How Long Has This FINRA Violation Been Going On?

September 8, 2017

How long is too long for a Wall Street regulator to investigate allegations of misconduct and either file charges or settle? In a recent FINRA settlement, we are confronted with misconduct that allegedly took place in 2009. Despite having eight years of accumulated wisdom, the self-regulator doesn't explain why a former employer characterized the misconduct as an outside business activity but FINRA charged a private securities transaction. Maybe another two years -- the passage of a decade -- might help to get everything nice and neat?

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, John Hoyt Williams, Jr. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of John Hoyt Williams, Jr., Respondent (AWC  2013037675101, August 28, 2017).

Williams entered the securities industry in October 1993 as an associated person with a FINRA broker-dealer and its affiliate insurance company. Williams first became registered in 1994. The AWC asserts that in 1999, Willams was registered with FINRA member firm LPL Financial LLC, where he remained until he registered with another FINRA member firm in August 2013. The AWC asserts that "Williams does not have any disciplinary history with the Securities and Exchange Commission, FINRA, any other self-regulatory organization or any state securities regulator."

Collateral and Loans

The AWC asserts that between February and March 2009, Williams referred three LPL customers to a company referred to in the AWC only as "Company." The purported purpose of the referrals was to "obtain non-recourse loans secured by the customers' securities." In describing the the proposed transaction, the AWC states:

[W]hen the securities were pledged as collateral for these non-recourse loans, the Company could not obtain repayment from the customers beyond the pledged collateral. The customers pledged securities valued at approximately $700,000 for non-recourse loans totaling approximately $500,000. The customers ultimately realized gains from the transactions. However they were exposed to the risk of suffering losses in the amount of $200,000.  

The AWC alleges that Williams facilitated the transactions by recommending that the three LPL customers pledge securities as collateral for the Company's loans. The AWC characterizes, in pertinent part, Williams' role in the transactions having assisted the customers with completing and submitting the transaction documents. The AWC asserts that by April 2, 2009, Williams had received $12,880 in  referral fees from the Company.

Private Securities Transactions!

FINRA deemed the cited transactions as constituting Williams' participation in three private securities transactions ("PSTs") without providing prior written notice to LPL and receiving written approval.  The AWC further asserts that:

In addition, on a questionnaire Williams submitted to LPL during 2010, Williams stated that he had not received any referral fees of this type.  

Outside Business Activities?

According to online FINRA BrokerCheck records as of September 8, 2017, LPL "discharged" Williams on July 5, 2013, based upon allegations of:



FINRA deemed Williams' conduct to constitute violations of  NASD Rule 3040: Private Securities Transactions of an Associated Person (which was superseded by FINRA Rule 3280 in April 2015 and thereafter amended) and FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Williams a $10,000 fine and ordered him to disgorge the $12,880 in referral fees via payment to FINRA.

Bill Singer's Comment

Peevish, Snarky, and Rankles

Let me start with an admittedly peevish observation concerning this portion of the AWC:

[W]hen the securities were pledged as collateral for these non-recourse loans, the Company could not obtain repayment from the customers beyond the pledged collateral. The customers pledged securities valued at approximately $700,000 for non-recourse loans totaling approximately $500,000. The customers ultimately realized gains from the transactions. However they were exposed to the risk of suffering losses in the amount of $200,000.  

Not to be too snarky here but, you know, like, ummm, duh . . . a non-recourse loan is one in which, let's see, oh, yeah, in the event of a default on the loan there is no recourse for the lender beyond the pledged collateral.  So, yeah, of course, anyone pledging collateral for a non-recourse loan would be exposed to liability for the full value of the collateral. That's the whole point of making the transaction non-recourse. Accordingly, the issuer of such a non-recourse loan would be foolish not to take into consideration the quality of the collateral and in the case of a pledge of securities, an issuer would normally require a valuation in excess of the principal of the loan because the prices of stocks can decrease over time.

The aspect of the quoted AWC language that rankles me (and, my, I do not like rankles) is that it not only annoyingly restates the obvious but gets in a bit of what I see as a regulatory "kidney punch" by admonishing that the pledging customers were exposed to the "risk of suffering losses in the amount of $200,000." Talk about restating the obvious squared! When was the last time you saw a FINRA AWC or any regulatory Decision state that when a customer purchased, say, $200,000 of Facebook or Apple stock that "they were exposed to the risk of suffering losses in the amount of $200,000?"  

