New SEC rule expected to thin brokerages' ranks.

Several of Los Angeles' smaller brokerage firms may merge with bigger companies or shut down during the next 18 months as they struggle to comply with a new federal rule beefing up capital levels, officials said.

However, companies which come up with the cash to satisfy the rule may eventually be viewed with increased respect by investors, predicted local brokers.

"There's no question that some Los Angeles firms will merge or go out of business in some way. How many, I can't say," said Kye Hellmers, former director of the National Association of Securities Dealers, District Two, with 440 registered broker/dealers in the Southern California and Nevada areas.

The Securities and Exchange Commission adopted the new rule in late November to pump up the fiscal cushions of smaller firms in order to protect investors from incurring losses if brokerages fail.

Expected to be phased in over the next 18 months, the new rule requires brokerages which carry customer accounts and hold securities (so-called clearing firms) to maintain minimum capital levels of $250,000, up from $25,000.

Underwriting firms and companies which don't hold customer securities would be forced to keep a minimum of $100,000, up from $25,000.

Smaller firms, often called introducing firms, with only $5,000 in capital requirements, will see their mandated levels increase to $50,000 if they want to hold assets or retain customer funds, said Michael Macchiaroli, assistant director of the SEC's market regulation division.

Macchiaroli said the rule was created to discourage marginal firms from entering the business and to force firms operating on the edge to either clean up their act or shut down.

"It's not going to knock anybody out right away," Macchiaroli predicted. "It ought to be a little more difficult to set up a broker/dealer than a yogurt shop. You could start a broker/dealer by borrowing a credit card."

While some members of Los Angeles' brokerage community said the rule would not adversely affect their companies, other firms are faced with either obtaining more capital, merging with another firm or shutting down.

Frank S. Isozaki, chief financial officer for Thomas Green Securities Inc., a Los Angeles-based securities firm, said his company won't be affected by the rule. However, he predicted other firms would fold or be swallowed into larger firms.

"In the LA. area, I would guess a dozen or so firms will be forced to merge," he said.

One local broker said the rule could be especially tough on women and minority-owned brokerages and underwriting firms, often created to take advantage of state or city requirements that a certain amount of business be done with such firms.

"It will hit us particularly hard. It means I'm going to have to put up more money. I'm cranky as hell about it, but I understand why they need to do it," said Margo Kairoff, president of Kairoff & Co., a Santa Monica-based, woman-owned firm, which will see its net capital requirements increase from $25,000 to $100,000. "The businesses that are professional and for real will be able to comply. Others will just fall off the edge."

Kairoff said she has already been approached by two potential buyers, both large firms based outside California.

The SEC has considered increasing capital levels since several firms went out of business after the stock market crash of 1987. When firms fail and do not have enough cash to pay off investors, the Securities Industry Protection Corp., a governmental agency similar to the Federal Deposit Insurance Corp., steps in. However, it can take years for investors to receive even a portion of their money, Macchiaroli said.

While many brokers predicted some firms would have trouble with the new rule, no one wants to name names.

"We will see local people leave the business," said Gerald Winters, chief financial officer with Downtown L.A.-based First Wilshire Securities Management Inc. "I can't say who they are."

Officials at some of the bigger securities firms based in Los Angeles County, including Seidler Amdec Securities Inc. and Wedbush Morgan Securities Inc., said they would not be hurt by the rule.

Instead of being concerned, some firms hailed the new rule, saying it was long overdue and would not only beef up capital, but increase individual investors' respect for the smaller firms registered with the National Association of Securities Dealers.

"It's not going to hurt my partner or myself; it will help smaller firms get some credibility," said Thomas A. Gans, president of Los Angeles-based Pacific Coast Financial Securities Inc., formed a year ago.

Gans said, "We can say, 'Here is our net capital and if you don't believe us, ask the NASD.'"

Fred Roberts, chairman of the NASD board of directors, hailed the SEC's move to increase capital requirements as a "positive for our industry."

However, Roberts said he was concerned that the $5,000 brokers will not be affected by the new rule if they abstain from holding securities. These smaller firms, often "one-man shops," should "definitely" see their required capital levels raised to $10,000 or at least $25,000, he said.

The higher capital levels may make it harder for entrepreneurs who want to leave big brokerage houses and branch out on their own because they will have to come up with more cash.

Kenneth Fundstein, a portfolio manager with Beverly Hills-based Financial Management Advisors, said the new rule "sticks in my brain. If I want to start my own firm, I'm going to have to pony up more money."