Stock Market: When the Broker Goes Broke

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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%?