Welcome to #finraFridays!
This Blog breaks down the mysteries of FINRA’s Conduct Rules, and its investigative and disciplinary process as well as firm practices so that those of you who are facing scrutiny by the regulator are better prepared to defend yourself. In each posting, we explore a rule or small piece of the process and explain how it impacts FINRA and you. If you want a topic covered on #finraFridays, feel free to contact Gary Carleton at gary@carletonlaw.net.
This Week:
Firms Attracting Brokers Through Forgivable Loans:
The Two-Edged Sword
The ability for securities brokerage firms to attract and keep registered brokers who have transferable books of business is the bread and butter of many retail brokerage firms. It takes years of hard work and superior customer service for a broker to grow a book of retail customers with many securities brokerage accounts. Those brokers become particularly valuable to firms who are looking to grow through the transfer of brokers and their customers’ accounts and assets.
Hiring brokers that are new to the industry requires an investment of time and energy before they start earning enough in commissions to be an asset to the firm. That is why many firms look for established brokers who are looking for an incentive to move firms with their clients.
One of the more prevalent ways that firms attract brokers with a book of business is by offering them forgivable loans. Firms give brokers four, five, or six-figure “loans” upon joining the firm and transferring their customers’ accounts to the new firm. Despite what a customer might hear as to the reason his broker changed firms, these loans can be strong inducements.
These loans become forgivable, often in tranches, depending on how long the broker maintains his or her registration and customer accounts with the firm. For example, in one situation, the loans are forgiven in three installments with the first third of the loans being forgiven after the broker has been at the firm for at least 18 months. The second and third tranches of the loans then become forgiven on each succeeding 18 months of registration at the firm.
You would think that most brokers, upon receiving the upfront loan, would be good with maintaining and even growing those funds as investments. Most times, you would be wrong. Those funds often get spent quickly to help pay needed expenses.
That’s fine as long as the broker stays at the firm long enough to have the loans fully forgiven, which, like the example above, could take four and a half years. Brokers who decide to leap to another firm before the forgivable loans period has passed, are obligated to repay the loans within the short period of time referenced in the loan.
Unfortunately, there are just too many brokers who leave firms before retiring the loans, and do not have the funds to repay the loans. Firms are then forced into seeking mediation or arbitration to enforce forgivable loans. Establishing liability in an arbitration is not difficult as there is a loan and an acknowledgement of lack of repayment before the first, second, or third tranche of forgiveness is completed.
Brokers who are found liable for the loan repayments but who nonetheless fail to make payment are subject to disciplinary action by FINRA for failing to pay an arbitration award. Every year, brokers are barred from the industry for failing to make such payments.
Conclusion
Brokers who change firms and accept forgivable loans as an inducement need to assure themselves that the firm will meet the needs of their clients regardless of the loan. They also need to be sure to be able to promptly repay any loans in the event they determine to move on before the loan forgiveness period has run. Not being able to repay those loans will likely lead to arbitration and a potential disciplinary action and bar from the industry.
Gary Carleton focuses his practice representing individuals and firms facing FINRA investigations, disciplinary proceedings and appeals, and statutory disqualifications. He also serves as co-counsel with attorneys who have clients facing a FINRA investigation or disciplinary proceedings Contact Gary Carleton at 202.744.6297 or gary@carletonlaw.net to set up an initial consultation.
In Case You Missed It – You can find prior blogs on the FINRA investigative and disciplinary process at www.carletonlaw.net and go to the Blog tab. #finraFlashback blogs in which we discuss notorious FINRA disciplinary proceedings can also be found at www.carletonlaw.net.
The prior topics include:
* SEC’s Seemingly Endless Delays in Ruling on FINRA Disciplinary Appeals – Justice Delayed Means Justice Denied
* FINRA’s Disciplinary Hearings Disappearing Act
https://carletonlaw.net/finras-disciplinary-hearings-disappearing-act/
* Guarding Against Excessive Trading in a Customer’s Account
* Keeping Stockbrokers Out of Trouble by Updating Their FINRA Form U4 Filings
https://carletonlaw.net/keeping-stockbrokers-out-of-trouble-by-updating-their-finra-form-u4-filings/
* Why FINRA’s Disciplinary Decisions are so “Appealing”
https://carletonlaw.net/why-finras-disciplinary-decisions-are-so-appealing/
* FINRA Flashback – FINRA’s Investigation Uncovers Stock Manipulation
https://carletonlaw.net/finra-flashback-finras-investigation-uncovers-stock-manipulation/
* FINRA Flashback to Stratton Oakmont
https://carletonlaw.net/finra-flashback-to-stratton-oakmont/
* Where have all the FINRA Members (and disciplinary actions) gone?
https://carletonlaw.net/where-have-all-the-finra-members-and-disciplinary-actions-gone/
* Special Considerations for Small Firms when Negotiating Settlements with FINRA https://carletonlaw.net/special-considerations-for-small-firms-when-negotiating-settlements-with-finra/
* Receiving that First Request for Information (a Rule 8210 Request) https://carletonlaw.net/receiving-that-first-request-for-information-a-rule-8210-request/
* Pre-Wells Notices – An Early Opportunity to Discover FINRA’s Evidence and Present Your Case
* Understanding the Significance of FINRA’s Limited Jurisdiction;
https://carletonlaw.net/315-2/ and
* How Old is Too Old for a FINRA Disciplinary Action
https://carletonlaw.net/how-old-is-too-old-for-a-finra-disciplinary-action/
About Carleton Law PLLC
Getting a call from FINRA or SEC Enforcement telling you that your work as a securities broker is under investigation could be the worst day of your life. You have worked hard for years building your business. Now, with one wrongful allegation you can see it all swept away. But with expert counsel, it does not have to end that way.
For more than 30 years, Gary Carleton was the attorney conducting those investigations at FINRA and SEC and now his firm, Carleton Law PLLC, brings that savvy experience to bear to advocate for brokers and FINRA firms who find themselves in that dreaded position. Carleton Law focuses on the individual needs of each client to guide them through the maze of the investigative and disciplinary process.
Carleton Law PLLC | 2001 Massachusetts Avenue NW, Washington, DC 20036 | info@carletonlaw.net
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Readers of this article should contact their attorney to obtain advice with respect to any particular legal matter. No reader should act or refrain from acting on the basis of information contained herein without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this article does not create an attorney-client relationship between the reader or user and the article author or law firm.
Attorney Advertising – Gary Carleton, Principal of Carleton Law, is admitted to practice law in the State of New York and the District of Columbia. This article may be considered attorney advertising.