July 9, 2019
I need to borrow some money. An old family friend said he's ready to make the loan. I'll put it in a promissory note. He's more than happy to help me out. Unfortunately, my employer broker-dealer only allows for loans from family members. The friend's not a family member. Now what?
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, Scott Mason, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Scott Mason, Respondent (FINRA AWC 2017056094901, July 3, 2019)
The AWC asserts that Mason entered the securities industry in 1999, and by December 2013, he was associated with FINRA member firm LPL Financial LLC., where he remained before his termination in October 2017. The AWC asserts that "Mason has no prior disciplinary history."
Family Friend GR
The AWC alleges in part that on six separate occasions during the relevant period from April 2015 to August 2016:
[M]ason borrowed a total of approximately $108,360 from GR, a family friend who was also a client of both Mason and the Firm. Only one of the loans, a $50,000 loan from GR to Mason in April 2015, was documented by a promissory note pursuant to which Mason agreed to repay the principal, with interest, on or before December 31, 2015. Mason used the borrowed funds for personal expenses, including an income tax bill and bills related to real estate transactions. As of August 2017, Mason repaid GR in full, with interest.
"NO" But With Limited Exceptions
During the relevant times, LPL's written supervisory procedures ("WSPs") imposed a blanket prohibition on reps borrowing from "anyone," which included "customers" and was more expansive than that limiting group. Notwithstanding LPL's "NO" to "anyone" policy, the firm's WSP noted that:
[e]xceptions may be made only in limited circumstances, such as family relationships pursuant to FINRA regulation.
Even given that possible limited exception for family loans, GR was not a family member. On the other hand, perhaps if Mason had asked LPL for an exception for GR, the firm may have granted a waiver -- unfortunately, Mason never asked. The AWC alleges that Mason did not seek prior approval for, or disclose his receipt of, the loans to the LPL. Further, although GR had granted Mason an additional two years to repay the April 2015 loan, Mason also did not notify LPL of said loan modification. Finally, Mason allegedly falsely stated on an LPL Annual Compliance Questionnaire that he had not borrowed from or lent money to any firm customer.
Download a PDF Copy of the BrokeAndBroker.com Blog's "FINRA Borrowing Rule" analysis by veteran industry lawyer Bill Singer
Online FINRA BrokerCheck records as of July 9, 2019, disclose under the heading "Employment Separation After Allegations" that LPL had "discharged" Mason on October 5, 2017, based upon allegations of:
Borrowing money from a client and being a joint owner on client bank account, in violation of Firm policy.
FINRA deemed Mason's non-disclosed borrowing activities as noted above to constitute violations of FINRA Rules 3240 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Mason a $5,000 fine and a four-month suspension from association with any FINRA-regulated broker-dealer in any capacity.
Corrective Action Statement
The Mason AWC includes a provision under "III. OTHER MATTERS" that states:
D. I may attach a Corrective Action Statement to this AWC that is a statement of demonstrable corrective steps taken to prevent future misconduct. I understand that I may not deny the charges or make any statement that is inconsistent with the AWC in this Statement. This Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.
Respondents in a settled disciplinary action may submit a Corrective Action Statement and/or a Mitigation Statement to NASD Regulation. This article clarifies the NASD policies regarding such Statements.
A Letter of Acceptance, Waiver and Consent (AWC) permits a respondent in an NASD Regulation disciplinary action to settle the matter prior to the filing of a formal complaint. A Corrective Action Statement may be attached to the AWC, which is filed with the SEC and available to the public, provided such statement is: (1) limited to demonstrable steps taken to correct a problem associated with the disciplinary action; (2) generally no longer than 2-3 pages; and (3) contains the following legend:
This Corrective Action Statement is submitted by the Respondent. It does not constitute factual or legal findings by NASD Regulation, Inc., nor does it reflect the views of NASD Regulation, Inc., or its staff.
Separately, respondents may submit a Mitigation Statement for consideration by NASD Regulation and the National Adjudicatory Council. Generally, such Statements are used to describe mitigating circumstances surrounding the violation for the decision maker to consider in its review of the terms of a settlement. Unlike Corrective Action Statements, Mitigation Statements are not attached to the AWC or public order.
