It's All Going To Pot In FINRA Settlement

March 23, 2017

Was a time when marijuana was the thing of folded five-dollar bills, scared kids, and ripped-open boxes of Oreo cookies. Times have changed. Now it's big business. Public companies. Wall Street is rolling in the green. Alas, FINRA just harshed the mellow of a stockbroker who was stoking the fires, so to speak, of a pot biz. His career hasn't completely gone up in smoke but he's going to have to chill on the sidelines for a few months. 

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, Mark Schklar submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Mark Schklar, Respondent (AWC 2015044509301, March 8, 2017).

The AWC asserts that Schklar was first registered in 1991 and by November 2012 was registered with FINRA member firm BB&T Securities, LLC. The AWC asserts that he had no prior relevant disciplinary history with the Securities and Exchange Commission, any self-regulatory organization, or any state securities regulator.

Gone to Pot

From February 2013 through January 2015, the AWC alleges that Schklar recommended and facilitated the sale of eight million shares of a company that manufactured equipment used to grow marijuana. Those sales were made to four investors for a total of $285,250. FINRA deemed that pursuant to FINRA Rule 3040: Private Securities Transactions, Schklar's conduct involved a private securities transaction ("PST") and he was required to provide prior written notice to and obtain prior written approval from member firm BB&T. FINRA deemed Schklar's conduct to constitute a violation of FINRA Rules 3040 and 2010.

Neither a Borrower Nor a Lender Be

The AWC also asserts that in February 2014, Schklar lent $80,000 to a BB&T customer, who is referenced only as "LS." At the time of the loan, BB&T's policies and procedures purportedly prohibited registered representatives from lending money to customers except when said transaction satisfied a permitted exception, which was allegedly not the case here. The AWC asserts that Schklar not seek the requisite permission from BB&T to undertake the loan (and, as such, no such permission was granted) but he had also answered "NO" on the firm's 2014 Annual Compliance Questionnaire to whether he had borrowed or lent money to any customer during the prior year. FINRA deemed the loan to constitute a violation of it Rule 3240 and 2010.


In accordance with the terms of the AWC, FINRA imposed upon Schklar a $10,000 fine and an eight-month-suspension from associating with any FINRA member firm in any capacity.

Bill Singer's Comment

FINRA Rule 3240. Borrowing From or Lending to Customers states, in part:

(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: . . 

Notwithstanding that the overwhelming majority of Rule 3240 cases involve associated persons borrowing money from their customers, the fact remains that the rule also prohibits the lending of money by an associated person to their customers (unless various exemptive conditions are satisfied). For many industry persons, the prohibition against lending to a customer may not make sense. What's the harm? Why is this a problem?  In fact, there are a number of reasons to monitor such activity. Regardless of what you may think about the issue, keep in mind that lending to customers is subject to a regulatory rule. Try putting a $10,000 fine and eight-months of downtime into your pipe and smokin' it.