The BrokeAndBroker.com Blog frequently covers FINRA regulatory cases involving allegations of improper borrowing by registered representatives from customers. Although such cases represent a significant portion of the docket, the regulator's "Sanction Guidelines" inexplicably offered no guidance on the considerations for imposing fines or suspensions for such misconduct. Thankfully, FINRA recently rectified this glaring omission with a thoughtful revision of its Sanction Guidelines.Case In PointFor 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, Todd J. Pilosi submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Todd J. Pilosi, Respondent (AWC 2016051455601, April 5, 2017).The AWC asserts that Pilosi entered the securities industry in 1992 and from 2006 to June 2012 was registered with FINRA member firm RBC Capital Markets, LLC.; and, thereafter, with LPL Financial LLC until October 2016.$150,000 BorrowedThe AWC asserts that on four occasions between July 2009 and March 2012, Pilosi borrowed a total of $150,000 from an individual identified only as "Customer A." The AWC asserts that there were no "set" terms for the loan and the only documentation for the transaction were the four checks given from Customer A to Pilosi. In-House ProhibitionDuring the relevant times, the AWC asserts that RBC's policies and procedures "prohibited lending arrangements between the firm's registered representatives and customers." Notwithstanding his firm's prohibition, the AWC alleges that Pilosi never notified or obtained pre-approval from his employer to enter into and accept the loans from Customer A. Further, in April 2012, Pilosi purported denied on a firm compliance questionnaire that he had borrowed money from any customer. The LawsuitIn August 2016, when Pilosi was registered with LPL, Customer A sued Pilosi in California state court seeking to collect on the loans. Thereafter, Pilosi disclosed to LPL that he had borrowed funds from the customer while employed with RBC Capital.
SIDE BAR: Online FINRA BrokerCheck records as of April 11, 2017, disclose under the heading "Customer Dispute - Pending" that RBC Capital Markets received notice on August 29, 2016, that a customer had filed a lawsuit in Superior Court of California seeking $165,000 in damages and alleging:
Client alleges she remitted funds to financial advisor for personal loans and investments away from RBC which has not been repaid. Client is also alleging breach of oral contract, fraud, breach of fiduciary duty, conversion and negligent failure to supervise. Financial Advisor was employed with RBC from account opening in 2009 until June 29, 2012.Online FINRA BrokerCheck records under the heading "Employment Separation after Allegations" disclose that LPL "Discharged" Pilosi on October 10, 2016, based upon allegations of:
Terminated after the registered representative disclosed to the Firm that he had borrowed money from 2009 and 2012 from a customer at his prior employer.
Pilosi and Customer A have reached a settlement in principal for Pilosi to pay Customer A $150,000 on or before October 15, 2017.Sanctions
4. Borrowing From or Lending to Customers. There are large numbers of litigated and settled cases involving borrowing and lending arrangements between registered representatives and customers, but the current iteration of the Sanction Guidelines has no guideline related to these types of violations. The introduction of a guideline related to borrowing and lending arrangements between representatives and customers provides adjudicators with guidance on the assessment of sanctions in these cases.As revised, the FINRA Sanction Guidelines provide on page 77:Borrowing From or Lending to Customers - Failure to Comply With Rule Requirements / FINRA Rules 2010 and 3240
Principal Considerations in Determining SanctionsSee Principal Considerations in Introductory SectionCompromise with CreditorOffered by way of context, online FINRA BrokerCheck records under the heading "Financial - Final" disclose that on August 31, 2009, Pilosi entered into a "Compromise" with creditor Bank of America concerning an "Original Amount Owed" of $39,400, which was "Satisfied/Released" on February 1, 2012. Under "Terms Reached with Creditor," we are informed that:
Monetary SanctionFine of $2,500 to $73,000Suspension, Bar or Other SanctionsConsider suspending the respondent for a period of 10 business days to three months.Where aggravating factors predominate, consider a longer suspension (of up to two years) or a bar
- The purpose of the loan.
- The number of loans at issue.
- The number of customers involved in the respondent's borrowing or lending arrangements.
- Whether the loan was documented through a loan agreement or other written instrument.
- The dollar amount, duration, interest rate, repayment schedule, and other terms of the loan and whether they are reasonable.
- Whether the respondent made payments in conformance with the loan agreement and has repaid, or attempted to repay, the loan.
- The age, financial condition, and financial sophistication of the customer.
- Whether the respondent made any misrepresentations to the customer.
- Whether the respondent misled his or her employer member firm about the existence of the loan or otherwise concealed the activity from the firm.
ACCOUNT LEGALLY PAID IN FULL FOR LESS THAN THE FULL BALANCE: $38,000.00.The BrokeAndBroker.com Blog "Borrowing" ArchivePDF Copy of Bill Singer, Esq.'s Borrowing Rule Analysis