It comes off as disingenuous when a financial services regulator wrings its hands over how customers realized gains from their pledge of collateral but were exposed to the "risk" of losing the full amount of their pledged securities. Again, ummm, you want me to explain the mechanics of pledging collateral for a loan? Do the same risk-reward concerns not arise with similar import within the context of an investment in a municipal bond or REIT or any number of investments? Do I not incur the same risk when purchasing a multi-million vacation home in the Florida Keys?

If FINRA wants to allege that Williams' customers had complained that they were unaware of how a non-recourse loan functions or were mislead by Williams about the risk of their pledged securities, then the regulator should have noted such allegations in the AWC. I am not arguing that the lack of such complaints by the three customers would alter the existence or legitimate concerns about an unauthorized PST or OBA. Such complaints are beside the point. A violation is a violation even if a customer is thrilled with her profits from such a questioned transaction. On the other hand, in a FINRA  regulatory settlement involving alleged misconduct that's over eight years old, the regulator should make more of an effort to place events in their proper context and with the benefit of hindsight that such an extended lapse of time affords.


Seems like just the other day when I wrote in "FINRA Calls PST Then OBA Then PST. Omaha! Omaha!! Omaha!!!" ( Blog, August 28, 2017) :

In a recent Financial Industry Regulatory Authority ("FINRA") regulatory settlement, a stockbroker was barred from the industry as a result of allegedly failing to properly notify his employer and obtain its approval for soliciting firm customers to invest in his own company. As Blog's publisher Bill Singer, Esq. notes, the published settlement is a bit perplexing because it seems to be start off as an Outside Business Activity violation but winds up as a Private Securities Transaction violation. With the football season nearly upon us, let's just say we got a bit of a regulatory misdirection play going on here.

Oh well, here we go again!

In today's Williams AWC, we have a BrokerCheck disclosure under the heading "Employment Separation After Allegations" in which a FINRA member firm could not be clearer as to why it had discharged Williams on July 5, 2013:


That BrokerCheck disclosure doesn't jibe with what's set forth in the "Background" section of the AWC:

Williams entered the securities industry in October 1993 when he became associated with a FINRA regulated broker-dealer and its affiliate insurance company. In January 1994, Williams became registered with FINRA as a General Securities Representative ("GSR'? through associations with both entities, until April 1995. In January 1997, Williams became associated with another FINRA member as a GSR, where he remained until September 1999. At that time, Williams became associated with LPL Financial LLC ("LPL") where he served as a GSR until July 5, 2013. In August 2013, Williams joined another FINRA member, where he served as a GSR until July I, 2017. Williams is not currently associated with a FINRA member . .

In the BrokerCheck disclosure, we are informed that Williams was "discharged" for OBA. In the AWC's presentation of his background, there is no reference to his July 2013 discharge by LPL. Frankly, that's not a great bit of regulatory work by FINRA.

Then there's the apparent disconnect in what Williams did or didn't do in a compliant manner.  LPL asserts in its BrokerCheck disclosure that it terminated Williams in July 2013, for his engaging in OBA. If, in fact, the OBA pertained to the non-recourse loans/collateral conduct cited in the AWC, then how is it that FINRA found that Williams had engaged in PST violations? If FINRA is right, then the BrokerCheck disclosure should be amended to conform to the actual findings; and if the BrokerCheck disclosure is right, then FINRA needs to re-think its arbitrary classification of the underlying acts. No, I'm not saying that Williams didn't do anything wrong or that he should not be sanctioned. If the issue here is whether his misconduct was OBA or PST, then once we resolve the violation, he should be sanctioned.

How Long Has This Been Going On?

The loans at issue were entered into in 2009; and, as such, it has taken eight years for FINRA to finalize its regulatory action. Even at my most charitable use of the calendar, FINRA was on notice of Williams' potential violation by July 2013 when LPL filed its termination disclosure. I mean, c'mon, more than four years from the date of termination in order to reach a regulatory settlement with these facts? Was Williams denying the existence of the loans for four years? Was he denying his receipt of compensation? What's the explanation for such a delay in resolution?

At the end of the day, is there any quality control at FINRA before it releases its published materials to the public and industry? Does anyone in management take the time to read anything before it's okayed for release?