Don't Ask. Don't Tell. A Taxing Case

October 12, 2010

In a Statement of Claim filed in April 2009, Lyn Ashlock alleged that she withdrew money from her IRA to meet her expenses but that her broker, Amy Cady, had failed to warn her regarding the adverse tax penalties from such a transaction. Claimant Ashlock sought $25,850 in compensatory damages and $20,000 in punitive damages, plus attorneys' fees, costs, etc.. Accordingly, Claimant Ashlock asserted breaches of fiduciary duty/contract; failure to give tax advice; negligence in not initially establish a 72(t) account; and failure to supervise. In the Matter of the Arbitration Between Lyn L. Ashlock, Claimant, vs. Arvest Asset Management and Amy Cady, Respondents (Stipulated Award / FINRA Arbitration 90-02108, October 7, 2010).

Respondents generally denied the allegations and asserted various affirmative defenses, including that all contracts/documents signed by Claimant Ashlock included specific disclaimers that Respondents:

  • were not in the business of giving tax advice,
  • did not give tax advice; and
  • urged all clients to seek independent tax counsel.

Respondent Amy Cady requested expungement of the arbitration from her Central Registration Depository ("CRD") record on the grounds that the claims/allegations are false, or, in the alternative, are factually impossible/clearly erroneous.


The parties agreed to settle any and all claims in this matter, and executed a Settlement Agreement and Release. As a material part of the Agreement, Claimant agreed not to oppose Respondent Cady's request for expungement, and, although given the opportunity to be present at further proceedings with regard to expungement, elected not to present evidence in opposition to the requested expungement.


The FINRA Arbitrator recommended the expungement of all references to the above captioned arbitration from Respondent Cady's CRD records with the understanding that pursuant to Notice to Members 04-16, Respondent Cady must obtain confimriation from a court of competent jurisdiction before the CRD will execute the expungement directive. Unless specifically waived in writing by FINRA, parties seeking judicial confimiatlon of an arbitration award containing expungement relief must name FINRA as an additional party and serve FINRA with all appropriate documents.

Pursuant to 12805 of the Code and in accordance with Rule 2080's obligation to make affirmative findings of fact, the Arbitrator found that the claim, allegation, or information is factually impossible or clearly erroneous, and is also false

The Arbitrator determined that Respondents did not have a contractual duty or other duty to provide tax advice to Claimant. Despite having no duty to do so, Cady provided general tax information to Claimant. Notwithstanding, the only fiduciary duties assumed by Respondents were expressly contained in the Customer Agreement between the parties, and were limited to the duties of:

  • carrying out Claimant's directions,
  • opening or closing brokerage accounts,
  • placing and withdrawing orders and
  • taking such other steps necessary to cany out Claimant's instructions.

The Arbitrator concluded that the above duties were were satisfactorily performed by both Respondents.

Informed and Didn't Consent

The FINRA Arbitrator determined that in deciding to create the initial account, the pros and cons of setting up a 72(t) account initially were discussed between Claimant and Respondent Cady, and because Claimant did not wish to be obligated or otherwise "locked in" to a 5-year commitment under the 72(t), Claimant made the voluntary and well-informed decision not to initially establish a 72(t) account, but rather to set up a 401(k) account.

To establish account suitability and parameters, Claimant completed, reviewed, and executed a comprehensive survey that set forth Claimant's monetary expectations and future requirements. If Claimant had followed and adhered to the representations made by her in the customer survey and analysis, she would not have suffered any penalty or adverse tax consequences.


Although the 72(t) account was initially calculated on an incorrect amount. Respondents attempted to make Claimant financially whole by tendering the amount of penalty incurred, which tender was refused by Claimant.

Bottom Line

Summing it all up, the Arbitrator appears to have found that Claimant was aware, or should have been aware, that Respondents were not in the position to offer tax advice to Claimant, nor did they assume any such duty to give tax advice. Claimant was expressly advised in writing to obtain her own independent tax counsel. Although not required to do so, Cady did offer certain general tax information to Claimant with regard to premature withdrawals under the 401(k) and the consequences (including certain tax consequences). Neither Respondent had any fiduciary duty to Claimant to offer or give tax advice. Claimant was adequately advised with regard to establishing a 72(t) account at the beginning of the engagement, but voluntarily chose not to establish a 72(t) account and established a 401k account instead. 

Bill Singer's Comment: One can always speculate as to why a case settled.  In this FINRA Arbitration I was struck by a few warning flags (from the perspective of an industry respondent making the decision to roll the dice by going all the way to a contested hearing and resulting verdict). 

  • First, this was an IRA account and for many arbitration panels that raises some ticklish concerns about the age of the customer, the care with which advice is rendered, and a heightened sense of suitability. 
  • Second,  the funds at issue here were withdrawn for "expenses" rather than a consumer discretionary purchase or investment speculation.  Some might wonder whether it would have been prudent for the respondents to have sent a written confirmation to the customer confirming that there could be tax penalties involved with such a withdrawal and urging the customer to seek independent tax advice.  Is that customary in the industry? No, but that doesn't change the validity of resorting to such a practice.
  • Third, we are informed by the FINRA decision that despite having no duty to do so, Respondent Cady provided general tax information to Claimant Ashlock.  Oh boy -- talk about being put on the defensive from the get-go.  Clearly, if you do not have a duty to do something you must exercise great care when voluntarily abrogating that constraint.  Whether it's a case of "no good deed goes unpunished" or an example of "never volunteer," the end result is the same.  At trial, Respondent Cady would not be able to simply deny giving any tax advice but would have to start explaining what she said, what she meant, and why she didn't simply shrug her shoulders when asked and suggest that Claimant contact an accountant or tax lawyer. 
  • Fourth, the killer here may well have been the admission that the 72(t) account was initially incorrectly calculated  -- and that respondents offered to compensate Claimant for the resulting damages.  You never want to have to defend a FINRA arbitration by first admitting to having made an error and then noting that you offered money to compensate for that harm.  Of course, who knows if the Claimant would have argued that but for the erroneous calculation, she would have opted for the 72(t) account in the first place.

Finally, under some circumstances, the withdrawal of money from your IRA before the age 59 could trigger the obligation to pay regular income tax on the withdrawal plus a 10% penalty tax. However, under Internal Revenue Service Code Section 72(t)(2)(a)(iv)) you may be able to avoid the 10% penalty tax if you take "substantially equal periodic payments." Such periodic payments are generally required to be made at least once a year for five years or until you reach age 59, whichever is longer. The outcome of such a contemplated withdrawal may be determined by the specific facts of your situation.  Make sure to consult with a qualified tax professional.

NOTE: The above does not constitute tax advice and must not be relied upon as such. You should contact a qualified tax professional. Bill Singer is not in the business of giving tax advice and does not give tax advice, If you need tax advice, you should consider contacting a certified public accountant or independent tax counsel.

Okay - so - now you see how that should be done?

Also, see this for a similar case: FINRA Arbitration Panel Rejects Duty to Advise on Tax Consequences by Broker at