The Securities and Exchange Commission said yesterday it will hold a hearing on whether E. F. Hutton & Co. should be granted a permanent exemption from the law that prohibits convicted felons from acting as investment advisers.
The SEC granted the big securities firm a temporary exemption from the law last year after Hutton pleaded guilty to 2,000 counts of fraud in a check-kiting scheme in which the company cheated its banks out of millions of dollars of interest payments.
Last October, the SEC told Hutton to hire independent consultants to study how well the securities firm handles customer funds and accounts and how well it manages mutual funds and other investment companies that it advises.
The consultants' reports, released by the SEC yesterday, said Hutton essentially complies with securities laws and regulations, but recommended changes in procedures and beefing up Hutton's staff in certain areas.
Hutton, which agreed in advance to follow the advice of the SEC-approved consultants, said yesterday that all of the recommendations "have been or will be implemented."
One of the consultants, accountant Nelson Kibler, said the SEC should use the Hutton case as an opportunity to evaluate whether it should set a policy on whether brokerage firms should be required to make payments to customers from local banks, so the customers have faster access to their funds.
Hutton made nearly all customer payments from a single bank. Some brokerage companies have been reprimanded for deliberately writing checks on far-away banks to delay the time it takes for checks to clear.
Kibler -- a senior partner in the accounting firm of Touche, Ross & Co. -- said Hutton should be more forthright in telling its customers they have the right to automatically receive payouts of dividends and interest. He also called for increased disclosure in a few other areas that relate to Hutton's dealings with its customers.
Frederick M. Werblow, senior partner in the accounting firm of Price Waterhouse & Co., also found Hutton's investment-company management in basic compliance with the law. But he said Hutton should increase personnel in its legal, investment management and processing operations. He also called for some changes in the way Hutton deposits customer checks in its life insurance company.
A spokeswomen for the SEC said that, under the agency's procedures, it will be more than 90 days before the commission can hold a hearing on whether Hutton should be granted a permanent exemption and allowed to continue to operate as an investment adviser.
The SEC granted Hutton a temporary exemption last May because the company has about 500,000 customers with more than $4 billion in funds under management -- customers Hutton said would be harmed if the securities firm were forced out of the investment management business immediately.
In its guilty plea, Hutton paid millions of dollars of fines and court costs and agreed to reimburse any bank that was cheated out of legitimate interest payments because Hutton, in effect, tricked them into giving it an interest-free loan. The company regularly wrote checks on accounts in which there were funds based on checks that had been deposited by Hutton, but not yet collected by the bank.