State Pact Seeks to Increase Broker Disclosure

NEW YORK —  State securities regulators on Thursday announced an agreement in principle that they contend will increase public disclosure of stockbrokers’ disciplinary records.

But in interviews, they conceded that in many instances, there would actually be less information disclosed rather than more.

A committee of the North American Securities Administrators Assn., the national organization of state securities regulators, had been negotiating about disclosure for more than two years with brokerage firms and the National Assn. of Securities Dealers.

Before the agreement can take effect, the state regulators must approve it in a vote scheduled for April.

The NASD operates a computer system that it owns jointly with the state regulators. The system lists all licensed brokers in the country and contains detailed information about customer complaints, lawsuits and disciplinary action.

The debate coincided with plans to modernize the computer system, known as the Central Registration Depository.

In the wake of media accounts of dishonest stockbrokers, including a 1992 series in The Times, a number of prominent brokerage firms, led by Merrill Lynch & Co., have pressed to decrease the amount of information publicly available about brokers’ records. They contended that much of the information amounted to unsubstantiated complaints and might unfairly damage brokers’ reputations.

Many investors consult these records before choosing a broker.

The new agreement provides one clear benefit for investors: The NASD itself for the first time will disclose brokers’ entire records to the public.

Currently, the full disciplinary records are available only from state regulators. Callers to an NASD toll-free hotline receive only a heavily censored version, which does not include customer complaints or pending arbitration cases.

Under the accord, firms will be required to report any customer complaint alleging damages of at least $5,000. Currently, the minimum for disclosure is $10,000. And any court judgment or arbitration award will have to be reported, regardless of the amount. Now, only awards of at least $5,000 are required to be disclosed.

But far more cases go to settlement than to a final judgment, and under the agreement far fewer settlements would be publicly disclosed than is the case now. Only settlements of at least $10,000 will be disclosed, double the current $5,000 threshold.

Stephen L. Diamond, Maine’s securities administrator who led the committee of state regulators who negotiated with the NASD, said he felt the higher threshold was reasonable because it might make brokerage firms willing to settle more cases with investors. But he acknowledged that one side effect might be that other potential customers weighing whether to do business with a broker might never find out about allegations of wrongdoing.

The accord also specifies that customer complaints that don’t lead to any formal action must be erased from the record after two years. Currently, they remain on indefinitely.

O. Ray Vass, Merrill Lynch’s director of regulatory policy, had led an industry committee that argued that customer complaints should not be disclosed at all unless they resulted in further action. Vass said it was unfair to brokers to disclose unsubstantiated complaints. “Anybody can allege anything,” he said.

But investors’ advocates noted that formal disciplinary action against brokers is rare and argued that a prospective customer ought to know if a large number of fellow customers had complained about a broker.

James P. O’Donnell, the NASD’s executive vice president, said the accord fairly balanced investors’ needs with brokers’ rights to fairness.