Taking Stock of Errant Brokerage Firms : SEC crackdown bodes well for consumer confidence in the market

Tough sanctions imposed by the Securities and Exchange Commission last week indicate a welcome new emphasis on consumer protection.

The SEC previously concentrated too much of its resources on insider trading and other fraudulent practices. Now, as more people are drawn to the stock market in hopes of larger returns in a time of low interest rates, the federal agency must continue to keep a watchful eye out for the best interests of inexperienced investors--particularly the elderly--who too often in recent years have become victims of unscrupulous brokers.

The SEC censured PaineWebber for what it said was “egregious” and “widespread” misconduct.

Many of the allegations surfaced last July in a series of articles by Times staff writer Scot J. Paltrow, who reported on some stockbrokers’ fraudulent activities. Among these were stealing of customers’ funds, making trades that were never requested, making numerous unneeded trades to boost commissions, lying to customers about the value of their accounts and selling unregistered stocks.

Without admitting or denying guilt, PaineWebber agreed to a one-month ban on new accounts at its Beverly Hills office and three others. The arrangement also requires the brokerage house to hire an outside consultant to review sales practices at the firm and to ensure that the financial settlements it reached with clients were equitable.

The potential for fraud has increased in recent years as many individuals removed their money from low-yield interest-bearing accounts such as savings plans or certificates of deposit and placed that money in stocks. The returns in the stock market can be higher, but so can the risks.

The action against PaineWebber is part of a broader investigation of allegations of fraudulent brokerage practices at some of the largest and best-known Wall Street investment firms, including Prudential Securities and Shearson Lehman Bros.

Created in 1934 to oversee the nation’s stock and financial markets, the SEC has traditionally concentrated on going after big-time illegal activities such as securities fraud. Now, small investors no longer need to feel ignored.

The agency must continue to put brokerage firms on notice: Punish brokers who cheat small investors or the government will do it for you. That’s a useful role for the Securities and Exchange Commission. That kind of vigilance will only reinforce confidence in the market.