GAO Assails Stockbroker Punishment : Securities: A report chides SEC and the exchanges for not doing enough to get ‘rogues’ out of the business.

The Securities and Exchange Commission and the nation’s stock exchanges are not wielding a stick big enough to drive dishonest stockbrokers out of the financial industry, according to an advance copy of a General Accounting Office report obtained Thursday by The Times.

The GAO report, commissioned by the House subcommittee on telecommunications and finance, faults the SEC, the National Assn. of Securities Dealers, the New York Stock Exchange and other exchanges for failing to permanently bar “unscrupulous” brokers. Regulators, it says, impose seemingly mild punishments that “may give investors the perception that violators are tolerated.”

The subcommittee, under chairman Rep. Edward J. Markey (D-Mass.), is due to hold hearings beginning Wednesday on the problem of “rogue brokers” at major Wall Street firms who prey on small investors through dishonest sales practices.

In a 1992 series, The Times reported that many of the nation’s biggest, best-known brokerages knowingly hired and retained brokers with long records of disciplinary actions, lawsuits and customer complaints.

Subsequently, the SEC conducted a major inquiry into the problem, resulting in a

May report that found evidence of serious rule violations at 25% of the brokerage branch offices inspected.

The GAO study, scheduled for formal release at the hearing, found that formal disciplinary action against brokers was rare and that the NASD and stock exchanges often took informal action that was never reported to the public or government regulators.

GAO investigators also found that although the SEC “permanently” bans from the securities industry dishonest brokers and supervisors who have committed serious violations, many eventually are allowed to return. Others are able to migrate to different parts of the financial industry, including insurance sales and banking.

As part of its study, the GAO surveyed state securities regulators and found that many were dissatisfied with the punishments imposed on brokers by the SEC, NASD and the exchanges. Of 44 state regulators, 24 faulted the NASD for lax enforcement and 14 complained that the agency was too lenient. (The NASD operates the Nasdaq over-the-counter stock market and supervises many smaller brokerage firms.)

In one case, the report says, a broker barred by the SEC because of fraudulent sales of securities was allowed to remain in the business--provided that he sold only mutual funds and annuities. In another instance, the president of a securities firm was fined and disciplined twice by the NASD for serious rules violations. But the NASD then allowed him to work at another firm as a broker, supervised by a former employee.

Brandon Becker, head of the SEC division of market regulation, said the agency would not talk about the GAO findings until SEC Chairman Arthur Levitt Jr. testifies next week at Markey’s hearing.

But in a written comment attached to the GAO report, Becker defended the SEC’s record and said the commission had acted responsibly in allowing certain banned brokers to return to work. NASD officials could not be reached for comment late Thursday.

The SEC already has taken a number of steps to crack down on firms that employ dishonest brokers, including launching formal enforcement actions and calling on the exchanges to step up their inspections and supervision of brokerage firms.