WASHINGTON -- Federal regulators will examine "scores" of small-and medium-sized brokerage firms in coming months to determine the extent that "rogue brokers" are preying on investors, SEC chairman Arthur Levitt told Congress yesterday.
The "sweep" of firms would extend upon a review launched by the Securities and Exchange Commission in 1992 of the hiring and supervisory practices of nine of the country's largest retail brokerage firms in which the SEC uncovered "significant evidence" of sales practice problems.
"I'm announcing today that the commission, in coordination with the National Association of Securities Dealers, New York Stock Exchange, and North American Securities Administrators Association, is planning a second joint examination sweep," Levitt told the House Energy and Commerce Committee's subcommittee on telecommunications and finance.
The panel, chaired by Rep. Edward Markey, D-Mass., was conducting an oversight hearing to examine the problem of unscrupulous "rogue brokers" in the securities industry and what steps regulators are taking to clean up the area.
The hearing follows the recent release of reports by the SEC and General Accounting Office that called for improved surveillance of and sterner disciplinary sanctions for abusers.
"Where the large firm project focused on specific large firms, this second sweep will include small- and medium-sized firms," Levitt said. "In the course of the next six to eight months, we'll be visiting scores of branches throughout the country," he said.
"To those who would prey on unsuspecting investors, this is a warning: Clean up your act, or we'll do it for you," said Levitt, who added that the SEC plans to conduct more examinations and levy more expensive sanctions in the future. But a top securities industry official called the idea of the rogue broker and "see-no-evil supervisor" a "myth." It is a "grotesque mischaracterization of this industry" and should be "laid to rest," Marc Lackritz, president of the Securities Industry Association, said at yesterday's hearing.
Levitt stressed that the SEC staff's upcoming examination will be informal. "We will not enter firms with armed guards and line up brokers and search them," he said.
As for permitting rogue brokers to re-enter the business, the agency will be tougher on those it has punished in the past for serious violations.
The SEC sometimes bars egregious violators from the securities business for life. But, oddly enough, the agency permits such offenders to reapply for their securities licenses, and it sometimes grants them re-entry. "From this day forward, any broker applying to the SEC for re-entry into the industry after an unqualified bar can expect the administrative equivalent of climbing Mt. Everest" Levitt said.
"We only impose bars in the most egregious cases, but when we do, then absent extraordinary circumstances, they will be permanent," he said.
Levitt said the SEC also examined registered representatives who had been the subject of sales practice complaints, litigation, or disciplinary actions. "More than one-third already had left the securities industry by the time of our study," he said. "But of those still in the industry, the majority had been able to change jobs at least once, indicating a willingness among firms to hire individuals with a history of customer complaints."
Moreover, firms that terminate brokers for unscrupulous practices sometimes are afraid to state on the employee's exit reports why they fired the person out of a fear of a defamation suit, Levitt said."We expect to come forward with measures that will afford qualified immunity from defamation suits to firms that disclose in good faith the reasons a broker is terminated," Levitt said.
The commission is working with the NASD, which plans to improve its central repository for information about brokers to enable regulators to search hundreds of thousands of records to identify problem brokers and target firms for examination, Levitt said. Also, the SEC has asked firms to include their legal and compliance departments in hiring decisions. "If a broker is hired against the recommendations of those departments, we want someone up the chain of command to put the decision in writing," he said.
Levitt said the SEC staff is considering developing a rule to curtail abusive "cold-calling" of the public by brokers. He added that good broker training can make the difference between a sales "force" and a sales "farce." A group known as the Council on Continuing Education is developing a mandatory curriculum for brokers that by July 1995 "promises to improve practices throughout the industry," he said.
"I'm also troubled by the use of contests that reward brokers for selling one product over another," Levitt said. He said a blue chip industry committee is examining compensation and incentive practices at firms.
But one committee Republican said at yesterday's hearing that he sees no evidence of systemic abuses by brokers.
The SEC staff did not find "systemic" problems, one hearing participant said. "But I think there are clearly lots of brokers playing it pretty close to the line," he said.
