March 3, 2022
A close friend of yours is in a bind and needs a few thousand bucks for home renovations. You lend him the money. As it turns out, you're a stockbroker. Happily, your friend fully repays you. Some of the repayment comes from the friend's brokerage account and some comes from his bank account. No one's complaining. Everyone's happy. That is, until FINRA pokes its nose into the loan.
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, Andrew B. Elsoffer submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.
In the Matter of Andrew B. Elsoffer, Respondent (FINRA AWC 2018060469601)
The AWC asserts that Elsoffer was first registered in 1995, and from November 21, 2011 to November 1, 2018, he was registered with Stifel, Nicolaus & Company, Incorporated.
No Good Deed Goes Unpunished
In pertinent part, the AWC alleges that:
[B]etween May 15, 2018 and July 30, 2018, Elsoffer
assisted his firm customer, who was a close friend but not an immediate family member,
with renovating his home at a time when the customer was unable to oversee the
renovations himself. He loaned the customer a total of $13,703 to pay to the contractors
renovating the home. The customer then reimbursed Elsoffer via three checks totaling
$2,703 drawn on his firm account and two checks totaling $11,000 drawn on his bank
account. Elsoffer did not disclose or seek prior approval from the firm for the loans.
FINRA Rule 3240
Let's review 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:
(1) the member has written procedures allowing the borrowing and lending of money between such registered persons and customers of the member;
(2) the borrowing or lending arrangement meets one of the following conditions:
(A) the customer is a member of such person's immediate family;
(B) the customer (i) is a financial institution regularly engaged in the business of providing credit, financing, or loans, or other entity or person that regularly arranges or extends credit in the ordinary course of business and (ii) is acting in the course of such business;
(C) the customer and the registered person are both registered persons of the same member;
(D) the lending arrangement is based on a personal relationship with the customer, such that the loan would not have been solicited, offered, or given had the customer and the registered person not maintained a relationship outside of the broker-customer relationship; or
(E) the lending arrangement is based on a business relationship outside of the broker-customer relationship; and
(3) the requirements of paragraph (b) of this Rule are satisfied.
(b) Notification and Approval
(1) The registered person shall notify the member of the borrowing or lending arrangements described in paragraphs (a)(2)(C), (D), and (E) above prior to entering into such arrangements and the member shall pre-approve in writing such arrangements. The registered person shall also notify the member and the member shall pre-approve in writing any modifications to such arrangements, including any extension of the duration of such arrangements.
(2) With respect to the borrowing or lending arrangements described in paragraph (a)(2)(A) above, a member's written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such borrowing or lending arrangements.
(3) With respect to the borrowing or lending arrangements described in paragraph (a)(2)(B) above, a member's written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such borrowing or lending arrangements, provided that, the loan has been made on commercial terms that the customer generally makes available to members of the general public similarly situated as to need, purpose and creditworthiness. For purposes of this subparagraph, the member may rely on the registered person's representation that the terms of the loan meet the above-described standards.
(c) Definition of Immediate Family
The term "immediate family" means parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person whom the registered person supports, directly or indirectly, to a material extent.
***Supplementary Material: ***
.01 Record Retention. For purposes of paragraph (b)(1) of this Rule, members shall preserve the written pre-approval for at least three years after the date that the borrowing or lending arrangement has terminated or for at least three years after the registered person's association with the member has terminated.
FINRA's Borrowing Rule does not prohibit borrowing from or lending to 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 the FINRA rule notwithstanding that a violation of an in-house rule could also invoke FINRA's alleged jurisdiction. As the AWC notes: "Stifel prohibited registered representatives from lending money to firm customers, except
for immediate family members."
Notwithstanding that Elsoffer did not borrow money from but lent money to his close friend , FINRA found Elsoffer's cited conduct to be in violation of FINRA Rules 3240 and 2010 -- and, just going by the Rule's ambit of "borrow money from or lend money to any customer," it seems that Elsoffer fell into the trap. Finally, embedded in the Rule is a subheading: (b) Notification and Approval, which clearly admonishes registered persons that the scheme here is an obligation imposed upon them to "notify the member of the borrowing or lending arrangements described . . ."
The Other Checks That Didn't Exist Actually Did
If all that Elsoffer had done was to lend money to his customer for home renovation, maybe FINRA would have imposed lesser sanctions -- maybe even let him off with a warning. Unfortunately, Elsoffer compounded his woes:
On December 7, 2018, pursuant to FINRA Rule 8210, FINRA requested that Elsoffer
provide a signed statement addressing his termination and allegations that he had violated
firm policy. In his December 18, 2018 written response, he misrepresented that all check
writing was done from the customer's firm account. On November 5, 2019, pursuant to
FINRA Rule 8210, FINRA asked Elsoffer whether, in addition to the three checks written
from the firm account, the customer had written Elsoffer additional checks from any bank
accounts and if so, to provide all supporting documentation. In Elsoffer's written
December 4, 2019 Response, he misrepresented that no other checks existed. On April
14, 2021 and thereafter, Elsoffer corrected his prior misstatements by producing personal
bank statements and two additional cancelled checks drawn on the customer's bank
account totaling $11,000.
In citing Elsoffer's alleged provision of misinformation to its investigative staff, FINRA found that he had violated FINRA Rules 8210 and 2010.
Online FINRA BrokerCheck disclosures as of March 3 ,2022, disclose that Stiel Nicolaus "discharged" Elsoffer on October 16, 2018, based upon allegations that:
Loss of confidence following the settlement of an arbitration and violation of the
firm's policy prohibiting receipt of customer funds into an employee's account. The
customer has not complained and the firm has found no evidence of wrongful
taking of client property.
In accordance with the terms of the AWC, FINRA imposed upon Elsoffer a $15,000 fine and a two-year suspension from associating with any FINRA member in all capacities.
Bill Singer's Comment
Elsoffer lent a close friend just a tad under $14,000 for two months. The fact that it was for home renovation doesn't actually impact the regulatory concerns but it's nice to have the context. The client cut five checks in order to make repayment of Elsoffer's loan -- three from the friend's brokerage account and the other two from the friend's bank account.
Why didn't Elsoffer disclose his intention to lend money to his close friend to his employer brokerage firm? The AWC doesn't answer that question. Could be that Elsoffer thought that Rule 3240 only pertained to borrowing from a customer and not lending to a customer. Could be that Elsoffer thought that the Rule didn't apply to dealings between close friends. Could be that Elsoffer knew that he needed to disclose the loan to his employer but just didn't think it was that big deal and opted to get on with his business.
Reduced to simple numbers, there were five checks, three from the brokerage accounts, two from the bank account, Elsoffer first said that there were only the three brokerage checks but then disclosed the additional two bank checks. Sigh . . . in hindsight, not the smartest tactic when dealing with a regulator. So, sure, we can all come up with scenaria that sort of makes Elsoffer the victim here and puts FINRA in a lousy light. We could do that but we shouldn't. The cardinal sin for regulators is when you lie to them during an investigation. Elsoffer lied to FINRA. Regardless of how minor the lies were in the scheme of thing, no regulator takes such misrepresentations lightly. It would have been better for Elsoffer to have told the truth from the beginning, or to have refused to answer FINRA's questions.