Securities Markets: Actions Needed to Better Protect Investors Against
Unscrupulous Brokers (Letter Report, 09/14/94, GAO/GGD-94-208).

Unscrupulous brokers--persons licensed to sell securities who have
seriously breached sales practice rules or have a history of repeated
sales practice violations--can significantly harm investors financially
and can erode public confidence in the securities market. Although
unable to determine the exact extent to which unscrupulous brokers are
operating in the securities industry, GAO obtained data showing that of
almost 470,000 active brokers, about 10,000 had at least one formal
disciplinary action taken against them for a variety of violations,
including sales practice abuse; 816 had three or more disciplinary
actions. Precise information on unscrupulous brokers is unavailable
because abusive sales practices are often difficult to detect and the
Central Registration Depository--a data base maintained by state
regulators and the National Association of Securities Dealers--does not
describe informal disciplinary actions taken against brokers and does
not provide summary data by type of violation for the disciplinary
histories it maintains. Available evidence points to shortcomings in the
detection and discipline of unscrupulous brokers. Furthermore, GAO found
that some practices contribute to a perception that Securities and
Exchange Commission and industry disciplinary actions are lenient. For
example, brokers who were permanently barred have been able to reenter
the industry. Also, brokers barred from the securities industry are free
to work in other financial sectors, such as the banking and insurance
industries. GAO summarized this report in testimony before Congress;
see: Securities Markets: Actions Needed to Better Protect Investors
Against Unscrupulous Brokers, by James L. Bothwell, Director of
Financial Institutions and Markets Issues, before the Subcommittee on
Telecommunications and Finance, House Committee on Energy and Commerce.
GAO/T-GGD-94-190, Sept. 14, 1994 (eight pages).

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-94-208
     TITLE:  Securities Markets: Actions Needed to Better Protect 
             Investors Against Unscrupulous Brokers
      DATE:  09/14/94
   SUBJECT:  Securities regulation
             Brokerage industry
             Employee dismissal
             Consumer protection
             Reporting requirements
             Information disclosure
             Sanctions
             Ethical conduct
             Data bases
             Independent regulatory commissions
IDENTIFIER:  National Association of Securities Dealers Central 
             Registration Depository
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Report to Congressional Requesters

September 1994

SECURITIES MARKETS - ACTIONS
NEEDED TO BETTER PROTECT INVESTORS
AGAINST UNSCRUPULOUS BROKERS

GAO/GGD-94-208

Unscrupulous Brokers


Abbreviations
=============================================================== ABBREV

  AMEX - American Stock Exchange
  CFTC - Commodities Futures Trading Commission
  CRD - Central Registration Depository
  NASAA - North American Securities Administrators Association
  NASD - National Association of Securities Dealers
  NYSE - New York Stock Exchange
  SEC - Securities and Exchange Commission
  SRO - self regulatory organization

Letter
=============================================================== LETTER


B-258276

September 14, 1994

The Honorable John D.  Dingell
Chairman, Subcommittee on Oversight
 and Investigations
Committee on Energy and Commerce
House of Representatives

The Honorable Edward J.  Markey
Chairman, Subcommittee on Telecommunications
 and Finance
Committee on Energy and Commerce
House of Representatives

This report responds to your requests that we review the oversight
and disciplinary actions of the Securities and Exchange Commission
(SEC) and several of the securities industry's self regulatory
organizations (SRO) against unscrupulous brokers--individuals
licensed to sell securities who have committed a significant breach
of sales practice rules or have a history of repeated sales practice
violations.\1 The activities of such brokers can cause serious
financial harm to investors and erode public confidence in the
securities markets.  Because recent press reports have alleged that
unscrupulous brokers move from one firm to another and continue to
commit sales practice violations, you were concerned that SEC and the
securities industry may not be adequately protecting investors from
unscrupulous brokers. 

As agreed with the Subcommittees, this report discusses (1) the
extent to which unscrupulous brokers are active in the securities
industry, (2) regulatory and industry efforts to discipline
unscrupulous brokers, and (3) the capability of the industry to
identify unscrupulous brokers through its database of broker
disciplinary histories. 


--------------------
\1 Sales practice abuse activities, which generate commissions for
the broker but can jeopardize investor funds, include unsuitability
(selling of securities that are inappropriate on the basis of the
investor's source and amount of income), unauthorized trading (buying
or selling securities without the consent or knowledge of the
investor), and churning (excessive trading in the investor's
account). 


   BACKGROUND
------------------------------------------------------------ Letter :1

Oversight of the U.S.  securities industry is primarily based on the
concept of self-regulation, a process by which the industry regulates
itself with oversight from SEC and state regulators.\2

This process is accomplished through a framework of (1) supervisory
and compliance systems at securities firms; (2) oversight and
discipline by SROs, state securities regulators, and SEC; and (3)
SEC's approval of SROs' rules and regulations and review of
examination and disciplinary programs.  SROs, such as the National
Association of Securities Dealers (NASD) and the New York Stock
Exchange (NYSE), establish rules of conduct for their member
securities firms and perform examinations (on a routine basis or in
response to an event) to detect violations of those rules and
federal/state securities laws and regulations. 

Brokers who violate federal or state securities laws and regulations,
or SRO or firm rules, are subject to various disciplinary actions by
SEC, state regulators, SROs, courts, and their employers.  Available
disciplinary actions vary in severity, reflecting the differing
degrees and circumstances of wrongdoing they address.  Relatively
minor violations can result in informal disciplinary actions, such as
a letter of caution, which is a warning letter, or a compliance
conference, which is a conference between SRO staff, the firm, and
the individual broker to address corrective actions for the
securities violation.  More serious violations can be addressed by
formal disciplinary actions, including the imposition of monetary
fines, censures, restitution orders, suspensions of varying lengths,
and bars from certain or all securities-related functions. 

Sales practice abuse can be detected through a variety of means,
including investors' complaints, a firm's supervisory and compliance
systems, SRO examinations, and self-reporting by brokers.  The
Securities Exchange Act of 1934, as amended, and SRO rules require
brokers to disclose specific information when applying for a state
license and when registering with SEC and SROs.  Brokers and firms
must disclose information relating to criminal convictions, civil
litigation, and administrative proceedings, if applicable. 

