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Regulator Deletes Red Flags From Brokers' Records, Says Study

Study Into Brokers' Records Was Conducted by Public Investors Arbitration Bar Association

By Jean Eaglesham and Rob Barry
March 6, 2014 8:49 p.m. ET

Updated March 6, 2014 8:49 p.m. ETA Wall Street regulator is facing heightened pressure to overhaul its oversight of stockbrokers and better protect investors.

The Financial Industry Regulatory Authority "routinely" strips out some possible red flags on brokers from its database in the information it makes available to investors, according to a study released Thursday by an organization of lawyers who represent investors in claims against brokers.

The study followed a Wall Street Journal investigation, which disclosed in a page-one article Thursday that more than 1,600 brokers' records don't show personal bankruptcies and criminal charges that should be reported.

Finra, which oversees the nation's brokerage firms, said it would "look closely at taking additional steps to address these reporting issues" unveiled by the Journal, a spokeswoman said. The regulator describes itself as the "first line of defense" for 90 million U.S. investors.

Investors can look up brokers on a Finra website called "BrokerCheck" and quickly find out their professional history. But the Public Investors Arbitration Bar Association, the lawyer group, said Thursday that Finra was scrubbing potential black marks from the information it provided to investors.

Finra defended its BrokerCheck tool. "While the system may not be perfect, we do have to make determinations on what information…is appropriate to release, while at the same time balancing fairness," it said.

Finra rules require brokers' records to show various red flags, including personal-bankruptcy petitions filed in the past 10 years and felony charges and convictions. But not all potential black marks are covered by this reporting system. One example: Brokers don't have to report many types of misdemeanor charges and convictions.

A Journal investigation found dozens of brokers with criminal records that don't have to be disclosed to investors. The criminal charges uncovered by the Journal, which don't show up on brokers' records—in accordance with the current rules—include assault, sexual contact without consent, hit-and-run and habitual substance abuse.

Consider the matter of Niyukt R. Bhasin, founder, owner, president and chief executive of NSM Securities Inc., a former brokerage firm in West Palm Beach, Fla. The BrokerCheck record for Mr. Bhasin, 45 years old, doesn't show any criminal history.

But Mr. Bhasin has twice been put on probation for domestic assault misdemeanors since 2004, according to court records.

He again was placed on probation last year after being found guilty of driving under the influence and other misdemeanor charges, the records say. None of these criminal charges need to be reported under the regulatory rules. Mr. Bhasin, his firm and two of his former brokers were last month charged by Finra with misconduct including excessive trading and unsuitable investment recommendations from March 2007 through September 2012 that allegedly "resulted in many NSM customers suffering significant losses."

Finra alleged in the civil disciplinary case that Mr. Bhasin "fostered a culture of non-compliance that resulted in widespread sales practice violations." His firm's Finra membership was canceled last month.

Mr. Bhasin, who is no longer working as a broker, didn't respond to numerous phones calls and emails seeking comment before his firm closed down. David Roth, a lawyer who represented him in last year's criminal case, declined to comment. Mr. Bhasin couldn't be reached for comment Thursday.

A Finra spokeswoman said the rules on which criminal charges and convictions have to be disclosed by brokers are made by the Securities and Exchange Commission. A spokesman for the SEC, which oversees Finra, declined to comment.

The Journal investigation found more than 11,700 brokers who have disclosed criminal histories. Of those, more than 2,300 mention the word "theft" in their BrokerCheck reports, more than 800 mention "larceny" and over 140 include the word "forgery."

The Journal's analysis was done using a unique database, gathered from 21 states, of more than 500,000 stockbrokers who were still working in the industry last year and comparing it with criminal and bankruptcy-court filings.

The analysis showed more than 1,500 brokers with personal-bankruptcy filings from 2004 through 2012 that aren't in their BrokerCheck records and 150 brokers whose records don't include criminal charges or convictions that should have been reported. Brokers' records should show personal bankruptcy petitions filed within the past 10 years.

Thursday's lawyers group report compared the information on brokers provided by Finra's BrokerCheck with the broader reports—on the same brokers from the same Finra database—that can be accessed from state securities regulators in states such as Florida and Iowa that have robust freedom-of-information laws.

The red flags that can be accessed in some states, but not from Finra directly, include information on whether a broker was ever under internal review "for fraud or wrongful taking of property, or violating investment-related statutes, regulations, rules or industry standards of conduct," the study said.

Other potential black marks scrubbed from BrokerCheck include whether brokers have previously failed industry-qualification exams, federal tax liens that have now been satisfied and personal-bankruptcy filings that are more than 10 years old, according to the lawyers group.

Terry Weiss, a lawyer at Greenberg Traurig LLP who represents brokers and brokerage firms, defended Finra's approach. He said the stockbrokerage business "may be the only profession where any of this sort of information is publicly disclosed in this fashion."

Write to Jean Eaglesham at [e-mail] and Rob Barry at [e-mail]
http://online.wsj.com/news/articles/SB10001424052702304554004579423270046013550