So, you’re a registered rep, working for a broker-dealer. Necessarily, you are registered with and subject to the oversight of FINRA, not a particularly happy proposition. But at least you can take comfort in the fact that while FINRA may have the right to stick its nose into your securities business, what you do away from the broker-dealer is none of its concern, right? Well, not so fast.
As one Miguel Hernandez learned the hard way, FINRA is very interested in what you do on your own time, away from the BD, at least if that involves swindling a senior citizen.
According to the AWC that Mr. Hernandez agreed to, he convinced an elderly woman who he met at church to give him $25,000 to “cover business expenses associated with his purported tax business.” In return, she was to receive an interest in the tax business and some number quarterly payments of roughly $1,000 each. Sadly, but predictably, Mr. Hernandez, in fact, had no tax business, and simply kept the poor woman’s money. FINRA appropriately characterized this misconduct as conversion, and barred permanently barred Mr. Hernandez.
The disposition of the matter is not especially newsworthy. FINRA will always bar you if you steal money from a client. What is interesting, at least to me, however, is that nothing Mr. Hernandez did here related in any way to him being a registered rep at a FINRA member firm. While the victim of his scam is described as a “customer” – presumably of his broker-dealer – the scam does not seem to have had anything to do with that fact. Also, the entity that she thought she was investing in was a “purported tax business,” which means it was not a securities firm, and what she got for her money was not itself a security. Basically, Mr. Hernandez scammed a woman he met in church out of $25,000, a woman who seems to have also been a customer of the broker-dealer, but it was irrelevant to the case that he was a registered rep.
This raises thought-provoking questions about the scope of FINRA’s authority. Essentially, FINRA’s jurisdiction, if you will, has two components: jurisdiction over individuals, and jurisdiction over those individuals’ activities. The first is pretty easy to understand: if you are registered, or even just associated, with a broker-dealer, FINRA has jurisdiction over you. Thus, very obviously, if Mr. Hernandez had not been a registered rep, FINRA could not have taken any action against him. But, what about the second component? Does FINRA have jurisdiction over everything that Mr. Hernandez ever did while he was registered? Or, did FINRA have jurisdiction, somehow, because he cheated the old woman out of $25,000? Was there something special about the fact he converted her money?
The answer, unfortunately, is that FINRA gets to make it up as it goes along. Historically, under similar circumstances, FINRA has taken disciplinary action against registered people for stealing money, even when the theft occurs away from the broker-dealer. But, candidly, it is not at all clear why FINRA can do that. It has nothing to do with either the sale of securities or the investment banking business, the two things that require registration with (or as) a broker-dealer. Why, then, can FINRA get away with branding that particular sort of bad conduct – stealing money – as the basis for a Rule 2010 violation, when other equally bad conduct unrelated to the securities business – say, lying about whether one’s house that’s for sale ever had termite damage – goes unexamined and unpunished? In a related fashion, how can FINRA – admittedly on rare occasion – take disciplinary action against a registered rep for problematic advertisements used to sell straight insurance products, not securities?
I cannot explain this adequately. But, it would seem that FINRA either does or does not have the legal ability to enforce bad conduct committed by registered persons away from and unrelated to their securities business. That is, either all such bad conduct should be subject to FINRA scrutiny, or none of it. The notion that FINRA gets to pick the circumstances that it chooses to enforce through its disciplinary process is troublesome to me. FINRA is already viewed by most BDs and registered reps as an aggressive “big brother,” constantly watching and waiting to swoop in to examine even the slightest perceived rule violation, followed up swift enforcement action. I suppose that is bearable, or at least understandable, when it comes to securities-related activities. The idea, however, that FINRA is prepared to bar people for actions that are completely unrelated to their securities business, well, that is another story; that is not necessarily what registered reps agreed to when they elected to work in this regulated industry.