NASD and state regulators maintain the Central Registration
Depository (CRD), a database containing information regarding the
disciplinary history of member firms and individual brokers. 
Originally established as a centralized broker licensing and SRO
registration system, CRD is now used by regulators and the industry
to help oversee brokers' activities.  Individual brokers and firms
are required to report to CRD formal disciplinary actions taken
against brokers by SEC, state regulators, SROs, courts, or employing
firms for violations related to the securities business and certain
customer complaint\3 and arbitration\4 information.  In addition to
formal disciplinary actions, member firms are required to provide CRD
with written notice of employment terminations.  Data generally are
to be reported within 30 days of the action's occurrence.  SRO staff
can use CRD information to help determine whether the firm or the
broker has violated securities laws or rules. 


--------------------
\2 To conduct business within a state, brokers generally must be
licensed by the state. 

\3 Any complaint that alleges (1) damages of $10,000 or more, (2)
fraud, (3) the wrongful taking of property, or that is settled for
$5,000 or more is to be reported by the broker to CRD. 

\4 Arbitration, the most frequently used method to resolve securities
complaints and disputes between investors and broker-dealer firms, is
a process in which decisions are rendered by arbitrators. 
Arbitration was designed by the industry to be faster and less
expensive than litigation. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

We do not know the exact extent to which unscrupulous brokers are
active in the securities industry because (1) sales practice abuse is
often difficult to detect, (2) CRD does not contain data on informal
disciplinary actions, and (3) CRD is not designed to provide summary
data by type of violation for the disciplinary histories it
maintains.  Although we could not determine the exact extent to which
unscrupulous brokers are active in the securities industry, we were
able to obtain CRD data showing the number of brokers with
disciplinary histories.  Of the almost 470,000 active brokers listed
in CRD as of November 30, 1993, about 10,000 had at least 1 formal
disciplinary action against them for a variety of violations,
including sales practice abuse violations and such criminal acts as
driving while intoxicated, and 816 had 3 or more disciplinary
actions. 

In our opinion, even a few unscrupulous brokers can cause serious
financial harm to investors and have the potential to damage public
confidence in the securities industry.  Consequently, SEC and
industry efforts to ensure effective oversight of brokers and
discipline of those who violate laws and regulations need to be as
effective as possible.  Available evidence, however, points to
shortcomings in the detection and discipline of unscrupulous brokers. 
In particular, according to SEC's 1994 staff report involving 9 U.S. 
broker-dealer firms, 25 percent of 161 branch offices SEC examined
for sales practice abuse had weaknesses in broker hiring and
supervision practices.\5 Further, 40 cases were referred for
investigation and possible enforcement action to SEC enforcement
staff.  The report acknowledged that although it was not possible to
generalize its findings because of the small number of firms
examined, the disproportionate number of referrals for investigation
and enforcement consideration suggested that (1) supervisory and
compliance systems needed improvement and (2) existing sanctions for
sales practice violations at the SROs and SEC needed to be
strengthened. 

Furthermore, we found that certain practices contribute to a
perception that SEC and industry disciplinary actions are lenient. 
Such actions allowed the imposition of retroactive bars and brokers
who were permanently barred to reenter the industry.  We also noted
the potential for brokers barred from the securities industry to
migrate to other financial services industries, such as banking and
insurance. 

SEC, state regulators, and SROs need effective broker surveillance
monitoring systems that can help them identify brokers with a history
of sales practice abuse and firms with questionable sales practices. 
CRD, the only centralized source of information about brokers'
employment and disciplinary histories, is used by regulators and SROs
as a regulatory surveillance tool to perform this function.  However,
because CRD was originally designed to be a state licensing and SRO
registration system, it does not contain certain data that would be
useful for regulatory surveillance and has limited capability to
efficiently search, retrieve, and summarize data on brokers'
disciplinary histories.  NASD is in the process of a multimillion
dollar redesign of CRD to address its limitations.  While the
redesign appears to address major regulators' needs, additional
enhancements would improve CRD's capability to serve as a regulatory
surveillance tool. 


--------------------
\5 The Large Firm Project:  A Review of Hiring, Retention and
Supervisory Practices, Division of Market Regulation, Division of
Enforcement, U.S.  Securities and Exchange Commission, (May 1994). 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

The objectives of our review were to (1) determine the extent to
which unscrupulous brokers are active in the securities industry, (2)
assess regulatory and industry efforts to discipline unscrupulous
brokers, and (3) assess the capability of CRD as a regulatory
surveillance tool. 

To determine the extent to which unscrupulous brokers are active in
the industry, we identified the types and sources of information
reported to CRD.  We requested that NASD develop a computer program
to identify any active broker listed in CRD with a formal
disciplinary action.  A formal action by a federal/state regulator or
SRO or an indictment or conviction by a court constituted a formal
disciplinary action.  We wrote a computer program to compile the
number of formal disciplinary actions against individual brokers and
identify which regulatory agencies took the actions.  We did not
attempt to verify the accuracy of the data in CRD. 

To assess industry efforts to discipline unscrupulous brokers, we met
with officials responsible for examination and enforcement at SEC,
NYSE, and NASD.  We also discussed these issues with officials of the
North American Securities Administrators Association (NASAA) and
senior executives at two major broker-dealers.  To assess these
efforts, we (1) reviewed all 39 SEC inspection reports on SRO
examination and disciplinary activities conducted from 1983 through
1993, (2) compiled information on the number of formal disciplinary
actions taken by NASD and NYSE from 1990 through 1993 in response to
customer complaints, and (3) analyzed SEC, NASD, and NYSE guidelines
for sales practice examinations.  To solicit views on licensing,
monitoring, and disciplinary procedures, we sent a questionnaire to
51 state securities regulators,\6 44 of whom responded.  In addition,
we reviewed the results of the May 1994 SEC staff study on the
hiring, retention, and supervisory practices at nine major U.S. 
broker-dealers. 

To obtain additional insight into the nature of the violations
leading to disciplinary actions, and by whom the actions were taken,
we categorized by type of formal disciplinary action the 9,799
brokers who had some formal disciplinary history.  Because CRD has
limited capability to provide aggregate information and can only
provide summary information on individual broker disciplinary
histories, we took a judgmental sample of 100 brokers to obtain
information on the violations leading to the disciplinary actions. 
We selected brokers from 3 types of formal disciplinary actions
identified in the CRD--50 with bars, 32 with formal disciplinary
actions other than bars, and 18 with court actions.  The 50 bars,
imposed by an SRO, a state securities regulator, or SEC, limited or
prohibited a broker's participation in securities activities.  The
sampled number of these actions does not necessarily represent the
proportions in which they occurred in the total population of 9,799
brokers.  We selected a larger number of bars because we wanted to
obtain a greater understanding of the violations for which a bar was
imposed. 

