Broker Regulation: Help Or Hindrance?

April 25, 1994|By David Conn | David Conn,Sun Staff Photo/ 1993

Thomas J. Emory Jr.'s record as a stockbroker makes for some interesting reading.

He has been under investigation for alleged wrongdoing by two regulatory agencies. He has eight customer complaints on his record since 1986, alleging unauthorized trading, unsuitable investments and churning, or excessive trading just to generate commissions. He or his firms have settled those complaints for more than $100,000.

All of this is well known to Mr. Emory, regulators and his employers, including his current workplace, PaineWebber Inc.'s Hunt Valley office.

The only ones who might not know are his customers. This is what a national toll-free hot line, intended to disclose brokers' records to investors, had to say about Mr. Emory: "Summary information: None."

This secrecy, combined with the weaknesses of the regulatory system, can make it doubly difficult for brokerage customers to protect themselves.

In many ways, the regulatory system -- aimed at protecting small investors -- is the customers' worst enemy.

Brokerage firms are loath to make public the complaints and misdeeds of their employees. Regulators can take years to investigate and act against offenders. And customers, who must go to great lengths to investigate their brokers, more often simply trust them without question.

"You'd be surprised how many people walk into a firm and sign up with the 'broker of the day,' " says William Levine, president and chief executive of Investors Arbitration Services, a Woodland Hills, Calif.,firm that represents customers in brokerage disputes.

"The client has to become more responsible," Mr. Levine urges. "He should shop around for a broker like he shops around for a home or a car."

Most investors who take the trouble to call the national toll-free hot line run by the National Association of Securities Dealers tend to come away with little or no news.

The hot line is supposed to disclose final regulatory and court actions. But since most complaints are settled quietly, few brokers end up with sanctions on their record. The NASD, recognizing that many complaints against brokers are unwarranted, doesn't disclose customer complaints at all.

Further, because employers and brokers dread seeing a black markon their official records, many customer complaints are never even registered, as required. An examination this winter by three regulatory agencies showed that 80 percent of all complaints made against Dean Witter brokers were either filed late or not at all to the New York Stock Exchange, according to a report by Investment Dealers Digest, a trade magazine.

Even when a broker's actions are serious enough to attract the attention of regulators, customers are kept in the dark. The process of investigating and sanctioning brokers and supervisors can drag on for years, leaving the salespeople free to do business.

Several customer complaints against Mr. Emory were being investigated by regulators. The Chicago Board of Options Exchangecontacted one of Mr. Emory's former clients about its investigation, and the NASD made a similar call to another of his clients.

But those clients, who spoke on condition they not be named, were questioned by the respective agencies about seven months ago, and they haven't heard anything since.

Mr. Emory referred questions to PaineWebber. Joseph Grano, president of the firm's retail division, says most of Mr. Emory's problems related to options trading while he was with Merrill Lynch, an activity PaineWebber has stopped him from doing.

For Mr. Emory, now working under heightened supervision, the firm "felt that rehabilitation was in order," Mr. Grano explains. The NASD is mum, but the Chicago Board of Options Exchange acknowledges its investigation. Both agencies say their rules forbid them from disclosing anything about them, including when they started or what the allegations might be.

Even when complaints are investigated, brokers can be allowed to work unhindered for years while most customers remain unaware.

A formal investigation of a broker by the NASD staff, which can take months, is typically followed by a recommendation to the district conduct committee, which comprises volunteers from the industry. And if sanctions are imposed, a broker can appeal to the agency's board of governors, and even to the SEC.

"That whole process can take anywhere from two to four years, during which the individual accused continues to be invisible" to the public, acknowledges Joseph R. Hardiman, president and chief executive of the NASD, which is both the brokerage industry's largest trade association and its chief regulator.

Sometimes it takes even longer. In 1986 the New York Stock Exchange first became aware of alleged widespread client abuses at Shearson's 55 Wall Street office in New York. But it wasn't until 1991 that the exchange announced a $750,000 settlement with the firm of charges of heavy churning, unauthorized trading and other problems.

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