FINRA Fines and Suspends Rep For Borrowing from Friend During Covid Pandemic

May 18, 2023

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)
https://www.finra.org/sites/default/files/fda_documents/2022076079801
%20Bryan%20Sproul%20CRD%206087064%20AWC%20gg.pdf

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

As noted in the AWC, Sproul ran afoul of the following:

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 Sanctions

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.

Bill Singer's Comment

FINRA Rule 3240 does not prohibit an associated person from borrowing or lending to a customer unless said associated person is also registered ("No person associated with a member in any registered capacity. . .") Further, the FINRA Borrowing Rule does not prohibit borrowing from or lending to any "customer" of a registered person but restricts such activity to "any customer of such person." Better drafting of the Rule would have defined the "of such person" term -- for purposes of this article, let's just say that a "customer of such person" likely extends to a customer directly serviced by the registered person at issue and would often be demonstrated by the attachment of the servicing rep's production number to the customer. Expanding upon the Borrowing Rules' restrictions, FINRA member firms often prohibit registered reps from borrowing/lending involving any firm customer, whether or not serviced by the subject registered representative -- and even associated persons may be subject to such restrictions as set out in an Employee Handbook or employment agreement. As the Sproul AWC notes in part:

The firm generally prohibited its representatives from lending to or borrowing from firm customers, allowing for exceptions only where consistent with FINRA Rule 3240, including lending arrangements with immediate family members or based on a personal relationship outside of the broker-client relationship. Pre-approval of any loan was required regardless of whether an exception was met.

You should also keep in mind that even if cited conduct was only a violation a member's policies and procedures, that result could separately trigger a violation of FINRA Rule 2010 to the extent that the violation of the firm's rule is also deemed to not comport with "high standards of commercial honor and just and equitable principles of trade."

SIDE BAR: For an interesting variation of the "borrowing" theme, note that FINRA will also sanction conduct involving the lending of money to a friend/customer; see, "No Good Deed Goes Unpunished As FINRA Sanctions Rep For Lending Money To Friend" (BrokeAndBroker.com / March 3, 2022)
https://www.brokeandbroker.com/6316/finra-loan-awc/

For those of you who may have forgotten, around March 2020, Covid was first declared a pandemic. Some six months AFTER the June/July 2021 dates when Sproul borrowed money from his friend (who was also a customer), FINRA published "Retrospective Rule Review Report / Business Continuity Planning and Lessons From the COVID-19 Pandemic (FINRA Regulatory Notice 21-44 / December 23, 2021)
https://www.finra.org/sites/default/files/2021-12/Regulatory%20Notice%2021-44.pdf In FINRA's December 2021 Regulatory Notice, the regulator acknowledged that the "COVID-19 pandemic, beginning in early 2020, caused unprecedented regulatory and operational impacts on member firms and other market participants, as well as regulators."

Sproul's alleged misconduct occurred in June and July 2021. Missing from the Sproul AWC is any reference to the extant Covid pandemic in June/July 2021. You know, that same pandemic that FINRA lamented about in its December 2021 Regulatory Notice as having an "unprecedented regulatory and operational" impact on its "member firms and other market participants, as well as regulators."

What I find both interesting and troubling is that the above-quote from the FINRA December 2021 Regulatory Notice didn't make any pointed reference to the plight of the industry's associated and registered persons who worked at the member firms. That telling omission summons up a whole host of issues as to FINRA's mind-set when it comes to the industry's financial professionals versus the industry's employer-member-firms. For FINRA, the industry's financial professionals -- the men and women who do the daily work -- are often an after-thought; or, as in the case of the quoted passage from Regulatory Notice 21-44, not even so much as a thought. That bias informs far too much of FINRA's regulatory agenda and often manifests itself in disparate treatment between misconduct by member firms versus by associated/registered persons.

I remind you of the Covid Pandemic's existence in 2021 because it was during that year when Sproul borrowed $14,000 from a friend (who was also a customer). The AWC says Sproul "never notified the firm of the loan or sought the firm’s pre-approval" for the loan; however, the AWC doesn't explain whether that non-notice was the byproduct of the dislocations caused by Covid.

