Brokers are warned to shape up

December 03, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- In a sharp warning to Wall Street executives that they face a new era of public scrutiny, SEC Commissioner J. Carter Beese said yesterday that Congress and federal regulators were on the verge of imposing stiff regulations to control "rogue brokers."

Mr. Beese told a group of top Wall Street managers meeting in Florida that the Securities and Exchange Commission was prepared to regulate brokers more closely if the industry did not take action to police itself. Investment companies must fire brokers who repeatedly violate the industry's code of ethics rather than allow them to continue hopping from firm to firm, Mr. Beese said.

"This commission will not tolerate the presence of rogue brokers in our markets. If you don't eliminate them -- we will -- and those with supervisory responsibility will be held accountable," Mr. Beese said at the annual meeting of the Securities Industry Association in Boca Raton, Fla.

Later, in a telephone interview after the meeting, Mr. Beese said he had received input from the SEC staff and the new Democratic chairman of the SEC, Arthur Levitt, so the speech represents the entire commission's concern over Wall Street ethics.

The comments signaled that the new SEC, now under Democratic control, might take a more activist approach toward investment regulation. But because Mr. Beese is the SEC's lone Republican on the five-member commission, it also represents a consensus that change is needed. Mr. Beese was a partner at Alex. Brown & Sons Inc. before being appointed to the SEC by former President George Bush.

"This is how the new commission is thinking: They have a window of time to increase self-policing efforts or Washington will do it for them," Mr. Beese said.

He said that support in Congress was growing for a "three strikes you're out" policy, which would see brokers banned from practicing if they were found guilty of three serious charges. Wall Street firms must come up with some similar "mandatory sentencing guidelines," Mr. Beese said, or face new laws as early as next year.

Mr. Beese said the heart of Wall Street's problems was its pay structure, which rewards brokers and their managers for short-term -- monthly or quarterly -- performance. This leads brokers to shirk their duty to build long-term relationships with clients in favor of selling products as quickly as possible.

Most recently, for example, Prudential Securities Inc. was fined $41 million for misleading investors in selling them limited partnerships. It also had to pay back $371 million to almost 400,000 customers who said they were misled by the investment company's brokers.

Another problem, Mr. Beese said, was investor education. A recent SEC survey showed that 36 percent of respondents thought mutual funds bought through a stockbroker were federally insured. Wall Street risks losing investors' trust if they fail to explain thoroughly what they are selling, Mr. Beese said.

Mr. Beese commended a recent decision by 17 major investment houses to stop making political contributions to local candidates. The contributions had come under fire because they had helped the Wall Street firms obtain underwriting contracts for municipal bonds.

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