California Plans to Reinstate Its Screening of Stockbrokers

NEW YORK — The California Department of Corporations said Tuesday that it plans to resume screening stockbrokers who do business in the state, a practice it abandoned to save money shortly after Proposition 13 passed.

Maurice Cox, supervising examiner of the department’s broker-dealer and investment adviser section, said screening is necessary because the securities industry has not been tough enough in cracking down on “rogue brokers” who cheat investors.

“There is a problem with brokers that continue to do business in this state who have extensive disciplinary histories,” Cox said.

California is currently the only state that does not license brokers. There are 123,000 who do business in the state.

Program plans do not call for reinstating formal licensing. Instead, four staff members would be hired to screen brokers’ records each time they moved from one firm to another or registered for the first time to do business in the state.

The plan would not require additional money from the state; rather, department funds would be reallocated from other programs, a spokesman said. But because it calls for hiring additional employees, the plan must be approved as part of the new state budget, now pending before the Legislature. The spokesman said he expects lawmakers to approve the hiring.

Cox said the new staff would allow the agency to take enforcement action against brokers who have records of disciplinary actions against them by securities regulators, or who have records of numerous customer complaints or judgments against them. He said such action could include banning certain brokers from selling securities in California.

Currently, brokers who want to sell securities to California customers simply check a box on a form filed with the National Assn. of Securities Dealers and pay a fee. There is no state review of their records. The department rarely investigates stockbrokers, instead leaving most enforcement to the National Assn. of Securities Dealers, a securities industry self-regulatory agency based in Washington, and to the New York Stock Exchange.

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“Our whole system was predicated on NASD oversight of the agents, and it’s become obvious that their oversight was not what we thought it was,” Cox said.

Under pressure from the Securities and Exchange Commission, the NASD in recent years has increased the number of disciplinary investigations of brokers. However, at an NASD conference in Florida last month, John E. Pinto, NASD executive vice president for regulation, denied that rogue brokers exist.

Cox said the department decided screening was again necessary after a 1992 series in The Times documented the records of several California brokers who continued to do business in the state despite lengthy disciplinary records and allegations of fraud against them.

The NASD also said it is overhauling its computer database of brokers’ records to make it easier for regulators to zero in on those who have many complaints against them. Cox said that although only four new employees would not be able to screen out all problem brokers, “if we can deter one rogue broker from conducting business in the state, we’re much better off because of it.”