by Bill Singer
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority (“FINRA”), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Kevin J. Nainiger submitted a Letter of Acceptance, Waiver and Consent (“AWC”), which FINRA accepted. In the Matter of Kevin J. Nainiger, Respondent(AWC 2012032069301, August 1, 2012).
On January 20,1994, Nainiger first became registered with FINRA as a General Securities Representative. From August 2006 until April 17, 2012, Nainiger was registered in that capacity with Commonwealth Financial Network. The AWC asserts that Nainiger had no prior FINRA disciplinary history.
Company Policy
Bill SingerContributor
During the relevant time, Commonwealth’s written procedures prohibited registered representatives from ”lending to, or borrowing money from, a client” except under certain circumstances that included loans based on a business relationship outside of the broker-customer relationship. Should a registered person desire an exemption from that prohibition, Commonwealth’s procedures required prior notice and approval before a registered person could participate in a lending arrangement.
The Loan
On July 1, 2010, N.R.E. Group (Nainiger’s wholly-owned limited liability company) purchased a building from a married couple who were also his customers at Commonwealth. The married couple agreed to finance the sale and provide a loan secured by a mortgage on the building to Nainiger through N.R.E. Group in the amount of $140,000, and the lenders were given a promissory note in that amount by Nainiger. To date, through N.R.E. Group, Nainiger has made all required payments on the promissory note.
The Problem
The AWC asserts that Nainiger did not seek or obtain Commonwealth’s approval before entering into the loan from his clients, nor did he otherwise disclose that arrangement to the firm. Moreover, in November 2010, Nainiger indicated on a firm compliance questionnaire that he had not borrowed money from any customers.
The AWC alleges that by borrowing money from customers in contravention of Commonwealth’s written policies and without the requisite prior disclosure, Nainiger violated FINRA Rules 3240: Borrowing From or Lending to Customers and 2010: Standards of Commercial Honor and Principles of Trade. In accordance with the terms of the AWC, FINRA imposed upon Nainiger a $5,000 fine and a 30-business-day suspension from association with any FINRA member in any capacity.
Bill Singer‘s Comment
In recent months, “Street Sweeper” has reported about a number of FINRA actions against registered reps who have engaged in transactions that fell under the ambit of the self-regulatory organization’sBorrowing Rule:
- FINRA Fines And Suspends Broker For Improper Customer Loans
- FINRA Trifecta Earns Stockbroker Fine And Suspension For Borrowing, U4, Private Securities Transactions
- Classic FINRA Case Of A Stockbroker Borrowing From A Client
- Commonwealth Stockbroker’s Private Securities Transaction and Customer Loan Prove Boiling Frog Story
- Borrowing From Customer Costs Stockbroker His Career
- Neither a Borrower Nor a Forger Be, FINRA Tells Barred Broker
Today’s case presents an atypical example of conduct that runs afoul of theBorrowing Rule. Nainiger’s violation may well have occurred because of a lack of “recognition” that the arrangement actually constituted a prohibited loan — however, because the AWC does not assert that he knew or didn’t know that the loan required prior notice and approval, my remarks are mere speculation and may well be off base.
For many FINRA registered persons, certain of the self-regulator’s rules are arcane, nuanced, or simply incomprehensible. While the regulator’s often flip response to such states of mind is “tough — you’re supposed to know the rules and if you don’t, then you have to pay the price,” such a hard-line doesn’t eliminate the reality that there are many rules and not all are clearly written or understood.
In Nainiger’s case, the loan was technically between the customers and N.R.E., which is not a FINRA member firm or registered party. Perhaps Nainiger didn’t feel that a loan between customers and N.R.E. fell under theBorrowing Rule — I’ve posted the full-text of the rule below, you read it and tell me what you would have concluded on that technical point.
Assuming that an entity that is “wholly owned” by a registered person engages in a loan with customers, where exactly does the Borrowing Rule address that distinction between the individual registered person entering into a loan and that of an entity that he or she wholly owns? And don’t tell me what interpretations or caselaw may provide because they are not included in the body of the Borrowing Rule, where many registered persons (most lacking legal degrees) would look to figure out what’s what.
Then there’s the issue of (a)(2)(E) of the rule which suggests a possible exemption where “the lending arrangement is based on a business relationship outside of the broker-customer relationship’ and the registered person follows the notice/approval protocol of the member firm. Was this transaction based on an outside business relationship? Would that have mattered — particularly since Nainiger didn’t seek prior approval from his firm and obtain same?
The Borrowing Rule snares many well-intentioned brokers and more than a fair number of the wholly clueless. Those who fall victim to this rule are not merely associated with indie/regional firms such as Commonwealth; to the contrary, the roster of FINRA disciplinary respondents is filled with the names of folks employed at Merrill Lynch, Morgan Stanley, JP Morgan, Wells Fargo, UBS, and that ilk.
When I see a specific rule that is regularly violated, it tells me two things. First, that a lot of men and women are desperate and may be engaged in misconduct — in which case, kudos to FINRA for doing its job. Second, that the rule is poorly written and those violating it may either not recognize the nature of their misconduct or not be aware that the prohibition even exists — in which case, FINRA needs to do a better job educating the industry and perhaps revising the language.
Carefully review the current FINRA Borrowing Rule:
FINRA Rule 3240: Borrowing From or Lending to Customers
(a) Permissible Lending Arrangements; Conditions
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;
(2) the borrowing or lending arrangement meets one of the following conditions:
(A) the customer is a member of such person’s immediate family;
(B) the customer (i) 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 and (ii) is acting in the course of such business;
(C) the customer and the registered person are both registered persons of the same member;
(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 registered 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; and
(3) the requirements of paragraph (b) of this Rule are satisfied.
(b) Notification and Approval
(1) The registered person shall notify the member of the borrowing or lending arrangements described in paragraphs (a)(2)(C), (D), and (E) above prior to entering into such arrangements and the member shall pre-approve in writing such arrangements. The registered person shall also notify the member and the member shall pre-approve in writing any modifications to such arrangements, including any extension of the duration of such arrangements.
(2) With respect to the borrowing or lending arrangements described in paragraph (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 borrowing or lending arrangements.
(3) With respect to the borrowing or lending arrangements described in paragraph (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 borrowing or lending 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) Definition of Immediate Family
The term “immediate family” means 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 any other person whom the registered person supports, directly or indirectly, to a material extent.
Supplementary Material:
.01 Record Retention. For purposes of paragraph (b)(1) of this Rule, members shall preserve the written pre-approval for at least three years after the date that the borrowing or lending arrangement has terminated or for at least three years after the registered person’s association with the member has terminated.