In a Financial Industry Regulatory Authority ("FINRA") Complaint dated November 11, 2011, the self-regulatory organization alleged that between in September 2006, Edward D. Jones & Co., L.P. registered representative Edward Allen Mantanona ("Mantanona") solicited and received from one of his customers a $30,000 loan, which he fully repaid with 8% interest by the end of December 2006. Allegedly, Mantanona sought and received a second $60,000 loan from the same customer at a 9% interest rate in February 2008, which was subsequently memorialized on February 13, 2008, in the form of an executed promissory note due by December 31, 2008. Mantanona allegedly failed to repay the second loan.
Didn't Ask, Didn't Tell
FINRA alleged that the borrowings violated NASD Rule 2110 and NASD Rule 2370, which prohibited an associated person from borrowing money from a customer unless pre-approved by the firm in writing. Purportedly, Mantanona did not request nor receive approval for the customer loan at any time from his firm.
On January 22, 2007, next to the question on Edward Jones's annual compliance questionnaire: "Have you ever borrowed money from or loaned money to an Edward Jones customer," Mantanona purportedly falsely indicated "No," and placed his signature beneath the bolded words: "The information I have provided above is accurate and complete."
On February 28, 2008, next to the question, "Since your last audit, have you ever borrowed money from or loaned money to an Edward Jones customer other than an immediate family member," Mantanona purportedly falsely indicated "No," and placed his signature beneath the bolded words: "The information I have provided on this questionnaire is accurate and complete."
By making these annual misstatements to his firm, the Complaint alleged that Mantanona violated NASD Rule 2110.
A Walk Down Memory Lane
NASD Rule 2370. Borrowing From or Lending to Customers (effective up to June 13, 2010).
This rule is no longer applicable. NASD Rule 2370 has been superseded by FINRA Rule 3240. Please consult the appropriate FINRA Rule.
(a) No person associated with a member in any registered capacity may borrow money from or lend money to any customer of such person unless: (1) the member has written procedures allowing the borrowing and lending of money between such registered persons and customers of the member; and (2) the lending or borrowing arrangement meets one of the following conditions: (A) the customer is a member of such person's immediate family; (B) the customer is a financial institution regularly engaged in the business of providing credit, financing, or loans, or other entity or person that regularly arranges or extends credit in the ordinary course of business; (C) the customer and the registered person are both registered persons of the same member firm; (D) the lending arrangement is based on a personal relationship with the customer, such that the loan would not have been solicited, offered, or given had the customer and the associated person not maintained a relationship outside of the broker/customer relationship; or (E) the lending arrangement is based on a business relationship outside of the broker-customer relationship.
(1) Members must pre-approve in writing the lending or borrowing arrangements described in subparagraphs (a)(2)(C), (D), and (E) above.
(2) With respect to the lending or borrowing arrangements described in subparagraph (a)(2)(A) above, a member's written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such lending or borrowing arrangements.
(3) With respect to the lending or borrowing arrangements described in subparagraph (a)(2)(B) above, a member's written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such lending or borrowing arrangements, provided that, the loan has been made on commercial terms that the customer generally makes available to members of the general public similarly situated as to need, purpose and creditworthiness. For purposes of this subparagraph, the member may rely on the registered person's representation that the terms of the loan meet the above-described standards.
(c) The term immediate family shall include parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and shall also include any other person whom the registered person supports, directly or indirectly, to a material extent.
The Sounds of Silence
Despite several requests for information from FINRA starting on February 3, 2010, Mantanona allegedly failed to respond, in violation of FINRA Rules 8210 and 2010. Following a FINRA Disciplinary Hearing at which Mantanona failed to appear, Mantanona was ordered separately barred from associating with any FINRA-registered firm in any capacity for:
- borrowing from a customer in violation of NASD Rules 2370 and 2110,
- making misrepresentations to his firm in violation of NASD Rule 2110, and
- failing to provide information in violation of FINRA Rules 8210 and 2010.
In addition, Mantanona was ordered to pay $60,000 restitution to his customer plus interest at the rate of 9% per year from February 13, 2008, until paid.
FINRA Department of Enforcement, Complainant, v. Edward Allen Mantanona, Respondent (2009021067101, Complaint, November 11, 2011;Default Decision, April 27, 2012).
Bill Singer's Comment
Ah yes, a perennial favorite among FINRA's possible violations - the old borrowing from customer. As classic a No-No as is on the self-regulator's books.
A few observations:
First, even if a broker borrowed money from a client(s) and fully repaid that obligation (or largely did), the arrangement is still a violation if the required prior notice to the firm and attendant approval were not satisfied.
Second, even if a broker has borrowed from a client(s) in the past and has established a record of repayment (with or without the requisite notice and approval), the non-payment of any subsequent loan will likely erase whatever mitigation FINRA might be disposed to grant when imposing sanctions. It likely goes without saying that stiffing a customer on a loan (particularly when the arrangement is in violation of both FINRA's and your employer's rules) isn't likely to win you any brownie points with the regulator.
Finally, let's consider the old cascade effect whereby one regulatory violation leads to another and another until you have the snowball from Hell. Not only did Mantanona enter into two loans from his customer in violation of FINRA's and his Edward Jones's rules, but he also compounded the transgression by denying the loans on two annual questionnaires. Of course, then came the mother of all FINRA violations:failing to cooperate in an investigation. Two improper loans, two false online answers later, and a whole batch of non-responses later, we find a respondent in a regulatory action opting to not show up for his hearing and defaulting. All of which explains why this case ended with a Bar.
For an example of yet another Edward Jones's broker who ran afoul of the borrowing rules, read this "Street Sweeper" column:
Neither a Borrower Nor A Forger Be, FINRA Tells Barred Broker (August 24, 2011)
Also, read this dramatic tale about a Morgan Stanley Smith Barney broker's regulatory nightmare:
The Desperate Stockbroker and Her Father's Korean War Medals (January 9, 2012)