May 7, 2013
Veteran Wall Street lawyer Bill Singer doesn't like this regulatory settlement involving an alleged violation of the Borrowing Rule. He thinks that the underlying transaction was fairly complicated and may have lulled the stockbroker into failing to recognize that any disclosure obligations were triggered. In the end, this case smacks more of a regulatory speed trap designed to generate fines than a compelling effort to educate the industry and protect the public -- which, after all, is the supposed mission of Wall Street's regulators.
The Book of Jobe
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, Timothy H. Jobe submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Timothy H. Jobe, Respondent (AWC 2010022680701, May 2, 2013).
Jobe first became registered in 1973; from 1993 until June 1, 2009, Jobe was registered with FINRA firm Merrill Lynch, Pierce, Fenner & Smith Incorporated and from June 1, 2009 until March 19, 2012, Jobe was registered with FINRA firm Morgan Stanley. The AWC asserts that Jobe had no prior relevant disciplinary history.
A 30-Year Relationship
For some 30 years leading up to 2007, a husband and wife maintained securities brokerage accounts serviced by Jobe as their account executive. In 2007, the surviving spouse died and assets from the brokerage account at Merrill were used to form a foundation. Following the deaths of both spouses, that entity became a customer serviced by Jobe. Additionally, the foundation board named Jobe as a director, but he declined the position and named an attorney as his replacement.
Around the fall of 2007, Jobe entered into an oral agreement with the attorney/director through which the foundation would purchase a residential property (Lisbon Place in Escondido, CA) owned by Jobe and his wife.
Around November 2007, Jobe requested that a real estate agent conduct an investigation of market conditions for the purpose of providing an opinion on Lisbon Place property's value. On June 11, 2008, the realtor provided Jobe with a "Comparative Market Analysis," which placed a $500,000 valuation on the property as of November 2007.
Morgan Stanley
In June 2009, Jobe left Merrill and became registered with Morgan Stanley, and the foundation transferred its account with him.
The Sale
On or about July 31, 2009, Jobe and his wife sold the Lisbon Place property to the foundation. Although the parties had initially contemplated a cash transaction, the foundation requested and Jobe agreed to an initial amount of $170,000, with the balance payable over the ensuing three years. Accordingly, around July 31, 2009, the foundation paid Jobe and his wife the $170,000 "down payment" and entered into a Deed of Trust wherein Jobe and his wife became the lenders for the balance of the purchase price.
Under the terms of the Deed of Trust, the foundation entered into a $330,000 Promissory Note (5 1/2 % interest per annum until paid) to Jobe and his wife, secured by the deed. Under the terms of the Promissory Note, all principal and outstanding interest was to be paid in full by July 30, 2019. The AWC asserts that the Promissory Note was paid in full by August 10, 2011.
The Rulebook
Under the then applicable former NASD Rule 2370, registered persons were prohibited from lending money to any customer of such person except under specific conditions, which allegedly were not applicable in his case. FINRA alleged that Jobe's conduct as described above constituted lending to a customer (the foundation) in violation of the regulator's rules.
In accordance with the terms of the AWC, FINRA imposed upon Jobe a $5,000 fine and a 60-day suspension from associating with any FINRA member firm in any capacity.
Bill Singer's Comment
Sorry, but I don't like this case and I certainly don't agree with the imposition on Jobe of a whopping 60-day suspension on top of the $5,000 fine.
Regulation serves an important purpose in protecting the public from non-compliant industry professionals -- and that protection is necessary and needs to be rigorously enforced. In my years of representing public customers and industry participants, I have been a consistent advocate for that position and have never, ever suggested otherwise.
On the other hand, sometimes regulation seems little more than a speed trap designed to generate revenue. This form of gotcha regulation ultimately undermines the effectiveness of regulation and motivates industry participants to cover up their misconduct, which tends to make bad situations far worse. You are free to place Jobe anywhere along the spectrum from fair and appropriate to absurd and mercenary. For me, this seems like an issue in which a registered person became involved in a real estate transaction but failed to recognize that the dealings were involving a customer in a way that should or might have tripped the Borrowing Rule.
Nothing in this AWC suggests or asserts that Jobe intentionally entered into the real estate transaction in order to defraud the buyer or to evade detection by Merrill Lynch's or Morgan Stanley's compliance departments. Moreover, I see absolutely no benefit from fining this registered person and suspending him; at best, this alleged infraction could just as sensibly been resolved with a letter of caution or an undertaking from Jobe in which he acknowledged the regulatory/compliance issues and promised to make timely notice of such borrowing in the future.
The full-text of 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.
.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.
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