Shoddy sales practices by stockbrokers and brokerage firms were blamed yesterday for costing small investors millions of dollars when financial markets plunged on Black Monday, Oct. 19.

The attack on the brokerage community came from James C. Meyer, president of the North American Securities Administrators Association (NASAA), which represents state securities regulators.

"It is fair to say that these losses are a direct outgrowth of a financial regulatory system which, in recent years, has unwisely deemphasized the protection of individual investors," Meyer said in testimony before the House subcommittee on telecommunications and finance.

Meyer was the lead witness at what Rep. Edward J. Markey (D-Mass.), chairman of the subcommittee, said was the first of a series of hearings into the causes of the market's collapse.

Meyer was followed to the witness table by officials of the New York Stock Exchange, the American Stock Exchange, the Nasdaq over-the-counter market and the Chicago Board Options Exchange.

They expressed displeasure with Meyer's conclusions and said that despite some problems, the markets had performed well in the face of the heaviest trading in history. They also vowed to investigate any complaints sent to them.

Meyer, who also is director of the Tennessee Securities Division, gave the committee a detailed report on 8,000 telephone complaints recently received by NASAA on an investor hot-line.

"Half of the problems complained of by investors might have been prevented if brokers had observed proper sales practice rules before Oct. 19," Meyer said. The hot line phone calls, he said, included complaints against brokers of unsuitable investments, unauthorized trading and false and misleading information in sales pitches.

Meyer also said that the small margin or deposit required on options, plus a lack of investor sophistication about options, left many investors with substantial losses and large debts to brokerage firms.

Meyer said that an analysis of 2,562 calls to the hot line showed that the callers suffered "a projected total loss of $457.25 million or an average of more than $172,000 per caller."

Meyer recommended that:

Congress and the Securities and Exchange Commission direct the exchanges to increase their attention to the "market conduct" of member firms.

Minimum fines against brokers who ignore the "know your customer" rule be set at $5,000.

Customers be told about the background and history of brokers and brokerage firms, the risks of margin accounts, options and futures and that they be made aware of the meaning of arbitration agreements that most customers sign.

The margin requirements for futures and options, now in the 5 percent to 15 percent range, be raised to 50 percent, the same amount required for stocks.

Meyer's charges put officials of the exchanges on the defensive. The exchanges, which function as self-regulatory organizations, are responsible for the behavior of brokerage firms that are members of their exchanges.

The exchange officials said that, despite Meyer's views, the industry is adequately regulated. They expressed reservations about the use by Meyer and NASAA of undocumented complaints to draw conclusions about the industry.

One exchange official privately expressed displeasure that the exchange representatives had not been given a chance to study the hot line report in advance of the hearing.

Rep. Matthew J. Rinaldo (R-N.J.), ranking minority member of the subcommittee, sounded a skeptical theme repeated by other Republican members when he said, "It would be inappropriate to draw definite conclusions from the statements being made today. ... We have to recognize that not all the evidence is in. ... I don't think anyone should confuse legitimate investor protection with bad investment decisions."