FINRA has a ginormous rulebook --- yeah, "ginormous," look it up, it's a real word. Alas, so many rules and so little time. In today's featured FINRA regulatory settlement, our publisher Bill Singer read through the underlying facts and was puzzled by the odd characterizations. Bill figures that the Respondent probably violated at least one of FINRA's rules. Bill just doesn't think it's the one that FINRA cited -- or, perhaps, FINRA chose the right rule but didn't accurately explain the specifics of the conduct at issue. In the end, it looks like the regulator is trying push a three-prong plug into a two-prong outlet.
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, Anthony John Cummings submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Anthony John Cummings, Respondent (AWC 2016051104901, May 9, 2017).
The AWC asserts that Cummings was initially registered in 2001 and, thereafter, was registered from March 2002 through July 2016 with FINRA member firm Edward D. Jones & Co., L.P. The AWC asserts that Cummings had no prior disciplinary history with the Securities and Exchange Commission, FINRA, any other self-regulatory organization or any state securities regulator.
Misuse of Funds?
The AWC asserts the following about the underlying facts and violations at issue:
FACTS AND VIOLATIVE CONDUCT
NASD Rule 2330 provides that no person associated with a member shall make improper use of a customer's securities or funds. Conversion is an intentional and unauthorized taking of and/or exercise of ownership over properly by one who neither owns the property nor is entitled to possess it. Conversion of customer funds is a violation of NASD Rules 2330 and 2110.
Between September 2008 and April 2009, while registered with Edward Jones, Cummings solicited $60.000 from a Firm customer of his for personal expenses The funds came directly from the customer's account at Edward Jones. Cummings kept the funds and failed to repay his customer. Cummings acted unethically by accepting the funds without the means or intent to repay the customer. As a result Cummings converted the customer's funds.
By virtue of the foregoing, Cummings violated NASD Rule 2330; NASD Rule 2110; and FINRA Rule 2010.1
Footnote 1: Effective December 15, 2008, NASD Rule 2110 was renumbered FINRA Rule 2010
In accordance with the terms of the AWC, FINRA imposed upon Cummings a Bar in all capacities from associating with any FINRA member firm.
Bill Singer's Comment
In pertinent part, former NASD Conduct Rule 2330: Customers' Securities or Funds states:
(a) Improper Use
No member or person associated with a member shall make improper use of a customer's securities or funds.
If you read the superseded NASD Conduct Rule 2330: Customers' Securities or Funds, you will see that this former rule addressed the "possession and control of securities," and set forth requirements for the lending, segregation, and identification of customer securities. In addition, Rule 2330's paragraphs involve prohibitions against guaranteeing a customer against losses and sharing in an account's profits/losses. Truly, none of what's covered in Rule 2330 regulates the lending by the Edward Jones customer to Cummings.
As asserted in the AWC, Cummings had "solicited $60,000" from the customer, got the funds, and, thereafter, "failed to repay." Missing from all that description is a concise characterization by FINRA as to the nature of the cited transaction. For example, if the funds were a "gift" from the customer to Cummings, then there would not be an obligation to "repay." So, it's pretty likely that Cummings didn't solicit a "gift." If the customer "invested" $60,000 through Cummings and expected to be given shares of stock or some promised dividend, then there might not be a legal obligation to "repay." Again, it's pretty likely that the customer didn't think he was investing $60,000 with Cummings. Consequently, the only logical inference I can draw is that the customer thought he was lending $60,000 to Cummings, who would then repay the loan. Why doesn't the AWC use the terms "loan" or "borrowing"?
In furtherance of its conversion theory, the AWC makes a point that the "funds came directly from the customer's account at Edward Jones." Note that the AWC doesn't allege that Cummings removed the funds from the customer's account without prior authorization. The AWC doesn't allege that the customer had contemporaneously complained about Cummings' removal of funds from his account. In fact, it seems pretty clear that the understanding was that the customer had authorized Cummings to transfer the funds or that the customer had transferred the funds out on his own accord. After all, if Cummings had improperly removed funds from his customer's account, I'm sure that event would have been separately charged by FINRA. Ultimately, the fact that the funds came "directly from the customer's account," seems of little consequence to the alleged misconduct because the non-payment would likely have taken place regardless of the source of the $60,000.
Ultimately, the AWC presents us with a messy fact pattern from which it could be inferred that Cummings either begged for the money, or borrowed the money, or stole (converted) the money. What's the point of all the beg, borrow, or steal confusion?
From my reading of the AWC, I see Cumming borrowing from a customer and not repaying a loan. During the relevant times, the following NASD/FINRA rules were in effect:
Effective Up To June 13, 2010:
FINRA Conduct Rule 2370: Borrowing From or Lending to Customers
(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. . .
Effective After June 14, 2010:
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: . . .
Given my familiarity with FINRA's "Borrowing" docket, I am at an absolute loss to explain the charging in this case. FINRA may have gotten it right but the AWC sure as hell doesn't explain why the entire transaction at issue isn't characterized as a "loan." In support of my criticism of the charging in this case, let me call your attention to FINRA's online BrokerCheck files for Cummings, in which we find, as of May 12, 2017, under the heading "Customer Dispute -- Settled" a disclosure by Edward Jones that it had received a customer complaint on August 9, 2016, seeking $70,000 in damages based upon allegations that:
Client alleges that she loaned her financial advisor approximately $70,000 in 2008 and 2009.
In a status update posted on February 27, 2017, Edward Jones disclosed that it had settled the customer's complaint for $99,500.
Y'all notice that Cummings' employer filed its BrokerCheck disclosure with the phrase "she loaned her financial advisor . . ." L . . . O . . . A . . . N . . . E . . . D. Them ain't my words. They sure as hell ain't the AWC's words either.
To further make my point, consider yet another online BrokerCheck disclosure by Edward Jones in which the firm states that it had "Discharged" Cummings on July 28, 2016, based upon allegations that:
Mr. Cummings borrowed money from a Firm client without the Firm's knowledge.