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How some big brokerages cash in on customers' cash

By Ben Dorfman, Special to the Christian Science MonitorBen Dorfman is a former chairman and former chief economist of the US Tariff Commission. / December 12, 1980


Robberies of banks and other savings institutions now occur with such frequency that they may not even make the headlines unless the heists are particularly large, involve bloodshed, or both. Yet several of the nation's leading stock brokerage houses (dealers) quietly relieve their own customers of many millions of dollars annually -- without atttracting much public attention -- by engaging in practices the Securities and Exchange itself regards as being at least unethical.

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Largely on the basis of complaints lodged by victims and near-victims of such dealer malpractices, the SEC has succeeded in stamping out many and reducing the frequency of others. The commission's functions, however, are primarily "to ensure the maintenance of fair . . . markets for securities and the protection of investors. . . . While the Federal securities laws provide investors with recovery rights if they have been defrauded, the SEC is not authorized to act as a 'collection agency' on behalf of investors who have suffered losses. . . . If you have been defrauded, you must seek redress privately -- either infromally or through a court suit" ("Information for Investors," SEC, February 1980). Most investors nevertheless feel that their interests are adequately protected if they deal with any of the country's largest and best-known dealers.

Has it ever occurred to you, however, that (1) your own dealer, possibly one of the leading and best known, might be borrowing money from you (and perhaps from your bank as well) without having received consent to do so, and without paying or pledging any interest for the use of the "borrowed" funds; that (2) your dealer might remit most payments due you by checks mailed from its home office (which might be in a city distant from where you live) and drawn on out-of-town banks (thus prolonging its interest-free use of your funds); that (3 ) your dealer might delay making payments to you when due, going so far as to remit payments of dividents and interest only on a monthly basis rather than "immediately" as each becomes due, and engage in this practice without even having sought your consent; that (4) your dealer might increase commission rates without giving adequate notice, thus denying you an opportunity to "shop around" for lower rates (many cut-rate dealers charge commissions as much as 50 percent or more lower than those charged by most "full service" dealers; that (5) your dealer would impose "custodial fees" on "inactive accounts" without giving adequate notice that would enable you to transfer or close your account; and that (6) your dealer would fail to transfer your account promptly to another dealer upon your request, thus causing you inconvenience and possibly some additional expense as well?

All these practices have for years been the subjects of continuing investigation by the Securities and Exchange Commission; it issued an interim report on the subject on Sept. 28, 1978, Release No. 15194. The commission summarized its findings in that report with the observation that some of the leading dealers, "in addition to violating standards of fairdealing," engage in other conduct "inconsistent with just and equitable principles of trade" and in some instances "appear to violate antifraud provisions of the federal securities laws." The commission noted further that many of these practices "appear not to be isolated occurrences but instead to reflect established policies of several of the nation's lead ing broker-dealers." The commission admonished that "action to correct these abuses is overdue and should be undertaken promptly."