Was Sproul working from home?

Did he try to contact someone at Edward Jones but couldn't reach them?

Was Sproul overwhelmed by the financial impact of Covid and forced to borrow money from a friend -- and the stress of the moment clouded his mind and he failed to appreciate the need to get pre-approval?

Not saying any of the questions above was the case but I sure as hell would like to know if the pandemic played any role in Sproul's conduct.

I find it odd that FINRA used that somewhat strained characterization that the "customer disclosed the loan to another firm representative, who reported it to the firm," rather than alleging that the customer "complained about the loan." In fact, nowhere in the AWC is there any assertion that the customer had complained about the loan, about Sproul's conduct in soliciting the loan, or about any failure by Sproul to honor any aspect of any contemplated repayment of the loan. Again, it may well be that, in fact, the customer had complained; and, if that were the case, the AWC should say what it means and mean what it says.

I concede that FINRA Rule 3240 does not require that a customer complain about a loan in order to trigger a violation. Frankly, I understand the motivation behind the rule, take no issue with the bona fide regulatory purpose of the rule, and am not arguing against its proper and fair enforcement. On the other hand, by FINRA's own admission, the Covid pandemic was "unprecedented;" and, as such, it was appropriate for FINRA to consider 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.

When all is said and done, FINRA fined Sproul $5,000 fine and suspended him for one-month. The sanctions were purportedly imposed on him because he borrowed money during Covid from a friend. The AWC does NOT allege that the friend complained. The AWC admits that "Sproul subsequently repaid the loan, with interest." Missing from the AWC is some explanation as to why -- given the totality of the circumstances -- that a fine of the magnitude of $5,000 was warranted or an entire month of suspension appropriate; and why both a fine and the suspension were applied. Yes, I know what the Sanction Guidelines say. The dual sanctions imposed upon Sproul fall within the range of acceptable sanctions. I'm just wondering if FINRA considered what's truly "acceptable" during an "unprecedented" pandemic.

The AWC does not include a signature from Sproul's attorney and there is no reference to any such legal counsel. Accordingly, it appears that Sproul represented himself pro se. Maybe a lawyer would have persuaded FINRA to soften its sanctions. Maybe a lawyer would have argued a strong case before a hearing panel and prompted lesser sanctions or an acquittal. Then again, a lawyer would have cost thousands of dollars without any guarantees of reduced sanctions or a dismissal of the charges. What you should not lose sight of is that this FINRA regulatory settlement involves a human being -- a financial professional -- who needed to borrow $14,000 during the Covid pandemic from a friend. Maybe money was tight in the Sproul household. Maybe FINRA made the most of that financial vulnerability when negotiating the AWC with a pro se Respondent. in December 2021, FINRA was concerned about the business continuity plans of its member firms. Might have been nice if by May 2023, FINRA showed similar concern for the continuity of the careers of financial professionals who survived Covid.

As I often say, it's just not my place to question any settlement such as a FINRA AWC because I don't know what I don't know. After some four decades lawyering on Wall Street, I do know that as negotiations proceed between the regulated and the regulator, lots of stuff gets removed and softened as manifested in the final version of any settlement agreement. Further, the costs of defending against regulatory charges are often substantial and a settlement may present itself as a cost-effective opportunity to cut your losses, pay a fine, do the time, and then get on with your life. So . . . to be clear, Respondent Sproul may well be very happy with his AWC. If that's the case, so be it. I wish him the best.

VISIT the BrokeAndBroker.com Blog "Borrowing" Archive

http://www.brokeandbroker.com/index.php?a=topic&topic=borrowing

Download a PDF Copy of the BrokeAndBroker.com Blog's "FINRA Borrowing Rule" analysis by veteran industry lawyer Bill Singer
http://brokeandbroker.com/PDF/FINRABorrowingRule.pdf

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