SEC Calls for Crackdown on Stockbrokers : Wall Street: Agency letters urging that the exchanges review their policies are a first step toward tougher action.


The Securities and Exchange Commission has taken the first step toward directing the nation’s stock exchanges to impose harsher penalties and otherwise crack down on dishonest brokers at major Wall Street firms.

In letters dated Aug. 4, copies of which were obtained Tuesday by The Times, the SEC urged the exchanges “to review and, if necessary, enhance sanctions” against brokerage employees who engage in improper sales practices. The letters went to the heads of the New York Stock Exchange; the National Assn. of Securities Dealers, which operates the Nasdaq Stock Market, and seven other exchanges.

Signed by the SEC’s directors of market regulation and enforcement, the letters also called on the exchanges to make more frequent, detailed examinations of member firms for evidence of sales practice violations. These illegal practices include making trades that customers never requested, churning accounts by rapidly buying and selling securities to boost brokerage commissions, and putting customers into unsuitably risky investments.

The SEC also asked the exchanges to put more effort into investigating reports of such violations made in customer arbitration cases. In May, the agency found that the exchanges were not doing enough to follow up on these complaints.


Other recommendations in the letters include new, stiff punishment of firms that don’t comply with rules requiring them to promptly report to the exchanges disciplinary problems and customer complaints against their brokers.

The NASD and the stock exchanges are “self-regulatory organizations” that have the power and responsibility to discipline member firms and their brokers for violations of securities rules. The SEC has long left most enforcement of sales practice rules to these organizations.

After nearly two years of study, the SEC reported in May that some leading brokerages had failed to weed out employees with long records of defrauding customers. The agency said it had launched disciplinary cases involving a quarter of the 161 brokerage branch offices it examined as part of the study. Three major firms were reported to have especially bad records, but the SEC refuses to name them.

The study was launched in response to a 1992 series of stories in The Times that found that brokerage firms, the exchanges and the SEC were lax in protecting small investors from rogue brokers.


Michael Schlein, counsel to SEC Chairman Arthur Levitt Jr., on Tuesday described the report and recommendations as “pretty hard-hitting, and we’re following up to make sure that they get implemented.”

The SEC asked that the exchanges respond by Monday. A NYSE spokesman said the exchange has not yet replied to the SEC’s letter, and an NASD spokesman said senior officials were traveling Tuesday and could not be reached for comment.

Separately, the NASD announced proposed rules that would ban brokers from taking free travel and other gifts from outside firms whose mutual funds or variable annuity contracts they sell.

NASD officials said they had no evidence of abuses by mutual fund or insurance firms, but they said they wanted to eliminate even the possible appearance of abuse.


The proposed rules would not ban brokerages from giving their own brokers gifts for selling in-house products, such as the firms’ own mutual funds.

A special SEC committee is already studying broker pay issues.