SEC Looking to Overhaul Pay System for Stockbrokers : Securities: Levitt says the current setup encourages cheating. A high-profile panel will make recommendations.

WASHINGTON —  Calling for a radical change in the way stockbrokers are paid, Securities and Exchange Commission Chairman Arthur Levitt Jr. said Thursday that existing commission systems strongly tempt brokers to cheat their clients.

Levitt said he is appointing a panel of financial luminaries--including investor Warren Buffett and General Electric CEO Jack Welch--to make recommendations for an overhaul.

Most brokers are paid on the basis of how many sales they make, not how well customers do. They receive higher commissions for selling riskier investments than safe ones and frequently are paid extra for selling off securities owned by their firms when the market appears to be moving against those holdings.

“The fact is that we are living with conflicts of interest” between brokers and customers, Levitt said in a speech to members of the National Assn. of Securities Dealers.

He formally unveiled the results of a nearly two-year investigation into rogue brokers at nine of the nation’s largest securities firms.

As reported Thursday by The Times, the SEC found substantial problems at three of the nine firms, turning up serious wrongdoing at a quarter of the 161 brokerage offices it inspected. The report confirmed that brokers with long histories of customer complaints and lawsuits have found it easy to move from one Wall Street firm to another.

Levitt said he has strong reservations about the large cash bonuses many investment houses offer to get high-producing brokers to switch firms and bring their customers with them.

“Perhaps we should require the broker to tell her ex-clients about the terms of her compensation package at the new firm,” he said.

The SEC will also review the way brokerage supervisors are paid, Levitt said.

In his speech, however, Levitt--a onetime broker and former chairman of the American Stock Exchange whom President Clinton named SEC chairman last year--praised the securities business and insisted that rogue brokers are not a systemic problem.

“We have every right to be proud of the industry,” he said.

His comments drew criticism from state securities regulators and lawyers who represent investors.

John Perkins, Missouri’s securities commissioner, criticized the SEC for not interviewing investors as part of its investigation. “I will tell you it’s not an isolated problem for the people who lose all their money to these brokers,” Perkins said, noting that a third of the nine big brokerage firms examined by the SEC were found to have serious problems.

In a brief interview, Levitt said he did not mean to minimize the problem.

The SEC report did not identify the three firms found to have the most severe problems. But sources have said PaineWebber Inc. was found to have the most widespread problems, and Investment Dealers Digest has reported that the others are Prudential Securities and Shearson, which has since merged with Smith Barney.

“We have significantly beefed up legal and compliance efforts, independent of the commission’s study; we have been aggressively identifying any rogue brokers that may still be with the firm, and we are weeding them out of the system,” said Larry Armour, spokesman for PaineWebber.

Prudential did not respond to repeated requests for comment Thursday. A spokesman for Smith Barney Shearson said Joe Plumeri, its head of sales, was traveling and could not be reached for comment.

At the time of the Smith Barney Shearson merger, Shearson was known to be weeding out brokers who had significant records of customer complaints.

Levitt said Merrill Lynch Chairman Daniel P. Tully will head the panel that will study commission systems and other brokerage issues. Besides Buffet and Welch, the other members are Samuel Hayes, a Harvard Business School professor, and Raymond Mason, chairman of the Legg Mason Wood Walker brokerage firm in Baltimore.