We reviewed the disciplinary histories of 29 brokers who were subject
to a statutory disqualification\7 because of a bar imposed by SEC or
an SRO and whose employment status required regulatory review from
October 1991 through December 1993.  We also attempted to gauge the
extent to which unscrupulous brokers migrated to other sectors of the
financial services industry by determining the current employment of
96 potentially unscrupulous brokers who SEC identified in its May
1994 staff study as having left the securities industry. 

To assess the capability of CRD as a regulatory surveillance tool, we
reviewed CRD data and how these data could be used to identify
unscrupulous brokers.  We also discussed with senior NASD and NASAA
officials CRD's redesign and how planned changes are expected to
improve the industry's capability to monitor unscrupulous brokers. 

Our work was performed in New York, NY, and Washington, D.C., between
September 1993 and May 1994 in accordance with generally accepted
government auditing standards. 

We provided a draft of this report to SEC, Treasury, NASD, and NYSE
for review and comment.  Their comments and our evaluation are
presented at the end of this letter.  SEC's written comments and our
additional comments are presented in appendix III. 


--------------------
\6 Includes the securities regulator for the District of Columbia. 

\7 The definition of statutory disqualification, contained in section
3(a)(39) of the Securities Exchange Act of 1934 generally includes
individuals who have been barred by SEC or an SRO; convicted of any
felony or certain misdemeanors, such as bribery and forgery, within
the last 10 years; or have been enjoined temporarily or permanently
from violating securities laws by a court. 


   EXTENT TO WHICH UNSCRUPULOUS
   BROKERS ARE ACTIVE IN INDUSTRY
   IS UNKNOWN
------------------------------------------------------------ Letter :4

Although regulators and industry representatives acknowledge that
there are unscrupulous brokers active in the securities industry, it
is not known to what extent unscrupulous brokers are active in the
industry.  Several major reasons are as follows: 

  Unscrupulous activity is often difficult to detect.  Allegations of
     sales practice abuse are often difficult to substantiate because
     there is often little evidence other than the word of the broker
     against that of the investor.  Further, sales practice abuse
     violations often surface long after they have occurred, even
     after the broker has moved to another firm.  SEC staff
     recommended in its May 1994 staff study that SEC and SROs
     develop better means of identifying sales practice problems at
     an earlier stage. 

  Informal actions are not required to be reported.  SRO rules
     require that only formal disciplinary actions be reported to
     CRD, not informal actions.  Therefore, informal actions such as
     letters of caution or compliance conferences taken to address
     sales practice complaints are not reported to CRD. 

  CRD is not designed to identify and provide summary information on
     brokers by particular types of violations.  CRD, the only
     centralized source of information about brokers' employment and
     disciplinary histories, was originally designed to facilitate
     state licensing and registration of individual brokers, not to
     perform a regulatory surveillance function.  Over time,
     extensive narrative information on disciplinary actions for
     violations of securities and nonsecurities-related laws has been
     added to the system.  However, the system has not been changed
     to meet its new role as a surveillance tool.  Consequently, it
     cannot generate, without extensive manual effort, data on the
     number of brokers who have been disciplined for sales practice
     violations, financial/operational violations,\8 or nonsecurities
     criminal acts such as robbery. 

  The extent of nonreporting and erroneous reporting to CRD is
     unknown.  Regulators and industry representatives we spoke with
     were concerned that employing firms are less than candid in
     disclosing to CRD the reasons for terminating brokers'
     employment.  Also, in a recent staff study, SEC found that one
     major firm did not file reportable information on employment
     terminations to CRD in a timely manner.  SEC regards these
     disclosures as valuable red flags to address possible sales
     practice abuse in a timely manner. 

Although we could not determine the extent to which unscrupulous
brokers are active in the industry, we were able to determine the
number of active brokers in CRD with known formal disciplinary
histories.  Our analysis of CRD records disclosed that 9,799 (about 2
percent) of over 467,000 active brokers as of November 30, 1993, had
at least one formal disciplinary action taken against them by SEC, an
SRO, a state securities regulator, or a court.\9 Of these 9,799
brokers, 7,297 had 1 action taken against them, 1,686 had 2, and 816
had 3 or more.  In our judgmental sample of 100 of these 9,799
disciplined brokers, disciplinary actions were imposed for a variety
of violations of securities laws and regulations such as sales
practice abuses and financial/operational infractions.  The sample
also included brokers who had actions imposed for
nonsecurities-related infractions such as robbery or driving while
intoxicated.  A detailed breakdown of the 50 brokers identified in
CRD with bars from some or all functions of the securities industry
we sampled is contained in appendix I. 


--------------------
\8 Financial/operational violations generally involve activities
related to the management of a firm, such as filing incomplete and
inaccurate financial reports with regulators, or improperly offering
securities for sale before properly registering them. 

\9 These actions can include any charges and/or convictions for a
felony or misdemeanor involving investments, bribery, fraud, forgery,
false statements, counterfeiting, extortion, or other criminal acts. 


   EXISTING DISCIPLINARY POLICIES
   AND PRACTICES MAY NOT
   ADEQUATELY ENSURE INVESTOR
   PROTECTION
------------------------------------------------------------ Letter :5

The potential harm that even a few unscrupulous brokers can have on
investors can be financially devastating to them and could erode
investor confidence in the industry.  Because of this potential harm,
the industry's efforts to detect and discipline unscrupulous brokers
should be as effective as possible.  However, available evidence
points to shortcomings in the detection and discipline of
unscrupulous brokers.  SEC's May 1994 staff study of the hiring,
retention, and supervisory practices of nine large firms supports the
need for improvements.  Also, the most serious disciplinary measure,
permanent bars from the industry, may not necessarily result in
permanently removing unscrupulous brokers from the securities
industry.  Existing policies and practices may erode the
effectiveness of disciplinary actions and do not prevent unscrupulous
brokers from migrating to other sectors of the financial services
industry. 


