FINRA AWC Cites Prospective Customer, Possible Investor, and Proposal

September 4, 2019

When it comes to regulatory documents, I'm a stickler for saying what you mean and meaning what you say. When I've finished reading a disciplinary decision or settlement agreement, it shouldn't end with a guessing game. I should understand the fact pattern. I should be persuaded by the rationale for sanctions. I should feel that justice was served by the end result. A recent FINRA regulatory settlement comes up short on a number of those aspects.

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, Jedediah Elvin Dahl, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Jedediah Elvin Dahl, Respondent (FINRA AWC 2017055477301).

The AWC asserts that Dahl entered the industry in 2008; and, in 2015, he was registered with FINRA member firm Merrill Lynch, Pierce, Fenner & Smith Incorporate. The AWC asserts that Dahl "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization."

The Prospective Customer

The AWC alleges that in July 2016, Dahl met with "GP," who is described as "a prospective customer . . ." and the owner of a start-up company referred to as "BBR." At the time of the July 2016 meeting, the AWC alleges that GP was attempting to raise $500 million via a bond offering for BBR.

SIDE BAR: Truly, I have no idea what the hell a "prospective" customer is or why the AWC uses that idiotic term. Almost everyone on the planet could be viewed as a "prospective" customer. More critically, why is  FINRA using such a nebulous characterization in a 2019 AWC that addresses conduct going back to 2016? If, in fact, GP became a customer of Dahl's, then set that out in the AWC. If, as we speak, GP never, ever became a customer of Dahl's, then who the hell gives a crap whether FINRA or anyone viewed him as a "prospective" customer?

The Potential Investor

The AWC alleges that shortly after their July 2016 meeting, GP introduced Dahl to a "potential investor in BBR." That potential investor is referenced in the AWC as "JD." 

Oh great -- now got a "prospective" customer introducing a "potential" investor to Dahl! 

The AWC alleges that "Dahl spoke with GP and JD about her potential investment in BBR, and how it might be structured." Was JD looking to invest $1 or was she prepared to tackle the entire $500 million? Was she looking to invest in the purported bond offering or just window shopping and shootin' the breeze? Was Dahl merely providing wholly generic comments about how any deal is typically structured? These questions should have been addressed by FINRA in the settlement agreement.

A Proposal For A Potential Investor

Moving ahead, the AWC alleges that about three months after the July 2016 meeting and conversation among GP, JD, and Dahl, that [Ed: "Firm" refers to Merrill Lynch]:

On October 26, 2016, Dahl prepared and provided a letter to GP for his use with JD and any other potential investors (the "October 26 Letter"). The October 26 Letter was printed on Firm letterhead, and described a proposal by which potential investors could open an account with Merrill Lynch and use a line of credit drawn against their Firm account to fund their investment in BBR. However, the October 26 Letter failed to provide a fair and balanced presentation and sound basis for evaluating the proposed investment in BBR, in violation of FINRA Rules 2210(d)(1)(A) and 2010. For example, the October 26 Letter stated that the proposed method of investment would keep the funds invested in BBR from being put directly at risk, preserve the invested funds if BBR defaulted, and "increase [the investor's] total returns . . . ." However, the October 26 Letter failed to balance its positive discussions about the proposed structure of the investment with adequate risk disclosures that explained that the potential investment was speculative, illiquid, and carried a high degree of risk, including the risks associated with leveraging the invested assets in a brokerage account to fund BBR.

The October 26 Letter also contained false or misleading statements, in violation of FINRA Rules 2210(d)(1)(B) and 2010. For example, Dahl described his relationship with BBR as a "partnership," whereby he would serve as a "financial intermediary between potential investors" and BBR when no such partnership existed. The October 26 Letter also contained false and misleading statements indicating that the proposed structure of the investment would cover any interest or management fees associated with the brokerage account, and preserve the capital invested in BBR. 

The November 2016 Update

The AWC alleges that Dahl updated the October 26th letter on November 11, 2016, and provided that new iteration to GP "to use when soliciting potential investors." Although largely identical to the older version, the November 11th letter purportedly:

[I]ncluded an additional paragraph containing forward-looking predictions of BBR's performance, in violation of FINRA Rules 2210(d)(1)(F) and 2010. Specifically, the November 11 Letter stated that BBR "intends to pay their investors 8%, plus cover Merrill Lynch's expenses. As such, the returns of the municipal bond portfolio will be received by the client as pure profit."

Municipal bond portfolio returns? What municipal bond portfolio? Where did this investment come from? 


Online FINRA BrokerCheck records as of September 4, 2019, disclose that Merrill Lynch had "discharged" Dahl on August 10, 2017, based upon allegations that:

Conduct inconsistent with Firm policy regarding selling away.

