Articles Tagged with promissory note

We frequently represent individuals who have received an SEC Subpoena, and often the first question asked is, “Why did I get this subpoena? I did nothing wrong.”  The SEC investigates many kinds of misconduct, and the people they seek information and documents from (through the use of Subpoenas) very often are not “targets” of the investigation, but the SEC may believe they could be a “witness,” or may have useful information that could aid the investigation.  Understanding the common investigations the SEC may commence is a good first step to understanding what prompted the Subpoena.

According to the SEC, the most common types of investigations of potential securities violations include:

  • Misrepresentation or omission of important information about securities – when promoting the sale of securities, brokers, broker-dealers and other securities professionals should ensure that promotional materials accurately reflect the characteristics and risks of the securities.

Thinking about leaving your broker-dealer?  Looking to make the transition to a new firm?

It has been reported recently that brokers from Credit Suisse, Deutsche Bank and potentially Merrill Lynch are being heavily recruited to leave and join new broker-dealers.  For those leaving Credit Suisse, Deutsche Bank, and Merrill (as it is for any FINRA registered representative) the choice to move to a new broker-dealer is not one that is made lightly.  Whether a protocol move or a non-protocol move, many of the same issues remain at the forefront and need to be dealt with judiciously.  One of these issues is the transition bonus/promissory note.

If you are fortunate enough to have a substantial book of business and significant gross production, you may have been offered an upfront transition bonus by a new broker-dealer.  Frequently, these bonuses are awarded to reps in the form of Forgivable Promissory Notes.  The basic structure of these “Notes” is as follows:  The “bonus” is structured on paper as a loan.  Over a set time period – usually five to seven years – the balance of the loan, including interest, is paid off or “forgiven” by the broker dealer.

One of the well-known and strictly enforced rules in the securities industry is that brokers should not enter into undisclosed private loan transactions with their clients.  A Letter of Acceptance, Waiver and Consent (AWC) was recently accepted by the Financial Industry Regulatory Authority’s (FINRA’s) Department of Enforcement from Paul F. Gans, Jr., who was employed as a registered broker by Raymond James Financial, Inc. up until November 2014.  According the AWC, Mr. Gans inappropriately loaned money to a “family friend” in exchange for a three-year promissory note bearing 8% annual interest, without disclosing the transaction to his employer and ensuring it complied with his employer’s policies and procedures.  Mr. Gans was accused by FINRA of violating FINRA Rule 3240 (Borrowing from or Lending to Customers) and Rule 2010 (Standards of Commercial Honor and Principles of Trade).

Rule 3240 prohibits brokers from borrowing from or lending to customers, unless the transaction is permitted by the employing firm after disclosure and in compliance with the firm’s policies and procedures.  According to the AWC, Mr. Gans did not disclose the promissory note transaction to his employer.

As detailed in the AWC, Mr. Gans was suspended from association with any FINRA member for ten business days, and fined $5,000.  The firm, Raymond James Financial, Inc., disclosed on FINRA BrokerCheck that Mr. Gans was discharged for his lack of disclosure of an outside business activity, which may or may not refer to the promissory note transaction.  It was also disclosed on FINRA BrokerCheck that Mr. Gans was also discharged from his prior employer Morgan Stanley Dean Witter in 2000 for also violating that firm’s policies and procedures, that time for mailing correspondence without prior approval.  FINRA BrokerCheck also revealed that Mr. Gans was the subject of one customer complaint in 1994 for allegedly failing to inform a client in the decline in value of a “mutual investment,” which claim was settled by Morgan Stanley Dean Witter.