BROKER REGULATION: HELP OR HINDRANCE?

THE BALTIMORE SUN

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.

Mr. Hardiman says the NASD has suggested an expedited disciplinary process for some cases that might take as little as three to six months. But the SEC has raised concerns about violating due process rights, he says.

Weakened oversight

In some ways Maryland residents are lucky. Investors who call the Securities Division, part of the state Attorney General's Office, are warned about brokers with discipline and complaint records, whether or not those problems led to final actions.

"We put out these pamphlets telling people to call us," said Securities Commissioner Robert McDonald. But, he said, "I don't get the sense that they do call us too often."

"I think what we do is very important," Deputy Commissioner Melanie Lubin adds, "but the state can only put so much money into it."

To police the roughly 60,000 brokers registered to do business in Maryland, about 10,000 of whom actually live in the state, the securities division has 26 full-time employees. The staff includes two attorneys and three examiners. There is authority to hire two more employees, and three more attorneys can be called on an as-needed basis.

That's down from 35 employees before the state's budget problems caused a hiring freeze in the early 1990s.

Federal regulators have started to give investors a hand, starting with the paucity of public disclosure. Last year, the NASD hot line was expanded to include some arbitration awards, and pending formal disciplinary actions by state and federal regulators.

The NASD also is in the process of upgrading its entire computerized Central Repository Directory, a system that was originally intended as merely a broker registration data base, but has evolved into a national clearinghouse for disciplinary information as well.

And last month the SEC and the NASD announced that all brokers and financial planners will have to take consumer education courses. The SEC also published a brochure called "Investing Wisely," which provides tips for screening prospective brokers, and spotting possible troublemakers.

"To protect the integrity of the markets, we must protect the consumer," SEC Chairman Arthur Levitt said at the meeting to announce the new program.

Despite the encouraging talk, both industry observers and customers who have learned a hard lesson say that investors can't afford to wait for the system to publicize and weed out problem brokers. Clients who fail to investigate their broker's background and watch their own investments closely put their money and their future at risk.

SHOPPING FOR A BROKER

The easiest way to avoid problems with a stockbroker is to find a good one in the first place.

The Securities and Exchange Commission has published a free brochure called "Invest Wisely" to help investors screen prospective brokers and spot possible troublemakers. It can be ordered by sending a stamped self-addressed envelope to the Office of Consumer Affairs, the U.S. Securities and Exchange Commission, Mail Stop 2-6, 450 5th St. N.W., Washington, D.C. 20549. Write "Invest Wisely" on both envelopes.

In addition, regulators and industry members recommend these steps to seek out a good broker, maintain a client-broker relationship, and resolve problems if they occur:

1. Solicit references. Don't just walk into a securities firm and ask for a broker. Ask friends, relatives and co-workers for the names of brokers who have served them well.

2. Interview several brokers. Determine whether they have your financial interests in mind, especially whether they ask for detailed information from you, including your level of knowledge and risk tolerance. Beware of brokers looking merely to sell a product. Ask your finalists for at least 10 customer references; call all of them and ask about the size of their investment, the broker's performance, and his or her responsiveness.

3. Check with regulators. All brokers must be registered to do business. Call the NASD's hot line -- (800) 289-9999 -- to find out about arbitration awards and serious regulatory actions. Call the Maryland Securities Division -- (410) 576-6360 -- for a more detailed description of the broker's complaint and disciplinary record, if any.

4. Understand the costs. Most brokers are paid commissions based on the size of the investment. Make sure your broker explains those costs, including general fees for opening, maintaining and closing an account. Don't sign a new account agreement until you understand it completely.

5. Understand the investment. Don't be bullied into making an investment you don't understand fully. Read the prospectus, if applicable, and ask questions. Make sure the broker explains why buying a certain product fits your financial plan (or why it no longer does).

7. Read your statements. Make sure that every receipt mailed to you matches the transaction you've agreed to make. Check monthly account statements carefully for the presence of securities you didn't agree to buy, or other irregularities.

8. Pursue problems promptly. If a problem occurs, and your broker doesn't act promptly, call the office manager or the firm's compliance department. If the problem persists, contact state and/or federal regulators. Document everything.

9. Call an attorney. If the firm doesn't resolve your problem, think about finding a securities attorney, either one recommended by friends, or by the state bar association.

10. Take responsibility. Be involved. Stay informed. It's your money.

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