FINRA Sanctions Stockbroker's Loans From Mom, Friend and Friend's Wife
May 11, 2016
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, Matthew John Brock submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Matthew John Brock, Respondent (AWC 2015045912101, April 27, 2016).
Brock was first registered in 2002 with FINRA member firm Edward D. Jones & Co., L.P.
Money from Mom
The AWC asserts that without obtaining written pre-approval from Edward Jones, Brock accepted loans of $5,000 in April 2010 and $10,000 in May 2014 from his mother, who, during the times of the loans, was a Jones customer serviced by her son.
Up Close and Personal
Further, the AWC alleges that in November 2014, Brock accepted a $50,000 loan from a close personal friend and that friend's wife, both of whom were Jones customers serviced by Brock.
FINRA asserts that the three loans cited above from Brock's mother, friend, and the friend's wife constituted violations of NASD Rule 2370 and FINRA Rules 3240 and 2010.
The Ol' Misdirection
The AWC asserts that as part of his effort to conceal the three loans noted above, Brock made a false attestation on a branch audit questionnaire, two false verbal statements to the firm's branch auditors; and other false statements to firm personnel conducting an internal review of Brock's personal finances.
FINRA deemed Brock's falsehoods as violations of FINRA Rule 2010.
Goin' To The Ol' FINRA Rulebook
FINRA Rule 3240: Borrowing From or Lending to Customers carves out certain categories of so-called "permissible lending arrangements." For example, pertinent to the Brock AWC is Rule 3240(a)(2):
The borrowing or lending arrangement meets one of the following conditions:
(A) The customer is a member of such person's immediate family;
Rule 3240 offers the following guidance:
(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.
No person associated with a member in any registered capacity may borrow money from or lend money to any customer of such person unless: . . .
The member has written procedures allowing the borrowing and lending of money between such registered persons and customers of the member;
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;
Notice AND Approval
So . . . where did Brock go wrong? Essentially, it's spelled out under Rule 3240(b): Notification and Approval, which requires that the registered person notify the member firm of the proposed borrowing arrangements prior to entering into them and the member firm must pre-approve in writing the borrowing arrangement.
Notice NOT Required IF. . .
In circumstances involving borrowing from "immediate family," however, Rule 3240(b)(2) provides:
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
You may be able to borrow from a family-customer if your firm has written procedures that do not require you to notify the firm about immediate family borrowing. If no such specific written procedures exist, however, you would need to notify your firm or get its prior approval.
Edward Jones's No-Loan Policy
Unfortunately for Brock, the AWC asserts that:
At all relevant times, the Firm's written supervisory procedures prohibited registered persons from accepting a loan from an immediate family member who was a Firm customer without written pre-approval from the Firm and prohibited registered persons from accepting a loan from a customer where the borrowing arrangement was based upon a personal relationship between the registered person and the customer without written pre-approval from the Firm.2
= = = = =
2 where the borrowing arrangement is based upon a personal relationship between the registered person and the customer, subsection (b)(1) of FINRA Rule 3240 also expressly requires the registered person to notify and receive written pre-approval from his/her firm of the borrowing arrangement.
Discharged
FINRA online BrokerCheck records as of May 11, 2016, disclose that Edward Jones "Discharged" Brock on June 8, 2015, based upon allegations that he had:
FAILED TO DISCLOSE LOANS FROM TWO CLIENTS, ONE OF WHOM WAS HIS MOTHER, AND PROVIDED INACCURATE INFORMATION TO THE FIRM DURING AN INTERNAL REVIEW
FINRA Sanctions
In accordance with the terms of the AWC, FINRA imposed upon Brock a $15,000 fine and a seven-month suspension from association with any FINRA member firm in all capacities.
Bill Singer's Comment
It may surprise many BrokeAndBroker.com Blog readers to learn that I favor limits on borrowing by registered representatives from their customers. What should not surprise my readers, however, is my disgust with the cumbersome and often unintelligible FINRA Borrowing Rule that purports to explain when borrowing may or may not be permitted.
My effort above to apply the Borrowing Rule to the facts in the Brock AWC is a tortured exercise. Frankly, the Borrowing Rule is a confounding Mobius strip that endlessly turns back upon itself with no seeming start or end -- there is nothing constructive or helpful that emerges from this regulatory verbosity.