Over the years, I have often been asked about whether a registered representative can borrow money from clients (or in a few cases, lend money to). The answer is either “Yes, but…” or “No, but…” and what comes after that “but” makes all the difference in the world. For starters, the Financial Industry Regulatory Authority (FINRA)/ NASD Conduct Rule 2370: “Borrowing From or Lending to” sets out all the relevant prohibitions and exceptions, and does so with uncharacteristic clarity. It's always a good idea to start with a careful reading of any rule of which you might run afoul. See, http://rrbdlaw.com/RegulatoryLinks/Borrowing%20Rule/2370.htm
In the recently published July FINRA monthly disciplinary actions, a staggering five individuals were sanctioned for running afoul of NASD Conduct Rule 2370. These are tough times and many RRs are financially stretched. I get that. However, these are also hostile times to be an RR, and given the public's anger against our industry and FINRA's all too willing desire to appease the public bloodlust, don't be surprised if you are punished — severely — for violating the prohibitions against borrowing from customers. Hopefully, by detailing some recent cases, I will provide a public service to would-be borrowers among our ranks.
Curtis Morgan Allen borrowed $24,815.72 from public customers and failed to repay the loans. Bad enough — but then Allen compounded his problems by stating that he had never borrowed money from a client on compliance forms. FINRA imposed a six-month suspension on Allen, but did not impose any fines because he had been granted a discharge in bankruptcy.
Comment: Financial pressure forces us to do many things that we might not normally do. Worse, that same pressure often prevents us from clearly thinking things through. Keep in mind that if you are going to borrow from customers, the annual compliance questionnaire will inquire into that situation. If you think you have a problem borrowing a few bucks from a friendly client, watch what happens when you try to cover up that situation by checking off “No” on a form. How are they going to find out about the lie? Well, what do you think is going to happen if you don't repay the loan, or if the client sustains significant losses in his or her account and then starts talking to your firm?
Leonard Duane Sellers borrowed $92,200 from a customer who surrendered a variable annuity to fund the loan, resulting in a $7,000 surrender charge. FINRA fined Sellers $5,000 and suspended him for six months.
Comment: Here's another warning. It's one thing if your old high school pal Joe writes you out a check for $92,200 from his $500,000 checking account; but it's quite another if an elderly client, for example, surrenders a VA with the attendant penalty in order to fund the loan. You might want to give some thought to whom you ask for a loan and how they will fund it. Yeah, I know, beggars can't be choosers — but are you really prepared to sit around for six months, out of work, regretting a bad choice?
Dustin Andrew Boeckel borrowed $5,000 from a relative, who was also a customer of the firm. However, without authorization, Boeckel signed the relative's name on numerous checks. FINRA fined Boeckel $5,000 and suspended him for one year.
Comment: In terms of no-no's, this one would typically not be a ten on a scale of one to ten. It's a relatively small amount of money and it came from a relative. The unauthorized signature on checks — now that's a likely ten, and when you throw that into the mix, well, things can quickly go thermonuclear with your compliance department and FINRA. Is it worth a one-year suspension to you?
For more details and to read other similar cases, please see the links in the “Borrowing/Lending” box at the top of http://rrbdlaw.com/RegulatoryLinks/CASESOFNOTE/NASD/2009.htm