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FINRA Borrowing Rule Seems to Say What It Means But It Doesn't Actually Mean What It Says
July 22, 2020
Today's BrokeAndBroker.com Blog immediately starts off with a digression (and what better place to digress than at the start of things!). Our detour takes us to one of my favorite passages in Lewis Carroll's "Alice's Adventures in Wonderland":
"Come, we shall have some fun now!" thought Alice. "I'm glad they've begun asking riddles.--I believe I can guess that," she added aloud."Do you mean that you think you can find out the answer to it?" said the March Hare."Exactly so," said Alice."Then you should say what you mean," the March Hare went on."I do," Alice hastily replied; "at least -- at least I mean what I say -- that's the same thing, you know.""Not the same thing a bit!" said the Hatter. "You might just as well say that 'I see what I eat' is the same thing as 'I eat what I see'!""You might just as well say," added the March Hare, "that 'I like what I get' is the same thing as 'I get what I like'!""You might just as well say," added the Dormouse, who seemed to be talking in his sleep, "that 'I breathe when I sleep' is the same thing as 'I sleep when I breathe'!"
As the wise March Hare admonished Alice, saying what you mean is not the same thing as meaning what you say. Not at all. Not the same thing a bit!
All of which ends this digression and returns us to our point of departure.
FINRA Rule 3240
When it comes to the drafting of a law, regulation, or rule, I'm a stickler for the precision of language. FINRA Rule 3240: Borrowing From or Lending to Customers https://www.finra.org/rules-guidance/rulebooks/finra-rules/3240 states in pertinent part:
(a) Permissible Lending Arrangements; ConditionsNo person associated with a member in any registered capacity may borrow money from or lend money to any customer of such person unless: . . .
That language seems pretty straightforward: No registered person may borrow money from any customer of that person unless certain conditions are met.
The thing about how things seem is that they don't always turn out to be what they seem to be.
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, Dawn Hare submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Dawn Hare, Respondent (FINRA AWC 2019061881501)
https://www.finra.org/sites/default/files/fda_documents/2019061881501
%20Dawn%20Hare%20CRD%202654713%20AWC%20va.pdff
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The AWC asserts that Dawn Hare entered the securities industry in 1995, and by 2007, she was registered with FINRA member firm TIAA-CREF Individual and Institutional Services LLC, where she remained until her termination in March 2019. The AWC asserts that Hare "does not have any disciplinary history with the Securities and Exchange Commission, any state securities regulators, FINRA, or any other self-regulatory organization."
Hare Arranged Loan to Son's Business
As alleged in pertinent part in the AWC:
TIAA's written procedures prohibited its associated persons from borrowing from customers, with no exceptions. Hare knew and understood the Firm's policy. Nevertheless, in January 2019, while employed by TIAA, Hare arranged for her elderly TIAA customer to lend her son's business $250,000. Hare introduced the opportunity to her customer, negotiated the loan terms, and wrote out the checks for her customer to sign. Hare had a financial interest in her son's business, having lent it approximately $100,000 over the prior year and personally guaranteed certain outstanding debts. TIAA terminated Hare after learning of the loan from Hare's customer to Hare's son's business. The customer was made whole, including receiving $11,000 from TIAA. By virtue of the foregoing, Hare violated FINRA Rules 3240 and 2010.
Discharged
As alleged in FINRA's online BrokerCheck database as of July 15, 2020, TIAA "discharged" Hare on February 5, 2019 based upon allegations of "Violation of firm policy by requesting financial assistance for a family member's busienss from a client." The firm provided the following statement:
The representative approached one of her clients seeking financial assistance for a family member's business. The client subsequently made two payments by check, totaling $210,000, one to the family member and one to the family member's associated business. After the issue was identified and TIAA discussed the matter with the client and a trusted contact, the client decided he did not want to go through with the payments and $199,000 in funds from the checks that had not yet cleared were recovered and returned to the client's TIAA brokerage account.
FINRA Fine and Suspension
In accordance with the terms of the AWC, FINRA found that Hare had violated FINRA Rules 3240 and 2010, and the regulator imposed upon Hare a six-month suspension from association with any FINRA member in any capacity. The AWC notes that:
In determining the appropriate sanction in this matter, and in determining not to impose a fine, FINRA considered, among other factors, that on June 30, 2020, the New Hampshire Bureau of Securities Regulation entered a Consent Order that fined Hare $4,000 fine and suspended her state securities license for six months for violating New Hampshire securities laws in connection with her participation in the loan from her customer to her son's business.
VISIT the BrokeAndBroker.com Blog "Borrowing" Archive
http://www.brokeandbroker.com/index.php?a=topic&topic=borrowing
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
http://brokeandbroker.com/PDF/FINRABorrowingRule.pdf
Bill Singer's Comment
I'm just not sure about this one. My concern may be based upon a "technicality," but it's there nonetheless.
My reservations about this AWC aside, Hare entered into a settlement with FINRA and, as I always note, it's not my place to question any settlement, particularly when the Respondent is represented by counsel (as was Hare). Pointedly, I don't know what I don't know. FINRA AWCs are documents that are the byproduct of negotiation during which things that Staff alleged in their opening salvo may be diluted or eliminated, and facts that are alleged may be reduced or removed as part of the give-and-take. Consequently, what we see in the AWC is the last and not the first draft.
To be clear, TO BE VERY CLEAR, what follows below is nothing more than an indulgent, academic exercise because Hare entered into a settlement pertaining to her alleged violation of Rule 3240. On the other hand, as the AWC notes, Hare settled "without admitting or denying the findings."
No Associated Person May Borrow From Any Customer
To reiterate, as set forth in pertinent part, FINRA Rule 3240: Borrowing From or Lending to Customers. https://www.finra.org/rules-guidance/rulebooks/finra-rules/3240 states:
(a) Permissible Lending Arrangements; ConditionsNo person associated with a member in any registered capacity may borrow money from or lend money to any customer of such person unless: . . .
Reduced to its essentials, Rule 3240 prohibits, in part, the borrowing of money from a given associated person's customer by that associated person absent with compliance with a notification protocol set forth in the rule.
Hare "Arranged" The Loan
So -- let's plug some facts from the AWC into Rule 3240 and see how everything shakes out. As set forth in the AWC:
Hare arranged for her elderly TIAA customer to lend her son's business $250,000 . . .
By the AWC's own statement, Hare "arranged" for a loan for "her son's business." Granting that Hare is a "person associated with a member in any registered capacity," the next question is whether her arranging for a loan for her son's business is the same as her borrowing money from her customer.
I'm a stickler for precision of language. Say what you mean and mean what you say! FINRA Rule 3240 prohibits a registered person from borrowing money from any customer of that registered person unless certain conditions are met. All of which raises the question as to whether Hare borrowed money from the customer. Just going by the statement of facts in the AWC, that doesn't seem to be the case. There is no allegation that the checks that manifested the act of borrowing were made payable from the customer to Hare -- to the contrary, the AWC explicitly says that "TIAA terminated Hare after learning of the loan from Hare's customer to Hare's son's business." Let's reiterate that statement from the AWC as written by FINRA: the loan was from one of Hare's customers to Hare's son's business. There was no loan from the customer to Hare. As such, Rule 3240 does not seem to apply to this transaction as structured.