Stockbrokers Borrow From Customers For Car and Condo

January 5, 2015

There may be times when a registered person has a need to borrow money and, for whatever reason, a customer may be deemed the best source.  In businesses and industries all over the country, customers get involved in lending to and borrowing from those with whom they have a business relationship. Frankly, it's not all that rare an event or that big a deal. On Wall Street, however, the whole lending/borrowing thing with a customer runs afoul of so many prohibitions and restrictions that it's rarely an advisable route for a registered person to pursue.  In two recent regulatory settlements, we see how a customer loan for the purchase of a condominium and another loan towards a car landed two industry respondents in a mess.

One Case In Point

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, Monica Arreola Perez submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Monica Arreola Perez, Respondent (AWC  #2014039707901, December 19, 2014).

In and Out and In

In 2005, Perez became associated in a non-registered capacity with an affiliate of FINRA member firm PFS Investments, Inc.; and in 2006, Perez became associated in a non-registered capacity with PFS, where she remained until she apparently failed to take a FINRA registration examination and was terminated in September 2007. Thereafter, in January 2009, PFS renewed Perez's association status and she subsequently first became registered in September 2009. The AWC asserts that Perez had no prior disciplinary history.

Getting Personal

The AWC alleges that in May 2011, an individual with whom Perez had a personal relationship opened a brokerage account at the PFS.

SIDE BAR: I have no idea whatsoever what FINRA desired me to infer or the regulatory intended to imply by referencing a "personal relationship." I get that there is a distinction between a "personal" and a "business" relationship but, geez, we're all supposedly adults here and it might have been just a wee bit helpful for FINRA to explain the nature of this referenced relationship -- as in, you know, just friends or dating or living together.  I mean there's friends and then there's friends with benefits.

In any event, Perez and her personal-relationship customer got to the point that in June 2011, Perez allegedly borrowed $5,000 from this customer for the purported purchase of a car. The AWC asserts that the loan was memorialized pursuant to an installment note; however, Perez allegedly repaid only $1,000 of the loan.

Not With Any

The AWC asserts that from June 1, 2011 through July 31, 2014, PFS policies prohibited registered representatives from borrowing money from any firm customer.

From Bad To Worse

The AWC alleges that during the relevant time, Perez never sought pre-approval from PFS to borrow money from the customer; and, in fact, on three occasions in December 2011, January 2013, and November 2013, she falsely responded on her firm's annual compliance questionnaires that she had not borrowed money from any firm customer. As part of her annual responses, she further affirmed having read and understood compliance manual; and that she had agreed to comply with its policies and procedures.

Mr. His Name

Online FINRA BrokerCheck records as of January 5, 2015, disclose that a lawsuit was filed in Superior Court of the State of California on December 4, 2013, seeking damages estimated by the firm to be in excess of $5,000 based upon allegations:

[CUSTOMER] HAS FILED SUIT AGAINST ME REQUESTING THA [sic] I REPAY A LOAN AND THAT HIS NAME BE REMOVED FROM A CAR NOTE THAT HE AND I CO-SIGNED.

The online records further disclose that the lawsuit settled on March 20, 2014, in the amount of $8,500 with no individual contribution from Perez.  

FINRA Has A "NO" Of Its Own

FINRA alleged that by improperly borrowing money from a the customer, Perez violated FINRA  Rules 3240 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Perez a one-month suspension from association with any FINRA member in any capacity. No monetary sanction was imposed based upon Perez's sworn financial statement and demonstrated inability to pay a fine.

Second Case In Point

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, Gloria Gonzalez Andrus submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Gloria Gonzalez Andrus, Respondent (FINRA AWC #2013037263701, December 19, 2014).

In 1997, Andrus entered the securities industry with FINRA member firm Frost Brokerage Services, Inc. where she remained until her termination on June 11, 2013. The AWC asserts that Andrus had no prior relevant disciplinary history.

Goin' Condo

The AWC alleges that in September 2012, a customer loaned Andrus $390,000 to be used towards the purchase of a condominium. The loan was memorialized in a three-year promissory note. The AWC asserts that Andrus repaid $300,000.

Frost(y) Reception

During the relevant times, the AWC alleges that Frost Brokerage's written supervisory procedures permitted loans from customers to registered representatives subject to limited circumstances and dependent upon prior notice and approval; however, Andrus did not comply with said procedures in that she did not request nor received approval for the subject loan.

By way of brief recap, it's not looking particularly bad at this point. Sure . . . Andrus should have notified Frost Brokerage about the loan and should have obtained prior approval. That's a violation as far as these things go. One exacerbating factor that does not seem in play here is that Andrus paid down about 75% of the loan and there is no suggestion that she had defaulted on the alleged $90,000 balance.

Unfortunately, Andrus allegedly falsely certified on her 2012 annual compliance questionnaire that she had not received any loans from her brokerage customers. That's not a move calculated to endear her to her employer or any regulatory that may start poking around.

Condo Contravention

Online FINRA BrokerCheck records as of January 5, 2015, disclose that on May 15, 2013, Frost Brokerage "Discharged" Andrus based upon allegations:

ACCEPTED A LOAN FROM A CLIENT IN CONTRAVENTION OF FINRA RULE 3240 AND FALSELY CERTIFIED, IN CONTRAVENTION OF RULE 2010, THAT NO LOAN HAD BEEN RECEIVED. ACCEPTED GIFTS FROM THE SAME CLIENT AND FALSELY CERTIFIED, IN CONTRAVENTION OF FINRA RULE 2010, THAT NO GIFTS HAD BEEN RECEIVED.

Closing Costs

FINRA alleged that Andrus violated FlNRA Rules 3240 and 2010.  In accordance with the terms of the AWC, FINRA imposed upon Andrus a $5,000 fine and a two-month suspension from association with any FINRA member in any capacity.