O.C. WATCH : Handle With Care

Wall Street traditionally has regarded institutions such as city and county governments as savvy investors that know their stocks from their derivatives and need little help in figuring out what is risky and what is safe.

But when Orange County declared bankruptcy last December after losing $1.7 billion, then-county Treasurer Robert L. Citron said he was a financial naif. Merrill Lynch, which had sold Orange County many securities and now is being sued by the county, scoffed at Citron’s claim and denied any wrongdoing. But even before the Orange County fiasco, local governments across the country were admitting that their investment portfolios were shaky; as a result, the Government Finance Officers Assn. sensibly asked for help in protecting its members from themselves.

This week the National Assn. of Securities Dealers finally ended its resistance and proposed new rules to guard against brokerages selling unsuitably risky securities to government agencies. The proposals, which must be approved by the federal Securities and Exchange Commission, require brokerage firms to consider factors such as the size of the government agency’s bankroll before plunging into deep water and whether the agency is buying a financial instrument largely because the brokerage is hustling it. Similar rules are already in effect for individual investors.

Stockbrokers and buyers alike need to remember that government investments are made with taxpayers’ money. Losing it can cause deep, widespread pain. These are small steps, but noteworthy.