Study Finds Lax Supervision of Bad Brokers

Many securities firms continue to hire problem brokers and provide only lax supervision despite a regulatory crackdown in recent years, according to a report released Monday by federal and state regulatory staff.

The Securities and Exchange Commission and the National Assn. of Securities Dealers, which polices all U.S. brokers, said they will increasingly seek to hold broker supervisors accountable.

The report, which focused on small and mid-size firms, found that a third of the firms surveyed hired brokers with disciplinary histories, and half the branch offices committed supervisory violations.

About a quarter of the branch offices conducted only a “minimum” hiring review of broker applicants, and the same percentage provided “inadequate or no routine review” of brokers’ trades with clients, the report said.

“When I say we need to ‘shut down’ bad brokers, I don’t mean slap them on the wrist--I don’t even mean fire them,” SEC Chairman Arthur Levitt said in a speech. “I mean shut them down.”

The 17-page report, which did not name any firms, was prepared by staff of the SEC, NASD, New York Stock Exchange and the national organization of state regulators. Its findings were based on a review of 347 problem brokers at 101 firms from December 1994 to November 1995.

Levitt, in prepared remarks to a Securities Industry Assn. seminar in Palm Desert, said every SEC examination of brokerage offices will focus on supervision.

He also urged firms hiring brokers with a history of complaints to supervise them more closely, and asked compliance officers to review the accounts of any broker who is the subject of three customer complaints a year.

Levitt also encouraged firms to tie branch managers’ compensation to effective supervision, not simply sales.