RICHMOND, JULY 13 -- In a historic compromise with the State Corporation Commission, the Virginia branch offices of E.F. Hutton and Co. Inc. will be overseen by an independent auditor for the next two years.

The settlement, announced today, was prompted by an SCC probe into the illegal activities of convicted embezzler and former broker Clyde B. Pitchford Jr., and his apparent lack of supervision while working for Hutton.

While E.F. Hutton becomes the first brokerage firm in state history to be placed under such restrictions, the firm neither admits nor denies the alleged violations of the Virginia Securities Act made by the SCC's Division of Securities and Retail Franchising.

"The settlement allows Hutton to proceed with business in the commonwealth of Virginia, while monitoring the firm's Virginia branch activities to ensure adequate investment protection for Hutton's Virginia customers," said SCC Chairman Elizabeth B. Lacy.

After stories of Pitchford's embezzlement because public, the commission issued a March order asking Hutton officials to explain the activities of its Richmond branch office during the time Pitchford worked at the firm.

Pitchford worked in Hutton's Richmond branch office from July 1983 to Feb. 27, 1986.

Pitchford pleaded guilty on July 18, 1986, to charges of embezzling funds from 14 Hutton clients; he used the money personally or directed funds to Rex Group Inc., his private investment firm.

In the settlement order, the commission said it will retain an independent auditor for two-years.

The auditor will review and assess Hutton's internal audit and compliance programs for the firm's four Virginia branch offices.

Under the agreement, the SCC may select an accounting firm with a national practice, including, but not limited to, one the the "Big Eight" firms. The cost of the auditor will be paid by Hutton.

SCC Securities and Retail Franchising Division Director Lewis W. Brothers Jr. said the settlement order sends a message to the Virginia securities.

"The commission is not going to tolerate firms allowing their representatives to deal with customers in an unlawful manner or without significant procedures in place to supervise them," Brothers said.

In addition to the Richmond branch, Hutton has Virginia offices in Alexandria, Farmville and Norfolk.