A FINRA AWC found that a registered rep borrowed money from two customers, but the loan wasn't actually made directly to the rep but to her limited liability company. Is that a difference without a distinction or does that difference matter? A few years later, the same rep again crossed onto FINRA's radar when she allegedly made eight under-$10,000-cash-deposits into her bank account. A second FINRA AWC found that those deposits were efforts to "structure" in order to evade cash transaction requirements. Two bites of the regulatory apple. As I recall, that didn't work out that well for Adam and Eve.
2017 Smith AWC
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, Tania Lashae Smith submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Tania Lashae Smith, Respondent (AWC 2015048105501, August 10, 2017) (the "2017 Smith AWC") https://www.finra.org/sites/default/files/fda_documents/2015048105501 _FDA_RB7X3661%20%282019-1563254359702%29.pdf
The AWC asserts that Smith was first registered in 2006 with a predecessor firm of Wells Fargo Advisors, LLC (Ed: FINRA's online BrokerCheck discloses that firm as Wachovia Securities, LLC). The AWC states that Smith "has no relevant securities-related disciplinary history."
ON and QN Lend to PH
During the relevant time from November 2014 to February 2015, Smith was the servicing registered representative assigned to two customer accounts, which are identified in the AWC only as "ON" and "QN." During the relevant time, Smith was the 100% owner of a limited liability partnership, which is identified in the AWC only as PH.
According to the "Overview" section of the AWC [Ed: highlight added]:
ln November 2014, while employed as a GSR with Wells Fargo, Smith violated FINRA Rules 3240 and 2010 when she borrowed $10,000 from her Firm customers ON and QN.
Similarly, according to the "Facts And Violative Conduct" section of the AWC [Ed: highlight added]:
In November 2014, Smith borrowed $10,000 from Firm customers ON & QN through PH, a limited liability partnership of which Smith is the 100% owner. Smith was the Firm's GSR assigned to ON's and QN's accounts. In a contract Smith executed November 1, 2014, Firm customers ON and QN agreed to loan PH $10,000 on November 3, 2014. Per the contract, PH, through Smith, was required to repay the loan on or before February 3, 2015 with 40% interest. Smith repaid the loan with interest on February 13, 2015.
Wells Fargo WSP
During the relevant time, the Wells Fargo's written supervisory procedures purportedly prohibited its registered representatives from borrowing money or securities from customers.
Under the heading "Employment Separation After Allegations," FINRA's online BrokerCheck records disclose that Wells Fargo "discharged" Smith on November 18, 2015, based upon allegations that:
FA engaged in business activities outside the scope of an approved OBA and her LLC borrowed money from a firm client. The loan had been repaid by the time the firm discovered it.
FINRA deemed Smith acceptance of the $10,000 loan as a violation of FINRA Rules 3240 and 2010. In accordance with the terms of the AWC, FINRA imposed upon Smith a $5,000 fine and a 15-business-day suspension from associating with any FINRA member in any capacity.
Bill Singer's Comment
Let's review the pertinent part of FINRA Rule 3240: Borrowing From or Lending to Customers:
(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: . . .
FINRA's Borrowing Rule does not prohibit borrowing from any "customer" but restricts such activity to "any customer of such person." Consequently, solely going by FINRA Rule 3240, an associated person could conceivably borrow or lend to a customer of the employing firm provided that said customer was not serviced by the registered person at issue. In reality, many FINRA member firms impose a more expansive prohibition that covers any firm customer, whether or not serviced by the subject registered representative. More than mere semantics, this distinction is a critical element in determining whether or not certain conduct rose to the level of a violation of a FINRA rule notwithstanding that a violation of an in-house rule could also invoke FINRA's alleged jurisdiction.
Similarly, FINRA Rule 3240's prohibition against lending specifically states that "no person . . . may borrow . . ." The 2017 Smith AWC glosses over this critical jurisdictional element of FINRA's rule. As noted in the highlighted text above from the AWC, FINRA variously characterized the loan at issue as one involving Smith ("she") personally borrowing from ON and QN, but the AWC also characterized the cited transaction as one in which "Firm customers ON and QN agreed to loan PH . . ." Which was it? Did the customers lend money to Smith or to the LLC? Notwithstanding that PH is 100% owned by Smith, it is still a legal entity in the form of an LLC.
Some of you familiar with tax law might interject that the Internal Revenue Service treats a one-member-only LLC (and Smith is described in the AWC as PH LLC's 100% owner) as an entity disregarded as separate from its owner for income tax purposes. That's a worthwhile point to consider -- except, the IRS is not FINRA, and even if a one-member LLC is a "disregarded entity" for tax purposes, that entity is still of consequence for other considerations.
