The Financial Industry Regulatory Authority ("FINRA") Rule 3240: Borrowing From or Lending to Customers sets forth the circumstances under which registered persons may lend to or borrow from customers. I don't particularly like the Borrowing Rule -- specifically, I think it is written in an overly complicated fashion and gets into areas that I am not convinced regulation needs to go. On the other hand, I understand the motivation behind the Borrowing Rule and also appreciate the wisdom of proscribing certain stockbroker-customer loans. Alas, I am caught up in a cloud of ambivalence on the topic. Consider this recent FINRA settlement involving a loan between a stockbroker and his customer.
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, Paul F. Gans, Jr.submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Barry Paul F. Gans, Jr., Respondent (AWC 2014043897201, August 18, 2015).
In 1981, Gans first became registered and in 2000, he was registered with FINRA member firm Raymond James Financial Services, Inc., where he remained until his December 2014 termination.
A Personal Loan to a Friend
The AWC alleges that on July 31, 2014, Gans made a personal loan of $20,000 to a close family friend for the purpose of helping to fund the friend's family-owned auto dealership. Pointedly, the loan was not undertaken pursuant to a mere handshake between friends but was memorialized as a promissory note setting forth a three-year term with 8% annual interest. At the time of the loan, the friend had a retirement account at Raymond James that Gans serviced.
Contrary to Raymond James' policies and procedures, Gans did not obtain from his employer prior written approval to make the loan; and, further, he did not disclose the loan to the firm. According to online FINRA BrokerCheck records as of September 10, 2015, Raymond James "Discharged" Gans on November 20, 2014, based upon allegations of:
FAILURE TO DISCLOSE AN OUTSIDE BUSINESS ACTIVITY IN VIOLATION OF THE FIRM'S POLICIES AND PROCEDURES.
FINRA deemed Gans' conduct to constitute violations of FINRA Rules 3240 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Gans a $5,000 fine and a ten-business-day suspension from association with any FINRA member in any capacity.
Bill Singer's Comment
Assuming that the AWC presented the appropriate fact pattern, we must take note that no allegation was made by the regulator that the family friend had complained about any aspect of the loan. Although Raymond James discharged Gans based upon an alleged "outside business activity," there is no indication that such pertained to the loan at issue.
Clearly, Gans failed to comply with his employer's protocol when he did not obtain the firm's prior approval of the loan to the customer and did not provide prior written notice to the firm. If Raymond James fired him for that misconduct, it sure as hell is not indicated in the AWC or in the BrokerCheck records. On the other hand, if Raymond James had based a discharge decision on those failures, the employer would not have been acting unreasonably. Once again, ambivalence comes into play. And, let's not forget that the "loan" at issue in this matter was not the typical customer-to-stockbroker proposition but the reverse: Gans lent money to a friend, who also happened to be a customer.
All of which brings us to FINRA's willingness to accept a settlement offer from Gans calling for a $5,000 fine and 10-business-day suspension. I'm not sure why FINRA needed both a four-figure fine and a suspension under the circumstances here but, as I often note when discussing regulatory settlements, Gans signed off on it and it's not my place to second guess. If he's happy, that's fine with me.
READ a detailed analysis of FINRA Rule 3240: Borrowing From or Lending to Customers by veteran regulatory lawyer Bill Singer