      SEC STAFF STUDY RECOMMENDED
      EFFORTS TO BETTER DETECT AND
      DISCIPLINE UNSCRUPULOUS
      BROKERS
---------------------------------------------------------- Letter :5.1

In July 1992, in cooperation with NASD and NYSE, SEC's Division of
Market Regulation initiated an examination of the employment and
supervisory practices at nine of the largest broker-dealers in the
United States.  SEC selected branch offices of these nine firms that
it believed were most likely to have problems on the basis of
customer complaint information.  The impetus for this examination was
concern by SEC and SROs about the frequency and severity of sales
practice abuses.  At the 9 firms, SEC analyzed the employment and
disciplinary histories of 268 broker-dealers, each of whom had
received from 3 to 89 customer complaints. 

SEC's staff study on industry practices, issued in May 1994, reported
problems with the hiring and supervision of brokers at 25 percent of
the 161 branch offices reviewed and made 40 referrals of possible
securities law or regulation violations to SEC enforcement staff. 
The report acknowledged that it was not possible to draw general
conclusions regarding the securities industry as a whole because the
project involved only a small sample of the total number of
securities firms and, of the firms selected, only a small portion of
the branch offices and brokers at those firms were examined. 
However, the report concluded that the disproportionate number of
referrals for further investigation and enforcement consideration as
compared with that expected from routine examinations suggested that
(1) firms' supervisory and compliance systems needed improvement and
(2) sanctions for sales practice violations at SROs and SEC needed to
be strengthened. 

Key principles of the SEC staff study recommendations to SEC were
that problem brokers needed to be (1) identified at an early stage,
(2) scrutinized closely when hired and when making retention
decisions, and (3) subjected to aggressive enforcement action when
warranted.  The Chairman has publicly concurred with the thrust of
the recommendations and is considering how best to implement them. 


      BARS DO NOT ENSURE REMOVAL
      OF UNSCRUPULOUS BROKERS FROM
      THE SECURITIES INDUSTRY
---------------------------------------------------------- Letter :5.2

Serious violations of securities laws and regulations are addressed
through formal disciplinary actions, with the most serious violations
warranting a bar.  In practice, a bar may restrict a broker's
activities by function, length of time, or both.  However, even a
permanent bar allows brokers to seek reentry to the industry.  These
and other practices, such as NYSE's use of retroactive imposition of
bars, which credits the violator with time spent outside the
industry, may give investors the perception that violators are
tolerated, thereby eroding public confidence in the disciplinary
process employed by the securities industry. 

SEC and SROs may impose three types of bars:  (1) prohibiting work in
a specified function, such as prohibiting an individual from working
as a supervisor, while allowing the individual to remain in the
securities industry; (2) allowing reentry to the securities industry
after a specified period of time; and (3) prohibiting work in the
industry in any position for an unspecified time period.  States may
impose similar types of bars that are only applicable to activities
within the state imposing it.  Brokers subject to a bar by SEC or an
SRO, but not a state, are considered statutorily disqualified.  In
practice, such bars may not ensure permanent removal of a broker. 
This is because the statute allows a statutorily disqualified broker
to return to the securities industry, subject to heightened
regulatory scrutiny, if approved by SEC and an SRO.  Once permitted
to return, the broker must obtain SEC and SRO approval for every
employment change within the securities industry.  From October 1991
through December 1993, SEC approved the application for one
permanently barred broker to reenter the securities industry.  During
the same time frame, SEC approved employment changes for five
permanently barred brokers.  SEC had permitted these brokers to
reenter at an earlier time.  In its May 1994 study, SEC staff
recommended a number of measures to strengthen disciplinary actions,
including allowing for permanent bars without the possibility of
reentry. 

Some state regulators responding to our survey viewed SEC and SRO
disciplinary actions as being too lenient.  Of 44 state regulators
responding to our survey, 14 believed that SEC disciplinary actions
were too lenient, 24 viewed NASD actions as too lenient, and 11
viewed NYSE actions as too lenient.  Further information on these
responses is contained in appendix II. 

We observed some disciplinary practices that could contribute to the
perception that some disciplinary actions are lenient.  For example: 

  A securities firm president was fined $10,000 in 1984 by NASD for
     numerous supervisory and record-keeping violations. 
     Subsequently, his firm was expelled from NASD in 1992, and he
     was fined $60,000, suspended for 6 months, and permanently
     barred as a supervisor, principal, and manager of a firm.  After
     the expiration of the 6-month suspension, this individual was
     permitted by NASD to work in another firm as a broker supervised
     by a former employee. 

  A broker barred by SEC for fraudulent sales of securities was
     permitted to remain in the industry provided his activities were
     limited to the sale of mutual funds and annuities. 

  Several brokers received bars for a specific amount of time,
     imposed partly on a retroactive basis.  Enforcement officials at
     NYSE told us that retroactive bars are used to more readily
     obtain voluntary acceptance of the action; however, these
     officials did not favor the practice. 


      POTENTIAL EXISTS FOR
      MIGRATION TO OTHER SECTORS
      OF THE FINANCIAL SERVICES
      INDUSTRY
---------------------------------------------------------- Letter :5.3

Our review of current laws and regulations indicated that regulatory
gaps can exist in safeguarding investors from unscrupulous brokers. 
SEC's May 1994 study indicated that some potentially unscrupulous
brokers had left the securities industry.  However, we found, in
following up on some of these brokers and the brokers in our sample,
that some had migrated to other sectors of the financial services
industry, such as banking and insurance. 

Currently, SEC and the Commodities Futures Trading Commission (CFTC)
are authorized by law to honor each other's bars and can choose to
prevent barred individuals from migrating between the two regulators. 
However, no similar law or agreements are in force between SEC and
other financial services regulators to limit the migration of
unscrupulous brokers.  Therefore, an unscrupulous broker with a
disciplinary history of sales practice abuse can migrate to work in
an industry that is not federally regulated, such as insurance, and
sell certain financial products in that industry.  Similarly, such a
broker can work as a bank employee in a Federal Deposit Insurance
Corporation-insured bank selling bank-sponsored mutual funds if he or
she has a disciplinary history but has not been convicted of a crime. 

We analyzed the records of 96 potentially unscrupulous brokers
identified in SEC's May 1994 staff study who had left the securities
industry and found that 3 of these brokers had migrated to the
insurance industry.  We were unable to determine the current
employment of the remaining 93 brokers because data were not readily
retrievable.  We also found indications of migration from our sample
of 100 brokers with formal disciplinary histories.  For example, one
broker, who was barred by an SRO for 9 months in 1989 for
misrepresentations made during an insider trading investigation,
migrated to a related financial services company and worked as a
mortgage consultant.  Another broker, who was suspended by an SRO for
18 months in all functions for unauthorized trading, worked at 4
savings and loan associations as a loan officer and a salesperson for
certificates of deposits. 

