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Regulatory Sanctions

Beg, Borrow and Steal(?)

June 7, 2019

by Howard Haykin


Way too many brokers seek out and obtain loans from firm customers. It's not surprising, given the ready and willing nature of some brokerage customers who may (or may not) have ample pools of financial assets in their accounts. Yet, these loans violate most firm policies and industry regulations, and they can introduce stress and strain to relationships among brokers, customers and brokerage firms. They can further introduce conflicts of interest that discolor the motives and actions of brokers who should be acting without distraction on behalf of all their customers’ best interests in mind.
It's for these reasons that brokers, when caught borrowing, are usually terminated for cause and handed lengthy regulatory suspensions – regardless of the amounts involved. Here are 2 more cases.



PRUCO SECURITIES BROKER.   In November 2016, the broker borrowed $5,000 from an elderly customer. The loan has not been repaid. Pruco learned about the loan and, in September 2017, discharged the broker for taking loans and accepting money from multiple clients without firm approval. Upon receiving Pruco’s Form U5, FINRA initiated an investigation that concluded in March 2019 with the broker agreeing to pay a $5K fine and serve a 3-month suspension to settle charges that he violated FINRA Rule 3240(a).  [FINRA Case #2017056094402]



MORGAN STANLEY BROKER.   In August 2016, while experiencing financial difficulties, the broker borrowed $30,000 from a longtime friend and MS customer. Funds for the loan were wired from the customer's brokerage account to an external bank account also belonging to the customer. The customer then wired the funds to the broker. To conceal the purpose of the customer's withdrawal from Morgan Stanley, the broker submitted a wire transfer form that inaccurately described the reason for the wire transfer as for a "Car Purchase."


In December 2016, the customer agreed to loan the broker additional funds, and another wire transfer form was submitted to the firm – this time with “Living Expenses” as the reason for the withdrawal. After the funds were wired the customer elected not to consummate the 2nd loan. At or around this time, Morgan Stanley learned about the initial $30,000 loan, whereupon it terminated the broker and reimbursed the customer.


FINRA initiated an investigation that concluded in March 2019 with the broker agreeing to serve a 4-month suspension to settle charges that she violated FINRA Rule 3240(a). No fine was issued in light of the broker’s financial status.  [FINRA Case #2017052985001]



FINRA Rule 3240(a) prohibits a registered person from borrowing money from or lending money to his or her customer unless: (1) the registered person's employing member firm has written procedures permitting the borrowing from, and lending of money to, customers; and (2) the borrowing or lending arrangement meets at least one of five circumstances specified in the rule.
Even if these requirements are satisfied, the registered rep must seek prior approval from the member firm, and the member firm must preapprove the arrangement in writing, unless the firm's procedures provide otherwise. A violation of F1NRA Rule 3240 also violates FINRA Rule 2010.

These cases were reported in FINRA Disciplinary Actions for May 2019.