Now, let me dazzle you with a bit of my legal research skills. In an arcane portion of FINRA's rules you would find:
(a) The terms used in the Rules, if defined in the FINRA By-Laws, shall have the meaning as defined in the FINRA By-Laws, unless a term is defined differently in a Rule, or unless the context of the term within a Rule requires a different meaning.
. . .
The term "person" shall include any natural person, partnership, corporation, association, or other legal entity.
Smugly, you might snicker at me and say, see, Bill, you just got hoisted with your own petard. FINRA's rules specifically define a "person" as including a "corporation," and since an LLC is a limited liability corporation, it is a a "person" when that term is used in FINRA's rule. You would then conclude that FINRA Rule 3240 covers the misconduct of a "person" and, game, set, match, you would dismiss me as not such a smart lawyer. Gee, you're right. I am an idiot. Sorry for wasting your time.
But . . . hold on . . . just for a second . . . go back and re-read FINRA Rule 3240.
You see that part where it says "no person associated with a member in any registered capacity may borrow money from or lend money to any customer of such person . . ." You got that part? Great -- now tell me, is PH LLC associated with any FINRA member firm?
Oh, and by the way, if you don't mind this not-so-smart-lawyer asking you another question: Is PH LLC registered in any capacity with any FINRA member firm?
Yeah, you didn't see those issues, did you? So, assuming that PH LLC is a person but not one that is registered with a FINRA member firm, then it doesn't look like Rule 3240 applies, does it? What did you mumble? I couldn't hear you. Speak up . . . a bit louder if you don't mind.
Given that PH LLC is not a "person associated with a member in any registered capacity. . .," how does Rule 3240 apply to the loan at issue? If FINRA deems as operation of law or interpretation that a 100%-owned LLC is a "person" subject to the jurisdiction of Rule 3240, then the AWC should have presented that position and explained the regulator's rationale.
To further underscore why FINRA should have provided more explanation for its assertion of jurisdiction over the transaction per Rule 3240, consider Smith's BrokerCheck statement in response to Wells Fargo's "discharge" disclosure:
In 2014, I began an LLC renting and investing in real estate. I submitted an approval request for my outside business activity and it was approved. Therefore, Wells Fargo Advisors was aware of my OBA and approved it prior to me operating within the LLC. It was my understanding that I had met my compliance obligations to Wells Fargo Advisors. Wells Fargo Advisors and my branch manager never advised me of any further reporting obligations to them. I discussed my OBA with longtime family friends, a husband and wife, who I have known since college, over 10 years ago. This was prior to my entrance into the securities industry. My friends also held Wells Fargo Advisors accounts. I did not solicit my friends to invest in my LLC in November 2014, they suggested they invest after I discussed a house I was considering purchasing within my LLC. In our verbal conversation, we discussed that the money was an investment, not a loan. They wanted to make a short-term investment. I agreed to pay back their investment in 3 months in February 2015. I paid them back. This was before Wells Fargo discovered the matter. They only held cash in money market accounts and never owned any stock, bond, fund, or other type of security with Wells Fargo Advisors. I did not believe I was in violation any rule of Wells Fargo Advisors, FINRA, NASD, NYSE, or MSRB. My OBA's business checking account was held with Wells Fargo Advisors, and I was transparent in my dealings. The firm clients were pleased with the transaction and did not lose any money or have any negative experience in this matter. Monies were repaid before Wells Fargo Advisors discovered it. The clients were never interviewed or questioned about the issue. They are willing to provide a statement if necessary.
Yeah, I know: You didn't see all that coming. Smith says it was never a loan -- that it was an investment. Further, she says that Well Fargo had approved her LLC as an OBA.
Frankly, I was shocked when I started digging around after reading the AWC and came across that above BrokerCheck statement. When you take into account Wells Fargo's BrokerCheck disclosure concerning its discharge of Smith, you sort of wonder just what the hell was going on here:
Was this a loan or an investment?
Did the customers ever complain?
How the hell did Wells Fargo and/or FINRA even learn about his transaction?
If the customers submit an Affidavit affirming that they did not "lend" money to Smith but entered into an investment in PH, would that remove the prohibited borrowing regulatory violation?
If the customers did submit such an Affidavit, wouldn't that raise questions about a prohibited Private Securities Transaction and/or non-disclosed OBA activities?
Also, did you note the so-called "40% interest rate" on the alleged three-month loan? Doesn't that strike you as a usurious interest rate for such a short-term loan and likely in violation of most applicable state laws? Was that 40% indicative of a "return on investment" rather than a seemingly illegal or disproportionately high interest rate on a loan?
Now you understand why I'm paid the big bucks for taking on these arcane regulatory and compliance cases!
