SEC Raises Capital Levels for Brokers : Markets: Smaller firms will have to maintain a much larger cushion against losses to ensure that failing companies can pay debts to customers.

Moving to protect individual investors from losses should their brokerage firms go under, the Securities and Exchange Commission voted unanimously on Tuesday to sharply increase the amount of capital smaller brokerages must have on hand.

The bigger cushion of capital was needed so that small firms--including those dealing in penny stocks--”won’t fail and take all of their customers with them,” said Michael Macchiaroli, assistant director of the SEC’s market regulation division.

When firms fail and don’t have enough capital on hand to immediately pay debts to customers, the Securities Industry Protection Corp. steps in and runs a liquidation, during which investors sometimes must wait months or years to get any money back.

The move was seen by some SEC officials as long overdue. The SEC had last raised the “net capital” requirements in 1975. The federal agency has been considering increases in the requirements since the October, 1987, stock market crash led to failures of several small brokerage firms. Other firms have collapsed since then, leaving customers unable to get back their money or securities being held for them.

Macchiaroli said the new rules, to be phased in gradually over 18 months, will affect about 1,000 of the nation’s smaller brokerage firms.

For firms that “clear” trades, carry customer accounts and hold securities that belong to customers, the requirement will leap to $250,000 from $25,000. (Clearing a trade, similar to closing a deal, means conducting the final exchange of securities for cash on delivery.)

Firms that clear accounts but don’t hold customer securities will have to maintain capital of $100,000, up from $10,000. Macchiaroli estimated that about 100 of the 630 “clearing firms” don’t now meet the new requirements.

Very small firms, known as introducing firms--which basically are sales operations that contract with larger firms to clear all their trades--will have their requirement jump to $50,000 from $5,000. He said about 900 of the 2,500 introducing firms probably don’t now meet the new requirement.

Even industry organizations such as the National Assn. of Securities Dealers and the Securities Industry Assn. agreed that current capital requirements were far too low and supported the SEC rule change. Requirements that brokers keep as little as $5,000 of capital enabled many marginal operators to remain in business.

William Fitzpatrick, general counsel for the Securities Industry Assn., said the organization supported the change because “we feel it will make the industry stronger and increase investor confidence.”

The tendency of some firms to maintain the minimum required capital meant that almost any adverse turn of events--a judgment in a lawsuit or relatively minor trading losses, for example--could drive them into bankruptcy.

William Heyman, the SEC’s head of market regulation, said owners of some firms tended to pocket nearly all the profits every year, leaving little capital in the firms to cushion against losses and protect customers.

The SEC acknowledged that the higher requirements may put a few firms out of business, and will force some clearing firms to transfer the clearing function to larger, better capitalized brokerages.

SEC Commissioner Mary L. Schapiro said the increase has been necessary for some time. “The requirements really haven’t kept pace at all with risk in the industry,” she said, and questioned whether even the new $250,000 requirement may be too low. She said she urged the SEC staff to monitor brokerage firms’ performance and report back quickly if there are signs the levels should be raised further.

David E. Shellenberger, a Boston lawyer who represents individual investors in disputes with brokerage firms, said the new requirements may increase the chances that individual investors can recover funds from a small firm should a dispute arise.

He said he won a $225,000 arbitration award for a client in a dispute with a small Boston firm a few years ago but could collect only a small portion of it because the undercapitalized firm filed for bankruptcy. Higher capital requirements will make it more likely that a customer can collect in such a dispute, Shellenberger said.