SEC, NASD, NYSE, and state officials expressed concern about the
potential for brokers barred from the securities industry to migrate
to other financial services industries.  Some of these industries,
such as banking and securities, are subject to federal regulation,
while others, such as insurance, are not.  We discussed this
migration issue with Treasury and NASD officials.  As a result of our
discussions, Treasury officials told us that they have made initial
contact with SEC, CFTC, and banking regulators to explore the issue
of migration to the banking industry.  Addressing the issue of
migration to the insurance industry would be difficult for a federal
agency because insurance is regulated only by individual state
regulators. 

Treasury officials said that they would pursue whether CRD
information could be made available to all potential employers within
the financial services industry, including those industries regulated
by states.  NASD officials said that they had held preliminary
discussions with officials of four bank regulators to explore the
possibility of maintaining employment data, including disciplinary
histories, for bank employees engaged in securities-related sales
activity.  In our view, prospective employers of disciplined brokers
in financial services-related industries would benefit by being
informed of any disciplinary actions taken against the brokers. 
Banking and insurance regulators can access CRD information through a
toll-free telephone number, as can securities investors.\10 However,
the toll-free telephone number cannot provide certain CRD data, such
as certain customer complaint information and reasons for employment
termination, which are available only to SEC, SROs, state regulators,
and the securities industry. 


--------------------
\10 As required by the Penny Stock Reform Act of 1990, P.L.  10-429,
104 Stat.  931 (1990), NASD in 1991 established a toll-free telephone
number through which investors and other interested parties can
obtain information on formal disciplinary actions taken against
brokers.  In July 1993, the information provided was expanded to
include criminal and civil indictments, civil litigations, pending
disciplinary actions, and available arbitration decisions. 


   IMPROVEMENTS NEEDED IN BROKER
   SURVEILLANCE
------------------------------------------------------------ Letter :6

To safeguard investors and maintain public confidence in the
securities markets, SEC, state regulators, and SROs need effective
broker surveillance monitoring systems to help them identify brokers
with histories of sales practice abuse and questionable sales
practices.  SEC, state regulators, and the securities industry
currently rely on CRD, the only centralized source of information on
brokers' employment and disciplinary histories, as a regulatory
surveillance tool.  However, CRD is limited in its capability to
support regulatory surveillance of unscrupulous brokers because of
design limitations.  Further, SROs generally do not require member
firms to report information on disposition of customer complaints. 
Such information, if reported to SROs through CRD, would help
regulators and SROs monitor questionable sales practice activities at
member firms and industrywide. 

Limitations that restrict regulatory and SRO broker surveillance
capabilities include the following: 

  CRD has limited industrywide surveillance capability.  Although
     SEC, state regulators, and the securities industry use CRD to
     monitor brokers with disciplinary histories, it was not
     originally designed in 1981 to be a compliance-related
     regulatory tool.  Currently, CRD users cannot easily use the
     system to perform certain functions desirable for industrywide
     regulatory surveillance, such as identifying brokers with
     particular attributes (i.e., the type or number of disciplinary
     actions).  NASD is redesigning CRD to in part provide firms and
     regulators with the ability to identify and monitor brokers with
     specified disciplinary histories.  Although we did not assess
     the redesign efforts, discussions with users and responses to
     our questionnaire indicated that the redesign may address CRD
     users' major needs for improved capability to provide numerical
     data on the type of violations against brokers as opposed to the
     current nonsummary narrative type information on individual
     brokers.  NASD officials told us that improvements will be
     phased in starting in mid-1995. 

  CFTC, SEC, American Stock Exchange (AMEX), and regional stock
     exchanges are not directly reporting to CRD.  Currently,
     disciplinary actions taken by the CFTC, SEC, AMEX, and regional
     stock exchanges are not reported directly to CRD.  Instead, CRD
     personnel must obtain information on disciplinary actions
     imposed by these entities from publicly disclosed sources and
     enter the information into CRD.  Direct reporting to CRD by
     these regulators and exchanges would be more efficient and
     provide control over reliability of the data.  We noted that one
     broker who, despite a bar in 1988 by CFTC for fraud, continued
     to work as a trader at NYSE.  He was able to do so because he
     apparently did not report his disciplinary history to either CRD
     or NYSE.  When the bar was discovered, he sought approval for
     and was accepted to reenter the securities industry in 1993. 

  SROs generally do not collect and report information on customer
     complaints from individual firms to CRD.  Since 1988, NYSE has
     required member firms to report to NYSE quarterly all customer
     complaints received, including the name of the broker, the
     branch where the broker works, and the type of complaint.\11
     However, NYSE does not report this information to CRD.  Although
     most complaints do not result in disciplinary action, complaint
     information is useful to SROs for determining how best to
     allocate examination resources, according to SEC, NASD, and NYSE
     officials.  NASD officials told us that imposing a requirement
     on its members similar to that of NYSE will be on the agenda of
     its September 1994 board of governors meeting.  Customer
     complaint data have proven useful for regulatory surveillance,
     as indicated by SEC's use of the NYSE customer complaint data
     for its recent staff study.  Reporting of customer complaints to
     CRD by SROs would increase the usefulness of this information
     for regulatory surveillance.  We found also that some state
     securities regulators will disclose all information in the CRD
     to inquiring investors.  We recognize that public disclosure of
     complaints may be controversial because they may not always be
     indicative of wrongdoing by the broker.  Therefore, it may be
     necessary to maintain separate data bases, one for regulatory
     surveillance and one for public disclosure. 

  SROs do not report information on customer complaint disposition to
     CRD.  SROs generally did not gather information on the
     disposition of customer complaints from member firms and,
     therefore, could not provide these data to CRD.  By collecting
     customer complaint disposition data, SROs potentially could
     better assess and monitor possible sales practice abuse at
     member firms and identify sales abuse trends at a firm.  For
     instance, if a firm has a pattern of settling customer
     complaints involving sales abuse in favor of the customer, this
     may indicate that the firm needs to better monitor and
     discipline its brokers.  Requiring firms to report customer
     complaint disposition data to CRD would also provide additional
     information that could assist SEC, SROs, and state regulators,
     in better monitoring brokers industrywide for possible sales
     practice abuse.  Once again, public disclosure of data about
     complaint disposition may be controversial because complaints
     may be settled in favor of the investor for reasons other than
     wrongdoing on the part of the broker or firm.  Therefore, in
     this case, it may also be necessary to maintain separate
     databases, one for regulatory surveillance and one for public
     disclosure. 


