SEC to Crack Down on Dishonest Brokers in Small-, Mid-Sized Firms : Securities: Agency, NASD and stock exchanges are criticized for moving too slowly to protect investors.

The Securities and Exchange Commission disclosed Wednesday that it plans to launch a sweep of small- and medium-sized brokerage firms across the country to ferret out evidence of dishonest stockbrokers.

SEC Chairman Arthur Levitt Jr. announced the sweep at a congressional hearing looking into the problem of “rogue” stock brokers who repeatedly defraud small investors. Over the next six to eight months, he said, the SEC staff will visit “scores” of brokerage firm branch offices.

Levitt said the sweep will be similar to a series of examinations the SEC has carried out at the nation’s nine largest brokerage houses. In May, the agency said the earlier sweep had led it to open 40 formal disciplinary investigations.

“To those who would prey on unsuspecting investors, this is a warning: Clean up your act, or we’ll do it for you,” Levitt said.

During the hearing, Rep. Edward J. Markey (D-Mass.), chairman of the House subcommittee on telecommunications and finance, sharply criticized the National Assn. of Securities Dealers, the New York Stock Exchange and the SEC, which often take years to bring cases against brokers who blatantly violate securities laws.

Referring to specific cases involving small investors, Markey termed the agencies’ response “glacial.”

The SEC probes and the House hearing follow a 1992 series in The Times which reported that several of the nation’s most respected brokerage firms knowingly hired and retained brokers who had long records of defrauding customers. The series reported that regulators, including the stock exchanges, often took years to bring charges against brokers, while the brokers went on to victimize many more customers.

Investor advocates and securities industry officials clashed at the hearing over the extent of problems with rogue brokers and inadequate supervision by brokerages. Marc E. Lackritz, president of the Securities Industry Assn., said it was a “grotesque mischaracterization of this industry” to suggest that more than a tiny fraction of the nation’s 470,000 brokers are dishonest.

But a state securities regulator and an official of the General Accounting Office said the extent of the problem could be much greater than is currently known. Many informal disciplinary actions against brokers are never reported, they said, and the central computer system for tracking brokers’ records is severely outmoded. (The system will soon be overhauled.)

“I don’t personally believe that this industry is populated with thousands of criminals and bad actors who should be placed in jail. Nor do I feel there are very many (brokers) walking around with halos,” Levitt said. “But I do believe that there are lots of brokers who are walking pretty close to the line.”

Mary E. Murray, 75, a widow and retired Latin teacher from Cape Cod, Mass., testified that over a five-year period ending in 1990, a Prudential Securities broker “churned” her $99,000 account--ultimately costing her over $125,000 in losses. Churning involves rapidly buying and selling securities to generate commissions for the broker.

In 1992, arbitrators awarded Murray a $419,000 judgment against Prudential and the broker, Gerald R. Swirsky, criticizing their “open-eyed, reckless disregard” of Murray’s interests.

Neither the NASD nor NYSE has taken disciplinary action against Swirsky, though an official testified that the NASD expected to file charges soon.

Now a broker with Tucker Anthony in Boston, Swirsky has been the subject of other formal complaints. Reached by phone after the hearing, he declined comment.