Respondents may also settle a matter after the complaint is filed by submitting an Offer of Settlement. While both Corrective Action and Mitigation Statements may be submitted to NASD Regulation in connection with Offers of Settlements, these Statements are not attached to the final Order Accepting the Offer of Settlement, which is filed with the SEC and available to the public.
NASD Regulation will not accept Corrective Action or Mitigation Statements that deny the allegations or are inconsistent with the findings in the settlement. . .
FINRA AWCs permit the attachment of a Corrective Action Statement to demonstrate the steps taken by a respondent to prevent future misconduct subject to the understanding that such an attachment may not deny the charges or make any statement that is inconsistent with the AWC. Further the Corrective Action Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.
I am no fan of Corrective Action Statements and rarely, if ever, advocate their use. Given that the premise of an AWC is a settlement made without admitting or denying the findings, I don't understand why anyone would voluntarily submit a statement that typically make admissions of facts and findings; promises to correct situations that have not necessarily been acknowledged or admitted to; and, in the end, simply draws more undesired attention to the matter. If you feel compelled to attach a Corrective Action Statement, then ask yourself if you might not be better advised to argue your case before a Hearing Panel and, if necessary, on appeal. If you conclude that the costs and/or risks of contesting the charges aren't worth it, then just sign the damn AWC and get over it.
Some think that a Corrective Action Statement gives you a parting shot at unfair regulation or an opportunity to put your own spin on the matter. I would suggest that you simply avoid the temptation. As with any post-game analysis, it's just not going to change the score. Moreover, if during subsequent examinations, a regulator finds that you engaged in similar misconduct to that discussed in your statement, or, it is alleged that you failed to implement the promised revised policies and procedures, your own words may prove blunt instruments used to beat you into submission.
I notice that some settling Respondents submit a Corrective Action Statement that details a proposed or in-place supervisory scheme at a current FINRA member firm -- which takes on the trappings of a proposed scheme of enhanced supervision of a statutorily disqualified individual attendant to the filing of a FINRA Membership Continuance Application (the "Form MC-400") http://brokeandbroker.com/PDF/MC400.pdf. I find this written proposal an ill-advised practice because most AWC Respondents are merely suspended and fined and are not subjected to any further regulatory constraints after their time is served and the dollars paid. If FINRA wants to impose specific supervisory conditions upon a settling Respondent or require the submission of an undertaking by the registered rep or member firm, then so be it. On the other hand, why any member firm would draft an extensive list of compliance Do's and Don'ts to which a suspended rep would be subjected upon his or her return to production baffles me. Frankly, I'm old school: Don't volunteer anything and don't answer questions that weren't asked.
I appreciate that some employers/member firms think that memorializing an enhanced scheme of oversight for a settling registered person gives the firm a hedge against future misconduct, but I don't agree with that premise. If a firm harbors such concerns about a particular associated person that the member feels compelled to memorialize in a FINRA settlement agreement an extensive, proposed supervisory protocol, then maybe that firm should terminate the individual. You think that's harsh? Just imagine what some customer's lawyer will do with that published list of proposed corrective actions if the stockbroker engages in disputed conduct. A savvy claimant's lawyer will cite all that voluntary language attached to an AWC about strict supervision as proof that the employer brokerage firm knew that the stockbroker was a compliance nightmare requiring enhanced oversight, which, it will be argued, did not occur in violation of the specific representations to a self-regulatory-organization as part of a disciplinary settlement. Yeah, I know, when I put it like that, it doesn't sound so good. Trust me, it will be put like just like that. Notwithstanding my opinions, Mason apparently determined that it was advisable to submit this Corrective Action Statement:
Subject: Statement of Corrective Action
This Corrective Action Statement is submitted by the Respondent. It does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA, or its staff. This pertains to the violative conduct noted in the Letter of Acceptance, Waiver and Consent on matter #2017056094901.
My commitment to FINRA, the SEC, any Broker Dealer and any client is to never borrow or comingle bank accounts or funds ever again.