Will brokers be in trouble with the Financial Industry Regulatory Authority for taking Paycheck Protection Loan money? It depends on what the reps were doing with the money.
The agency is looking closely at brokers who took PPP loans and other Covid-19-related aid, and according to one securities attorney whose client received a letter, the agency is concerned not so much about the loan money itself as what it was used for. Finra said it is conducting “examinations to determine whether violations of the federal securities laws and Finra rules have occurred.”
“I think Finra is investigating these issues under the guise that brokers might be using the funds for undisclosed outside business activities,” said Max Schatzow, a partner at Stark & Stark law firm, whose broker client received a Finra exam letter. Whether or not brokers should worry will “depend on what is uncovered,” he added.
The letter has been sent to multiple brokers, and in it the regulator asks them for extensive loan documents, asks about the reasons for borrowing, asks for bank and brokerage statements and wants to know about outside business activities, said Finra spokesman Andrew DeSouza. The agency seeks extensive information from brokers, including loan documents, bank statements and tax filings.
"Finra is proactively looking at registered representatives that obtained loans through undisclosed outside business activities. It is core to Finra's mission to detect, deter and investigate potential fraud,” DeSouza told Financial Advisor. He declined to comment on how many brokers were under review.
According to Schatzow: “The application for a PPP loan on its own is not a violation of Finra rules. However, if a registered representative didn’t disclose the business to their member firm, then they likely violated Finra rules and their firm’s policies and procedures.”
If brokers are found to be engaging in outside activities they haven’t disclosed to their brokerage firm, Finra’s guidelines are to “consider suspending the respondent in any or all capacities for a period of 10 business days to three months.”
“Where the outside business activities involve aggravating factors, [Finra] considers a longer suspension of up to one year. Where aggravating factors predominate, [the agency should] consider a longer suspension [of up to two years] or a bar.”
The exam letter was sent to multiple brokers by Finra’s National Cause and Financial Crimes Detection Program and signed by Nicole Floyd, the agency’s associate principal investigator.
Focus On Reps?
Among other things Finra asks for in the exam letter are the reasons the broker applied for a loan, copies of all loan applications, statements on how the funds were used and all compensation received since October 1, 2019. The letter also asks for descriptions of any outside business activity in which the broker has participated since 2015 and whether that activity was disclosed to the rep’s brokerage, along with state and federal tax refunds since 2017 and all bank and brokerage account statements.