Still More Lumps for ‘Rogue’ Brokers : GAO urges redoubling of attack on investment malpractice

A new report from the General Accounting Office is highly critical of the Securities and Exchange Commission and the nation’s stock exchanges for not being more aggressive in weeding out unscrupulous stockbrokers. The most disturbing fact in the report is that “rogue” brokers who supposedly have been permanently banned from the securities industry often resurface at brokerages or in banking, insurance or other financial services. In one case, the report said, a broker barred by the SEC because of fraudulent selling of securities was allowed to remain in the business as long as he sold only mutual funds and annuities.

The number of brokers with records of dishonesty is small; most stock brokers are reputable. However, investors need better protection from the problem brokers. The GAO said the seemingly mild punishment meted out to rogue brokers “may give investors the perception that violators are tolerated.” The investigative arm of Congress recommended that the SEC go beyond the tougher enforcement efforts it announced in May when the commission completed its own inquiry into the broker problem.

The SEC conducted the investigation in response to a 1992 series by Times staff writer Scot J. Paltrow, who reported that many of the nation’s biggest brokerages knowingly hired or retained brokers with records of disciplinary problems, lawsuits and customer complaints. The agency found evidence of serious rule violations at 25% of the brokerage branch offices it inspected. It has taken a number of steps to crack down on firms that employ dishonest brokers, including formal enforcement actions and calling on the exchanges to step up their inspections and supervision of brokerages.

In recommending that the SEC take further steps, the GAO suggested that the commission become involved in redesigning the Central Registration Depository, which keeps records of disciplinary problems of brokers. The system currently cannot be used to identify which securities firms take on brokers with a history of customer complaints and discipline problems. The system also does not provide a means for users to identify the 100 brokers nationally known to be most often named in complaints.

In addition, the GAO recommended that the Treasury Department lend a hand to help the SEC track banned brokers after they leave the securities business, often moving on to jobs in insurance or banking.

These recommendations deserve the close attention of SEC Chairman Arthur Levitt Jr., who will not discuss the GAO report until he appears next week at hearings on problem brokers to be held by the House subcommittee on telecommunications and finance. That panel commissioned the GAO report.

The potential prey for unethical brokers has increased in recent years as many people have transferred their money from safe, low-yield accounts in banks to stocks or mutual funds, which have a higher return but are riskier.

Industry self-policing efforts have not adequately addressed the problem of unethical brokers. The SEC move to step up oversight back in May was the first step in that direction. Incorporating the GAO recommendations is a logical next step.