--------------------
\11 NYSE member firms are required by NYSE Rule 351 to collect and
report to NYSE data on customer complaints.  Since 1989, an average
of over 11,000 sales practice complaints have been reported annually
to the NYSE by member firms. 


   CONCLUSIONS
------------------------------------------------------------ Letter :7

The financial health and soundness of our nation's securities markets
depend partly on public confidence that these markets operate fairly
and honestly.  A key factor in public confidence is the level of
trust between investors and their brokers.  SEC, state regulators,
and the industry all have a role in protecting investors from
unscrupulous brokers.  Although regulators and the industry
acknowledge the existence of unscrupulous brokers, the extent to
which unscrupulous brokers are active in the industry could not be
determined.  However, we were able to determine that almost 10,000
brokers active in the industry have formal disciplinary histories. 
Given that even a few unscrupulous brokers can do serious harm to
investors, surveillance and disciplinary policies and practices need
to be as effective as possible.  We found evidence that improvements
could be made in the detection and discipline of unscrupulous
brokers.  For example, a recent SEC staff study concluded that
improvements should be made to industry hiring and surveillance
processes and SEC industry disciplinary practices.  We also found
brokers who had been permanently barred from the industry but later
were allowed to reenter the industry and other disciplined brokers
had migrated to other sectors of the financial services industry. 
Finally, broker surveillance systems could be improved by enhancing
the reporting of disciplinary actions and information on customer
complaints to CRD. 


   RECOMMENDATIONS TO THE CHAIRMAN
   OF SEC
------------------------------------------------------------ Letter :8

To help maintain investor confidence in the securities markets, we
recommend that the Chairman of SEC

  implement the recommendations of the SEC staff study to strengthen
     existing disciplinary standards, including the imposition of a
     permanent bar with no opportunity for reentry, when warranted. 

  monitor CRD's redesign to ensure that it provides the capability to
     allow regulators to more easily identify and monitor brokers
     with disciplinary histories. 

  direct SROs to enhance and increase the reporting of information to
     CRD.  Specifically, we recommend that SEC direct that (1) SRO
     formal and informal disciplinary actions be reported directly to
     CRD and (2) information on customer complaints and their
     dispositions be collected, monitored, and reported to CRD.  We
     also recommend that SEC work with NASD to develop procedures to
     balance regulatory surveillance and public disclosure interests
     pertaining to disclosure of customer complaint and complaint
     disposition information to regulators and investors. 

  work with NASD, NASAA, and the Department of the Treasury to
     increase disclosure of CRD data pertinent to the detection of
     unscrupulous brokers that migrate from the securities industry
     to other segments of the financial services industry. 


   RECOMMENDATION TO THE SECRETARY
   OF THE TREASURY
------------------------------------------------------------ Letter :9

Recognizing the potential for unscrupulous brokers to migrate freely
from securities to other sectors of the financial services industry
and related industries, we recommend that the Secretary of the
Treasury work with SEC and other financial regulators to

  increase disclosure of CRD information available to regulators and
     employers among the financial services industry and related
     industries so that regulators may be aware of and give
     consideration to a broker's disciplinary history in allocating
     examination resources and so that employers can use the
     information in making a hiring decision, and

  determine whether legislation or additional reciprocal agreements
     between SEC and other financial regulators are necessary to
     prevent the migration of unscrupulous brokers to other financial
     services industries. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

We provided a draft of this report to SEC, Treasury, NASD, and NYSE
for review and comment.  We obtained written comments from SEC (see
app.  III).  We obtained oral comments from Treasury in a meeting
with the Director, Office of Financial Institutions Policy on August
26, 1994.  We obtained oral comments from NYSE in a meeting on August
30, 1994, with NYSE's Senior Vice President, Government Relations and
the Senior Vice President, Compliance.  We obtained oral comments
from NASD in meetings on August 30 and 31, 1994, with NASD's
Executive Vice President for Regulation and the Director of
Regulatory Policy.  Treasury, NYSE, and NASD generally agreed with
the information provided and, with the exception noted below, our
conclusions and recommendations.  They offered some technical
clarifications that we incorporated in the report where appropriate. 

SEC strongly agreed with our basic finding that efforts to ensure
oversight of brokers and discipline of those who violate laws and
regulations need to be as effective as possible.  However, SEC
advised that care should be exercised in drawing conclusions that
shortcomings exist in the detection and discipline of unscrupulous
brokers based on CRD's universe of disciplined brokers or our sample,
which was drawn from CRD.  SEC commented that a sample drawn from CRD
would include not only sales practice violations but violations that
do not affect an individual's ability to act in a fiduciary capacity
as broker, such as driving while intoxicated. 

SEC's comments infer concern that readers might use the numbers taken
from CRD to reach erroneous conclusions about the extent to which
unscrupulous activity exists in the securities industry.  We agree
that the available data cannot be used to project the extent of
unscrupulous activity across the universe of brokers and we state
this explicitly in the report.  Indeed, it is our concern with the
limitations of currently available data that formed the basis of our
recommendations for improving CRD.  However, it is also important to
note that we did not base our overall conclusions solely on our
sample.  We also considered the results of our analysis of applicable
laws, regulations, and policies; our survey of state regulators; our
analysis of CRD and CRD data; and the findings of SEC's Staff Study. 

Concerning our recommendation that SEC implement the recommendations
in its staff study, SEC noted that it, in conjunction with the SROs,
has begun implementing a number of the recommendations from the 1994
staff study.  SEC also said that it has recommended SROs review their
rules and by-laws with a view toward enhancing disciplinary actions,
and plans to make public its policy on reentry to the industry of
previously barred brokers.  We believe that these will be positive
steps toward addressing a perception that disciplinary actions may be
lenient. 

Regarding our recommendation that SEC monitor the redesign of CRD,
SEC expressed the belief that CRD's redesign will greatly assist
regulators to identify and monitor brokers with disciplinary
histories, and said it will continue to work closely with NASD and
NASAA on enhancements to CRD. 

