(MONEY Magazine) – Mary Schapiro, 40, the first president of the new regulatory arm of the National Association of Securities Dealers, plans to take strong steps to rein in bad brokers and the firms that hire them. She'd better. Just weeks after Schapiro took the job at the brokerage industry's self-policing group, the Securities and Exchange Commission released a devastating report criticizing the industry for failing to adequately police its brokers. MONEY associate editor Ruth Simon talked with Schapiro, the former head of the Commodities Futures Trading Commission, about her plans to improve investor protection:

Q.How do you plan to respond to the tough SEC report?

A.We will bring more enforcement actions charging branch managers or compliance officers with failure to supervise their brokers. Nothing will focus those officials' attention on the problem like having them either pay fines or lose their jobs. And we're looking at a rule that says firms hiring brokers with bad records have additional responsibilities, like taping their phone conversations. We'd also like to make it harder for problem brokers to transfer from one firm to another. In addition, we're working with state regulators to get more criminal prosecutions of bad brokers.

Q.Small investors generally cannot sue their brokers; they need to arbitrate. But many investors think that the odds are stacked against them. How will you improve the arbitration process?

A.I will go to my board in May with a plan that would, starting this year, expand the pool of arbitrators, give investors a greater say on who sits on their arbitration panel and improve training of arbitrators so that they better understand securities laws. I also want to expand NASD mediation, which is faster and cheaper than arbitration [see Money Newsline, March 1996].

Q.The SEC has found that many firms soliciting new clients by telephone violate federal telemarketing laws. What would you do if you got a cold call at home?

A.I would hang up. I would never send money to somebody based on a phone call. I can't imagine a circumstance where that's a reasonable thing to do.

Q.How can investors better protect themselves?

A.You can check out a broker's disciplinary record by calling the NASD's toll-free hotline (800-289-9999). As I've said, I hope to put those records on the Internet next year.

Also, scrutinize your account statements for transactions you didn't authorize, excessive commissions and delays in executing your orders. Report any problems to the branch officer or the firm's compliance officer as well as to the NASD.