One final disclosure that's not noted in the AWC. Online FINRA BrokerCheck records under the heading "Criminal -- Pending Charge" disclose that on August 4, 2017, Smith was charged in Oklahoma with Forgery in the First Degree, a felony to which she pleaded not guilty. BrokerCheck further discloses that on July 23, 2018, the "STATE DISMISSED ALL CHARGES WITHOUT COSTS."
2021 FINRA AWC
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, Tania L. Smith submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Tania L. Smith, Respondent (FINRA AWC 2019061942701) (the "2021 Smith AWC")
The AWC alleges that Tania L. Smith was first registered in December 2006 and by January 2016, she was registered with T. S. Phillips Investments, Inc. Under the AWC heading of "Relevant Disciplinary History," FINRA discloses that:
In August 2017. Smith entered into an AWC (No. 2015048105501) in which she
consented to a 15 business-day suspension in all capacities and a fine of $5,000 for
borrowing money from a customer of her member firm. She accepted the loan without
notifying her member firm and obtaining written pre-approval, in violation of FINRA
Rules 3240 and 2010.
The 2021 Smith AWC asserts in part that:
On five dates. between May 2016 and August 2016. Smith intentionally structured eight
deposits into her personal bank account totaling $51,400 in amounts below $10,000 using
multiple bank branch locations and multiple transactions. For example, Smith made two
cash deposits of $9,000 each on May 16, 2016 at two different bank branch locations.
The eight deposits did not involve customer funds nor were customers impacted in any
way. Smith had knowledge of CTR requirements from training she received as a
registered representative as well as her prior employment as a bank teller. By structuring
deposits to evade CTR filings, Smith failed to observe high standards of commercial
honor and just and equitable principals of trade.
Why is my financial institution asking me for identification
and personal information?
Federal law requires financial institutions to report currency (cash or
coin) transactions over $10,000 conducted by, or on behalf of, one person,
as well as multiple currency transactions that aggregate to be over
$10,000 in a single day. These transactions are reported on Currency
Transaction Reports (CTRs). The federal law requiring these reports was
passed to safeguard the financial industry from threats posed by money
laundering and other financial crime. To comply with this law, financial
institutions must obtain personal identification information about the
individual conducting the transaction such as a Social Security number
as well as a driver's license or other government issued document. This
requirement applies whether the individual conducting the transaction
has an account relationship with the institution or not.
There is no general prohibition against handling large amounts of
currency and the filing of a CTR is required regardless of the reasons for
the currency transaction. The financial institution collects this information
in a manner consistent with a customer's right to financial privacy.
Can I break up my currency transactions into multiple,
smaller amounts to avoid being reported to the
No. This is called "structuring." Federal law makes it a crime to break
up transactions into smaller amounts for the purpose of evading the
CTR reporting requirement and this may lead to a required disclosure
from the financial institution to the government. Structuring transactions
to prevent a CTR from being reported can result in imprisonment for
not more than five years and/or a fine of up to $250,000. If structuring
involves more than $100,000 in a twelve month period or is performed
while violating another law of the United States, the penalty is doubled.
In accordance with the terms of the AWC, FINRA found that Smith's eight cited deposits constituted structuring in violation of FINRA Rule 2010, and the self regulator imposed upon her a 15-month suspension from associating with any FINRA member in all capacities. No monetary sanction was imposed in consideration that Smith had filed a Chapter 13 bankruptcy petition on April 7, 2021.
Bill Singer's Comment
An interesting aspect of 2021 Smith AWC is that it involves structuring misconduct that transpired in 2016 -- which pre-dated the issuance of the 2017 Smith AWC for misconduct involving borrowing from a customer; but post-dated the 2014 underlying loans at issue in the 2017 Smith AWC. Yeah, I know . . . go get a pen and some paper and chart that out.
Given Smith's 2017 settlement, FINRA could certainly have loaded up on her in the 2021 Smith AWC and imposed far more than 15 months of suspension. The question is why didn't FINRA go for the jugular? As much of a champion of the industry's respondents as I often am, oddly, I'm not quite sure why FINRA showed such generosity towards Smith. Not saying Smith's record warrants a harsher sanction but simply noting that FINRA could have gone either way here and I would not have disagreed.
Ultimately, Smith's record comes off looking a bit worse than it actually is. We should pretty much disregard that whole felony disclosure on BrokerCheck because she pled not guilty and the charges were dismissed. The loans might also be somewhat debatable given that they were made to an unregistered, non-member-firm entity rather than to Smith. On the other hand, there's so much going on with Smith that you have to wonder what may have been omitted in the two AWCs via settlement negotiations. Be that as it may, FINRA did not impose a Bar upon Smith in the 2021 Smith AWC, and you have to hope that the regulator will not come to regret it.