FINRA Sanctions

The AWC alleges that Dahl failed to submit copies of the October 26th or November 11th letters to Merrill Lynch in violation of FINRA Rule 2010 because said failures prevented the firm from fulfilling its FINRA Rule 3110(b) supervisory obligations. Further, the AWC alleges that the communications failed to comply with the standards set forth in FINRA Rules 2210(d)(1)(A), 2210(d)(1)(B), 2210(d)(1)(F).

In accordance with the terms of the AWC, FINRA imposed upon Dahl a $10,000 fine and a four-month suspension from association with any FINRA-regulated broker-dealer in any capacity. 

Bill Singer's Comment

Somewhat lost in all this regulatory and compliance hub-bub is the content of Footnote 1 in the AWC:

No individuals invested in BBR due to Dahl's misconduct.

By way of recap, we got a "prospective customer and a "potential" investor and what seems to be a fairly generic "proposal." We got misconduct involving a letter that sets forth parameters of a deal in which not a single individual undertook an investment of one penny. We even have the AWC conceding that Dahl's alleged misconduct did not prompt a single investor to invest. Yes, Merrill Lynch fired Dahl for "selling away," but there doesn't appear to have been any . . . you know . . . selling away because no one invested as a result of Dahl's alleged misconduct. 

As best I understand what the hell went on here, it seems to boil down to this allegation in the AWC:

[T]he October 26 Letter was printed on Firm letterhead, and described a proposal by which potential investors could open an account with Merrill Lynch and use a line of credit drawn against their Firm account to fund their investment in BBR. 

Frankly, Merrill Lynch had every right to be pissed off when Dahl used the firm's letterhead without the company's authorization. I'm not going to argue that point because I concur with both Merrill's and FINRA's concerns. As far as I'm concerned, the unauthorized use of letterhead is a fire-able offense absent a compelling explanation. On the other hand, the so-called "proposal" conveyed on the letterhead comes down to the very, very generic advice that:

potential investors could open an account with Merrill Lynch and use a line of credit drawn against their Firm account to fund their investment in BBR. 

That language hardly gets my undies in a bunch. There's also a bit of hypocrisy afloat. For example, consider this marketing piece from Merrill Lynch's website [Ed: highlighting provided]:

Are you looking for a flexible, convenient way to manage cash flow? 

The Loan Management Account (LMA account) offered through Bank of America is a flexible line of credit that can be used for almost any purpose. Whether you're looking to help a family member, remodel your kitchen, pay taxes or cover education costs, an LMA account can help. With an LMA account, you can generate cash, consolidate any other outstanding loans if desired and gain a clearer picture of your balance sheet. 

How to use an LMA account

You can use the LMA account as a convenient way to pursue a variety of personal and business financing needs, including:
  • Personal and investment real estate purchases
  • Luxury purchases
  • Tax payments
  • Education costs
  • Medical expenses
  • Weddings
  • Debt consolidation
  • Business startup or expansion or acquisitions
  • Diversification for concentrated securities positions
  • Emergency expenses
A Borrowing Strategy

An LMA account is a secured line of credit that uses your existing securities, such as stocks and bonds, as collateral. There are no fees to establish, no minimum balance nor annual fee, so you can access funds as you need to. You can access funds, generally within one day of approval. You can access your credit in the form of both fixed rate and variable rate loans. Your financial advisor can help you choose the loan terms that work best for your individual situation.

I'm not really seeing the difference between the 24/7 online Merrill Lynch "The Loan Management Account (LMA account) offered through Bank of America is a flexible line of credit that can be used for almost any purpose," and Dahl's letter stating that "potential investors could open an account with Merrill Lynch and use a line of credit drawn against their Firm account to fund their investment in BBR." Merrill is suggesting that its financial advisor can help customers secure a line of credit/ loan that is secured by an account and can be invested in some outside business opportunity -- which pretty much what Dahl seems to have parroted albeit on unapproved letterhead.

I approach this AWC with great ambivalence because I think FINRA made Dahl's conduct appear far worse than it was. That being said, when we're talking about less worse, worse, and far worse, we're still talking about "worse." The AWC is correct in asserting that, at times, Dahl engaged in misconduct. I'm not going to disagree with the $10,000 fine. As to the four-month suspension, well, given what's on the table, it seems a tad too much, but, you know, it's a settlement, Dahl signed off on it, and it's not my place to criticize his decision to get it over with. More to the point, I don't know what I don't know and perhaps some stuff got left out of the AWC in the spirit of settlement. 

Finally, merely as context and background, online FINRA BrokerCheck records as of September 4, 2019, disclose under the heading "Financial - Final" two compromises with creditors in 2014 and 2015, for respective amounts of $3,500 and $395 (of which the former was fully forgiven by Citibank) and the latter satisfied to Cap One Bank.