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Regulatory Sanctions

The High Cost of Borrowing from Firm Customers

September 14, 2017

by Howard Haykin


In August, FINRA reported on disciplinary actions against 3 brokers who were caught borrowing from a customer of their respective firms. They never notified their firms and their penalties were significant - especially where FINRA drilled down further and discovered that the broker had either given false responses on the Annual Compliance Questionnaire or had willfully failed to update the Form U4 for required disclosures. OUCH!


FINRA CASE #2016052641501.    Mark Bonds agreed to a $5K fine and a 30-day suspension to settle FINRA charges that he falsely denied borrowing money in a questionnaire submitted to his member firm.


BACKGROUND.    Bonds, a resident of Irvine, CA, first entered the securities industry in 2006 as a general securities representative registered with LPL Financial LLC ("LPL"). He resigned from the firm in November 2016 and currently is not associated with any FINRA member. Bonds had no prior disciplinary history.


FINRA FINDINGS.    In October 2015, Bonds borrowed $52,000 from an LPL customer, “SH,” who was a personal friend of Bonds. While another LPL registered rep handled SH's account, LPL policies explicitly prohibited registered reps from borrowing money or securities from ANY firm customer. To make matters worse, FINRA found out that, on 12/2/15, Bonds denied in his submitted Annual Compliance Questionnaire that he had borrowed funds. The questionnaire asked, among other things: "Have you, or any related person or entity, borrowed or loaned any money or securities from or to another individual or entity?"  [Once again, relative injustice of the ACQ!]


FINRA CASE #2016052247401.    Zena Yofonovich agreed to a 2-month suspension to settle FINRA charges that she borrowed a total of $63,500 from an elderly customer of her member firm. In light of Yofonovich’s financial status, no monetary sanction was imposed.


BACKGROUND.    Ms. Yofonovich, a resident of Glenview, IL, entered the securities industry in March 1985 She was registered with Pruco Securities from 1990 until 11/7/16, when she was U5’d for having “borrowed money from a client without firm approval." Yofonovich has not been associated with any FINRA member firm since her termination.


FINRA FINDINGS.    Between 6/11/07 and 5/24/09, Yofonovich borrowed a total of $63,500 from an elderly Firm customer. The borrowed funds were withdrawn from the customer's variable annuity held at the Firm. Yofonovich did not notify the Firm before borrowing the funds; nor did she seek or obtain the Firm's preapproval of the loan, and she has not repaid the loan. [So much for long-term service with the firm - 26 years, to be exact!]


FINRA CASE #2016048629001.    Mitchell Behm agreed to a $10K fine and a 7-month suspension to settle FINRA charges that he financed the purchase of a vacation home from an elderly customer of his member firm by taking a $180,000 loan from the customer without prior written permission from or notice to the firm.


BACKGROUND.    Behm, a resident of Lakewood, CO, first entered the securities industry in November 1996 and received his Series 7 and 63 licenses in 1997. He subsequently received his Series 65 (Uniform Investment Advisor Law) and 24 (General Securities Principal) licenses. In December 2005, Behm joined Edward Jones as a General Securities Rep and remained there until 1/4/16, when he was permitted to resign while under internal review for failing to seek Firm approval to purchase a customer's vacation property, which the customer financed. Behm immediately hooked up with another broker-dealer, but voluntarily resigned from that firm in May 2017. He currently is not associated with a FINRA member firm. Behm had no prior disciplinary history.


FINRA FINDINGS.    In June 2013, Behm purchased a vacation home from an elderly customer of his at Edward Jones, and financed the purchase with a $180,000 loan from the customer. The customer was not a member of Behm’s immediate family, and Behm was the registered rep assigned to the customer’s accounts. Needless to say, he did not seek the firm’s permission for the transaction, nor did he provide written notice to the firm.


The loan agreement provided that Behm would make monthly payments on the loan, with a balloon payment of the outstanding principal and accrued interest at the rate of 2% per year due in ten years. To date, Behm made timely monthly payments on the loan, totaling approximately $27,300.


While drilling down into the broker's records, FINRA found that Behm had filed a Chapter 13 bankruptcy petition in April 2009, which he never discloed on his Form U4. [Behm has since amended his Form U4 for the bankruptcy disclosure, which he discharged in early 2014 after completing 60 monthly payments.] In this case, FINRA viewed this incident as a "willful failure" on Behm's part, given the fact that, during the 5-year period, he had amended his Form U4 24 times – and each time falsely represented that he had no reportable bankruptcies.


Question 14K of Form U4 asks, among other things: "[w]ithin the past 10 years . . . have you made a compromise with creditors, filed a bankruptcy petition or been the subject of an involuntary bankruptcy petition?"  [This "willful failure" added at least 5 months to Behm's suspension.]