.

Stapf said NASAA makes no secret of the industry sponsorship. He also confirmed that fees paid by brokerage officials and other lobbyists to attend the convention subsidize the get-together, covering up to 30% of the cost.

In the Dixieland room, T. Webster Brenner, a regulator from Maryland, was enjoying the old-time jazz.

He comes from a state where budget reductions have affected nearly all government offices. “With all the state cutbacks, it’s nice somebody is doing us some entertaining,” he said, forlornly.