While SEC agreed that it was important to enter all relevant
disciplinary information into CRD, it disagreed with our
recommendation that informal actions, customer complaints, and
customer complaint disposition be reported to CRD.  SEC contended
that such reporting would clutter and create disorder in the system. 
SEC questioned the value of collecting information on informal
disciplinary actions based on its understanding that few sales
practice abuse violations result in informal actions.  While both SEC
and NASD commented that it may be valuable to collect and monitor
information regarding customer complaints and their disposition, both
were concerned that the reporting to investors of unsubstantiated
complaints would raise due process and privacy concerns.  NASD
commented that customer complaint and disposition data should be used
for regulatory surveillance and not be publicly disclosed.  NASD
noted, however, that some states consider all CRD information
available for public disclosure. 

We believe information on informal disciplinary actions and customer
complaints is useful for regulatory surveillance and can help
regulators and SROs identify brokers with a pattern of sales practice
abuse activity.  In the text of the report, we recognized possible
due process and privacy conerns related to the reporting of customer
complaints and disposition.  Although SEC said that they understood
few sales practice abuse violations result in informal actions,
empirical data are unavailable to document this.  We believe that if
CRD is effectively redesigned, useful information on disciplinary
actions and customer complaints and their disposition should be
generated and processed without disorder to the system.  In sum, we
believe that SEC's concerns could be effectively addressed by SEC,
SROs, and state regulators working together to (1) define parameters
for collecting such data and (2) ensure that disclosure of such data
to investors would incorporate adequate safeguards and due process
protections. 

Regarding the issue of direct reporting of SEC disciplinary actions
to CRD, SEC said that it is not prepared to change its longstanding
arrangement, whereby Commission disciplinary actions, as announced in
SEC's Daily News Digest, are reported to CRD by NASD staff.  While
this arrangement may have worked well in the past, the redesign of
CRD may provide SEC with the opportunity to directly report
disciplinary actions to CRD.  This would better ensure that all
disciplinary actions are reported. 

Concerning our recommendations on providing information on
unscrupulous brokers to other sectors of the financial services
industry, both SEC and Treasury agreed that prospective employers of
disciplined brokers in related financial industries would benefit by
being informed of any regulatory or disciplinary actions taken
against brokers.  SEC said that its staff will work with other
regulators to make CRD information available throughout the financial
services industry.  Treasury officials said that they would pursue
whether CRD information could be made available to all potential
employers within the financial services industry, including the state
regulated insurance industry. 


--------------------------------------------------------- Letter :10.1

We are sending copies of this report to SEC, the Department of the
Treasury, and other interested parties.  We will also make copies
available to others on request. 

This report was prepared under the direction of Bernard D.  Rashes,
Assistant Director, Financial Institutions and Markets Issues.  Other
major contributors to this report are listed in appendix IV.  Please
contact either Mr.  Rashes on (212) 264-0737 or me on (202) 512-8678
if you have any questions about this report. 

James L.  Bothwell
Director, Financial Institutions
 and Markets Issues


FORMAL DISCIPLINARY HISTORIES FOR
50 BROKERS WITH A BAR ACTIVE IN
THE SECURITIES INDUSTRY AS OF
NOVEMBER 30, 1993
=========================================================== Appendix I

                                                                      Formal
                                                                      disciplina
                      Regulator   Activity    Function                ry actions
Broker      Year bar  imposing    leading to  from which  Length of   after last
number       imposed  bar         bar         barred      bar         bar?
----------  --------  ----------  ----------  ----------  ----------  ----------
1               1969  SEC         Financial/  All         60 days
                                  operationa
                                  l

                1969  SEC         Sales       All         60 days
                                  practice

                1976  NASD        Sales       Principal/  Permanent   No
                                  practice,   supervisor
                                  financial/
                                  operationa
                                  l

2               1970  NASD        \a          All         30 days

                1976  NASD        Financial/  a. All      a. 1 year
                                  operationa
                                  l

                                              b.          b.
                                              Principal/  Permanent
                                              supervisor

                1993  NASD        Financial/  All         15 days     No
                                  operationa
                                  l

3               1981  Minnesota   Sales       All         3.5 years
                                  practice

                1981  Wisconsin   Financial/  All         120 days
                                  operationa
                                  l

                1982  NASD        Sales       All         Permanent   Yes
                                  practice

4               1992  Vermont     Sales       All         Permanent\
                                  practice                c

                1993  California  Sales       All         4 years
                                  practice

                1993  Minnesota   Sales       All         5 years     No
                                  practice

5               1983  Oklahoma    Sales       Principal   6 months
                                  practice,
                                  financial/
                                  operationa
                                  l, failure
                                  to
                                  supervise

                1984  Alabama     Financial/  All         Permanent
                                  operationa
                                  l

                1992  NASD        Sales       a. All      a. 6
                                  practice,               months
                                  failure to
                                  supervise,
                                  financial/
                                  operationa
                                  l

                                              b.          b.          No
                                              Supervisor  Permanent
                                              /
                                              principal

6               1974  NASD        Sales       All         Permanent
                                  practice

                1975  SEC         Sales       All         Permanent   No
                                  practice

7               1958  NYSE        \a          All         Permanent

                1958  SEC         Financial/  All         Permanent   No
                                  operationa
                                  l

8               1992  NYSE        Failure to  Supervisor  1 year
                                  supervise

                1993  SEC         Failure to  Supervisor  3 years     No
                                  supervise

9               1988  Massachuse  Financial/  All         1 year
                      tts         operationa
                                  l

                1991  Chicago     Sales       All         1 month     No
                      Board       practice
                      Options
                      Exchange

10              1971  NASD        Financial/  a. All      a. 6
                                  operationa              months
                                  l

                                              b.          b.
                                              Principal   Permanent

                1972  SEC         Financial/  All         Permanent\  No
                                  operationa              c
                                  l

11              1983  SEC         Sales       a. All      a. 9
                                  practice,               months
                                  financial/
                                  operationa
                                  l

                                              b.          b.
                                              Principal/  Permanent
                                              supervisor

                1983  Iowa        Sales       a. All      a. 9
                                  practice,               months
                                  financial/
                                  operationa
                                  l

                                              b.          b.          No
                                              Principal/  Permanent
                                              supervisor

12              1989  NASD        Sales       All         3 months
                                  practice,
                                  financial/
                                  operationa
                                  l

                1990  Pennsylvan  Sales       a. All      a. 60 days
                      ia          practice,
                                  failure to
                                  supervise

                                              b.          b. 180      No
                                              Principal/  days
                                              supervisor

13              1982  SEC         Failure to  Supervisor  30 days
                                  supervise

