When the Broker Goes Broke

An investor who buys stock through a reputable brokerage house would have reason to think that he really owns the shares. At least there is a general impression that he is safe in dealing with any member firm of the New York Stock Exchange. The Big Board has given substance to that impression by maintaining a trust fund that recently bulged with $55 million to assist customers of any brokers who lapsed into insolvency. Last week customers of Philadelphia-based Robinson & Co. discovered that the fund's protection is not so sure as they might have thought. In fact, the fund is exhausted.

Like many other brokerage firms, 15-year-old Robinson spent too much on expansion during the bull market of the late 1960s, and then was caught in the crash. It filed for bankruptcy on Sept. 1, after the Securities and Exchange Commission had charged it with illegally pledging its customers' wholly owned stock as collateral for bank loans. The shares that many of Robinson's 8,000 customers owned--and had left with the firm as a convenience--became the property of banks, primarily Morgan Guaranty Trust and Barclay's.

Catch 19. The pained customers sought help from the Big Board's trust fund, only to get another jolt. Robinson & Co. had resigned its seat on July 24. Because Robinson was no longer a member when it filed for bankruptcy, the exchange declined to dip into its trust fund to pay off the bankers and get the stock back. The exchange cited a little-known proviso in article 19 of its constitution: "Whether or not expenditures from the fund shall be made in any particular case, and, if so, in what manner, to whom, and to what extent, shall at all times remain exclusively within the sole and absolute discretion of the trustees of the special trust fund."

The Big Board has no more money to give. Its trust fund is fully committed to customers of ten firms that are closing out their customers' accounts.* The Big Board is also no help to customers of two other firms that were suspended in August: Charles Plohn & Co. and First Devonshire Corp. Both, like Robinson & Co., have been charged by the SEC with pledging customer-owned stock for bank loans. The exchange maintains that both have sufficient assets to repay their customers.

The exchange has not lately passed the hat among its other members to replenish the trust fund. Instead, Big Board officials are waiting for Congress to vote a bill setting up a Securities Investor Protection Corp., which would insure investors for up to $50,000 each. The SIPC would raise up to $150 million by assessing brokers, taking a cut of commissions and drawing bank loans; it also would have a $1 billion line of credit to the U.S. Treasury. The bill is bound to be enacted some time soon, but if Congress adjourns next week before approving it, the exchange will have to take immediate emergency steps to raise money from its own members.

New Warning System. Badly burned, the exchange has become more careful. The SEC allows a brokerage firm to have up to $20 in liabilities for every $1 of capital, but the exchange recently has begun to demand that its members quickly scrape up more capital whenever liabilities rise to more than $12 for every $1 of capital. Under this "early-warning system," the Big Board has ordered changes in 139 firms, or more than one-third of the 375 members that carry public accounts. Now 93 of those companies have brought their capital accounts into sound order; another five have transferred their customers to other firms but stayed in business; 16 have merged or sold out to competitors; and eight have either closed their doors, or are in the process of doing so. Still another 17 remain on the surveillance list, staying in business under threat of suspension. A suspension would also absolve the exchange, as in the Robinson case, from drawing on its depleted trust fund.

How can a small investor protect himself? A spokesman for the exchange offers some advice that can hardly alleviate the public's doubts about the financial solidity of many brokerages. An investor, says the spokesman, should ask his banker about the solvency of his broker. The customer might also demand a financial statement from his broker. And he would be well advised to take his securities from the broker and put them in a safe-deposit box. The exchange contends that 97% of its members are sound and only 3% face potential trouble. That raises just one question: Which 3%?

*McDonnell & Co.; Amott, Baker & Co.; Gregory & Sons; Baerwald & DeBoer; Dempsey-Tegeler & Co.; Meyerson & Co.; Fusz-Schmelzle & Co.; Blair & Co.; Orvis Brothers & Co.; and Kleiner, Bell & Co.

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