By FINRA's own admission, the Covid pandemic was "unprecedented." In reaching that conclusion, the self-regulatory-organization often empathized with its member firms and lamented about their challenges. In a recent regulatory settlement, however, it's not clear whether FINRA considered the impact of the pandemic on the thought processes and conduct of the registered person it charged with violations that arose during that relevant time period. See what you think.
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, Bryan Sproul submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.
In the Matter of Bryan Sproul, Respondent (FINRA AWC 2022076079801)
The AWC asserts that Bryan Sproul was first registered in 2012 with Edward Jones. Online FINRA BrokerCheck disclosures as of May 18, 2023, allege that Edward Jones "discharged" Sproul on July 26, 2022, based upon this allegation: "Concerns registered representative borrowed money from an unrelated client without pre-approval by the Firm."
$14,000 Loan From A Friend/Customer
As alleged in part in the AWC:
In June and July 2021, Sproul borrowed a total of $14,000 from his friend and customer. Sproul never notified the firm of the loan or sought the firm’s pre-approval. The customer disclosed the loan to another firm representative, who reported it to the firm. The firm raised the matter with Sproul and terminated him. Sproul subsequently repaid the loan, with interest.
Based on the foregoing, Sproul violated FINRA Rules 3240 and 2010.
FINRA's Borrowing Rule
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.
.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.
In accordance with the terms of the AWC, FINRA imposed upon Sproul a $5,000 fine and a one-month suspension from associating with any FINRA member in all capacities.
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