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Regulatory Sanctions

If You Must Borrow from a Customer, At Least Document the Loan

February 14, 2019

by Howard Haykin


In January, FINRA reported two cases involving brokers who borrowed funds from customers without first notifying or seeking approval of the loan from the firm. The sanctions differed significantly:
  • BROKER ONE, who borrowed $250K, was fined $5K and suspended 45 days;
  • BROKER TWO, who borrowed $125K, was fined $7.5K and suspended 5 months.



Let’s review the facts and circumstances of these cases to better understand FINRA’s probable reasons for levying such widely disparate sanctions.


BROKER ONE – WHAT WENT WRONG (AWC #2016050800401).    In June 2016, the Merrill Lynch broker borrowed $250,000 from a customer contrary to Firm policies. The broker planned to leave Merrill and affiliate with another firm, and needed the money to remodel office space that he planned to occupy.


  • The broker had 8 years’ experience with 3 firms.
  • The customer, an attorney, was a personal friend of the broker.
  • The loan was documented.
  • The loan was repaid with interest in August 2016 – 2 months later.



BROKER TWO – WHAT WENT WRONG (AWC # 2018059481701).    In May 2013, an LPL Financial broker borrowed $125,000 from a customer contrary to Firm policies. The broker needed the money to facilitate a real estate purchase.


  • The broker had 32 years’ experience with 3 firms.
  • The customer was a personal friend of the broker.
  • The customer was a senior investor at the time the loan was made.
  • There was no promissory note or other document memorializing the loan.
  • The loan, based on an oral agreement, had no specific terms regarding interest or repayment.
  • The broker misstated on several ACQs (annual compliance questionnaires) that she had not borrowed any money from another individual or entity.
  • Under terms of FINRA’s AWC, the broker must repay the $125,000 with interest to the customer.



Both brokers violated FINRA Rule 3240 (Borrowing From or Lending to Customers) by acting contrary to their respective firm’s policies. In each case, the broker failed to notify or seek approval of the loan from the firm.



FINANCIALISH TAKE AWAYS.    Here’s what apparently made a difference in the sanctions:


  • Broker One’s loan was documented; Broker Two’s loan was not.
  • Broker One’s loan carried an interest rate and apparently stipulated a repayment date; Broker Two’s loan specified no interest or repayment terms.
  • Broker One repaid his loan with interest after just 2 months; Broker Two never made any payments - principal or interest – over the 5-year period.
  • Broker Two borrowed the funds to facilitate a real estate investment that might have carried risk, thus possibly impacting Broker Two's ability to repay the loan.
  • Broker Two borrowed from a senior investor lender (a ‘cardinal sin’).
  • Broker Two submitted false statements on Merrill’s ACQs (another ‘cardinal sin’).


Here’s what apparently had little impact on the sanctions:


  • Broker Two’s clean disciplinary record over her long-term (32 year) career.
  • Broker One’s and Broker Two’s personal relationships (friendships) with the customers who lent funds.


Though initially critical of FINRA for the widely disparate sanctions in these cases, I quickly reversed my position after examining the details.



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

For further details, go to ...  FINRA Disciplinary Actions Online, and refer to the Respective AWC Number.