                1992  AMEX        Failure to  Supervisor  3 years     No
                                  supervise

14              1981  Minnesota   Failure to  Supervisor  3 years
                                  supervise,              and 30
                                  sales                   days
                                  practice

                1983  NASD        Financial/  Principal   Permanent   No
                                  operationa
                                  l

15              1978  NASD        Sales       Principal   3 years
                                  practice

                1978  SEC         Sales       a. All      a. 30 days
                                  practice

                                              b.          b.          No
                                              Supervisor  Permanent\
                                                          c

16              1975  NASD        \a          All         10 days

                1976  NASD        \a          Principal   Permanent   No

17              1988  NASD        Sales       All         1 year
                                  practice

                1992  Arizona     Sales       All         Permanent   No
                                  practice

18              1982  NYSE        Financial/  All         18          Yes
                                  operationa              months\b
                                  l

19              1980  NYSE        Sales       All         18          No
                                  practice                months\b

20              1988  NYSE        Sales       All         2 years     No
                                  practice

21              1991  NYSE        Sales       All         3 months    No
                                  practice

22              1977  SEC         Sales       a. All      30 days
                                  practice

                                              b.          2 years     No
                                              Supervisor

23              1983  Pennsylvan  Financial/  All         4 years     Yes
                      ia          operationa
                                  l

24              1975  SEC         Sales       All         Permanent\  No
                                  practice,               c
                                  failure to
                                  supervise

25              1993  NYSE        Sales       All         10 years\b  No
                                  practice

26              1979  NASD        Financial   a. All      a. 3
                                  operationa              months
                                  l

                                              b.          b.          No
                                              Financial   Permanent
                                              principal

27              1989  NYSE        Sales       All         3 months\b  No
                                  practice

28              1993  NASD        Financial/  All         Permanent   No
                                  operationa
                                  l

29              1989  AMEX        Sales       All         9 months    No
                                  practice

30              1989  Pennsylvan  Financial/  All         3 years     No
                      ia          operationa
                                  l

31              1990  Pennsylvan  Sales       All         2 years     No
                      ia          practice,
                                  financial/
                                  operationa
                                  l

32              1991  NASD        Sales       All         Permanent   No
                                  practice

33              1978  SEC         Sales       All         Permanent\  No
                                  practice,               c
                                  financial/
                                  operationa
                                  l

34              1987  AMEX        Failure to  Supervisor  3 years     No
                                  supervise

35              1991  NASD        Financial/  Principal   Permanent   No
                                  operationa
                                  l

36              1980  SEC         \a          a. All      a. 1 year

                                              b.          b.          No
                                              Principal/  Permanent\
                                              supervisor  c

37              1993  AMEX        Failure to  Supervisor  2 years\b   No
                                  supervise

38              1976  NASD        \a          All         Permanent   No

39              1971  NASD        Sales       Principal   Permanent   No
                                  practice,
                                  failure to
                                  supervise

40              1974  Pennsylvan  \a          All         Permanent\  No
                      ia                                  c

41              1970  SEC         Sales       a. All      a. 30 days
                                  practice,
                                  failure to
                                  supervise

                                              b.          b.          No
                                              Principal/  Permanent\
                                              supervisor  c

42              1977  SEC         Financial/  a. All      a. 60 days
                                  operationa
                                  l

                                              b.          b.          No
                                              Supervisor  Permanent
                                              /
                                              principal

43              1979  NASD        \a          Principal/  Permanent   Yes
                                              supervisor

44              1978  SEC         Failure to  Supervisor  Permanent   No
                                  supervise

45              1978  NASD        Sales       a. All      a. 60 days
                                  practice

                                              b.          b.Permanen  No
                                              Principal/  t
                                              supervisor

46              1986  NASD        Sales       a. All      a. 30 days
                                  practice,
                                  financial/
                                  operationa
                                  l

                                              b.          b.          No
                                              Principal   Permanent\
                                                          c

47              1978  NYSE        \a          Supervisor  2 years\b   No

48              1976  SEC         Sales       a. All      a. 60 days
                                  practice

                                              b.          b. 18       No
                                              Supervisor  months
                                              /owner

49              1988  AMEX        Sales       Option      6 months    No
                                  practice    trading

50              1983  SEC         Sales       a. All      a. 60 days
                                  practice,
                                  failure to
                                  supervise

                                              b.          b.          No
                                              Principal/  Permanent\
                                              supervisor  c
--------------------------------------------------------------------------------
Note:  These brokers were active in the industry because (1) their
bars expired, (2) they continued to work in a state or function other
than that from which they were barred, (3) approval for reentry was
obtained, or (4) their bar was being appealed. 

\a CRD did not contain data on the nature of the activity. 

\b Actual length of bar reduced because of retroactive imposition. 

\c While noted as permanent, these bars provided for the right to
apply for reentry to the industry within a specific time frame,
either in all or specified capacities. 

Source:  GAO analysis of CRD data. 




(See figure in printed edition.)Appendix II
QUESTIONNAIRE SENT TO STATE
SECURITIES REGULATORS
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)




(See figure in printed edition.)Appendix III
COMMENTS FROM SEC
=========================================================== Appendix I

text appear at the end of this appendix. 



(See figure in printed edition.)



(See figure in printed edition.)

Now on p.  9. 



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on SEC's September 2, 1994, letter. 

GAO COMMENTS

1.  It is not our intention to suggest that the large number of
problems found by SEC in its staff study of nine large firms and
their branch offices is systemic of the number that exists in all
branch offices.  We believe that the SEC findings in this unique
study, along with the other concerns we raise in this report,
indicated that some shortcomings do exist in the detection and
discipline of unscrupulous brokers.  We have modified the text to
more fully explain SEC's criteria for selecting the branch offices to
review. 

2.  We have modified the text to more fully explain the distinction
among the types of bars imposed, and SEC and SRO policies regarding
reentry to the securities industry. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Helen H.  Hsing, Associate Director
Bernard D.  Rashes, Assistant Director
Carl M.  Ramirez, Social Science Analyst

SEATTLE REGIONAL OFFICE

Desiree W.  Whipple, Reports Analyst

NEW YORK REGIONAL OFFICE

John P.  Harrison, Evaluator-in-Charge
John D.  Carrera, Senior Evaluator
Richard D.  Burger, Evaluator
Rita L.  Chambers, Evaluator Assistant

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

Lorna MacLeod, Attorney

