January 29, 2020
Featured in today's FINRA regulatory settlement is the hot-button issue of a stockbroker receiving a loan from a customer, who was a widow. Further, that same widow also paid for three vacations for that same stockbroker. Shortly after the loans and the gifts, the widow died. Not exactly a warm and fuzzy picture.
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, Kerry D. Wills submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Kerry D. Wills, Respondent (FINRA AWC 2017056557101)
The AWC alleges that Wills was first registered in 1985, and by November 2009, he was registered with FINRA member firm First Western Securities, Inc. The AWC asserts that Wills "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory-organization."
The Widow and the Stockbroker
The AWC alleges that over 30 years ago, an individual identified in the regulatory settlement as "Customer A" became Wills' client after he had:
assisted Customer A
with probate proceedings following the death of Customer A's spouse. Customer A
requested Wills's assistance, because Wills had previously provided financial services to
Customer A's husband and other family members. During that time, Customer A
developed a close relationship with Wills. Wills provided personal care to Customer A
over the last several years of her life that included handling healthcare, maintaining her
properties, and paying bills.
In May 2012, Wills borrowed $150,000 from Customer A to cover expenses incurred in
litigation. At the time of the loan, Customer A maintained accounts at First Western, and
Wills was the broker of record assigned to Customer A's accounts. The loan was
memorialized with a promissory note that provided for a ten-year term and a 2% interest
rate. Wills never disclosed the loan to his firm or otherwise sought an exemption from
the Firm's procedures prohibiting the acceptance of a loan from a firm customer.
Wills made one annual payment on the loan in January, 2014, but Customer A never
cashed the check. Customer A passed away six months later, leaving a trust document
that provided for loan forgiveness.
FINRA deemed Wills above-cited conduct to constitute violations of FINRA Rules 3240: Borrowing From or Lending to Customers and 2020
In addition to the alleged violation involving the loan, the AWC alleges that in further violation of FINRA Rule 2010:
In 2013 and 2014, Wills accepted gifts of approximately $19,500 in travel expenses
from Customer A. Specifically, Customer A paid for the airfare and tickets for three
international cruises for Wills. Wills accompanied Customer A on the three trips,
providing personal care and assistance with travel logistics. Wills did not disclose the
trips to the Firm or report the trips on the Firm's Gifts and Gratuities log.
In accordance with the terms of the FINRA AWC, the self-regulator imposed upon Wills a $10,000 fine and a six-month suspension from association with any FINRA member in any capacity.
Bill Singer's Comment
Your initial response to FINRA's sanctions may be that they are on the light side -- absurdly so. Frankly, that was my first reaction -- and then I went back and re-read the AWC. Somewhat lost in the AWC is FINRA's concession that:
[C]ustomer A developed a close relationship with Wills. Wills provided personal care to Customer A over the last several years of her life that included handling healthcare, maintaining her properties, and paying bills.
I do not offer that characterization to excuse any of Wills' cited conduct but he does not necessarily come off as a predator who had honed in on a vulnerable customer. To the contrary, it appears that Wills and Customer A had, in fact, "developed a close relationship," and among the attributes of that relationship were Wills' helping Customer A with many personal and professional aspects of her life.
Are you entitled to be cynical and question Wills' motives? Of course, have at it.
Are you justified in worrying whether Customer A was fully aware of her actions? Clearly, Wills' conduct invites such a concern.
Notably, where FINRA could have unloaded on Wills and characterized him in a horrific light (which is often the case in these types of cases), the AWC is curiously dispassionate. I suspect that the realities underlying the cited loans and gifts may have prompted moderation from the self-regulatory-organization. Our initial reaction to Wills receiving a a $150,000 loan in 2012 from Customer A is likely tinged by our awareness that the customer was a widow. Unlike many inappropriate loans whereby an unscrupulous stockbroker preys on the elderly and obtains funds without any written documentation or promise to repay, the AWC offers us a very different scenario:
[T]he loan was memorialized with a promissory note that provided for a ten-year term and a 2% interest rate. Wills never disclosed the loan to his firm or otherwise sought an exemption from the Firm's procedures prohibiting the acceptance of a loan from a firm customer.
Wills made one annual payment on the loan in January, 2014, but Customer A never cashed the check. Customer A passed away six months later, leaving a trust document that provided for loan forgiveness.
As such, the loan was documented via a promissory note and included a defined term and interest rate. Moreover, not only did Customer A not cash the first and only annual payment from Wills (for reasons not set forth in the AWC) but her death in June 2014 activate the loan forgiveness. Frankly, I wish the AWC had offered more explanation as to how and why the loan was configured as it was.
Similarly, while we can get in high dudgeon about Customer A paying $19,500 in travel expenses, we should also note that "Wills accompanied Customer A on the three trips, providing personal care and assistance with travel logistics."
Notably, there is no allegation in the AWC that Customer A's estate or heirs filed a lawsuit against Wills, and there is no allegation that he was under any criminal or civil investigation by any government agency. On the other hand, online FINRA BrokerCheck records as of January 29, 2020, disclose two items for Wills: 1) the instant AWC; 2) the 2003 dismissal of a misdemeanor charge in federal court for "obtaining or excercising [sic] unlawful possession over the property of another." That latter item leaves us ill at ease but we must acknowledge that the charge was dismissed.
Ultimately, the Wills AWC seems more about a stockbroker's failure to notify his employer-firm about his acceptance of loans and gifts from a customer -- notwithstanding that the stockbroker and the customer had a close, personal relationship. Such mitigating factors may explain why FINRA settled the matter for $10,000 and a six-month suspension rather than for a larger fine and/or a Bar.