FINRA examines companies that have accepted PPP loans for possible rule violations


FINRA is examining brokers who have received a loan under the Paycheck Protection Program, a federal government program intended to provide relief to small businesses affected by the coronavirus pandemic.

In a letter obtained by Financial planning, the regulator’s national financial crime and cause detection programs indicate that the purpose of the review is to determine whether PPP loans violate federal securities laws or FINRA rules. The recipient’s name and brokerage affiliation have been redacted.

A FINRA spokesperson confirmed the letter was from the regulator and clarified that it was not a focused review letter.

“FINRA is proactively reviewing registered representatives who have obtained loans in the course of undisclosed outside business activities,” the spokesperson said in an email. They declined to comment on rule violations that concern the regulator or the number of advisers screened.

While undisclosed outside business activities would violate FINRA rules, Max Schatzow, a Stark & ​​Stark lawyer who represents a company who received a copy of the letter sent to an affiliate advisor, says it appears that the regulator tries to determine whether or not the person should have taken out a loan in the first place.

The letter requests detailed information on why the advisor requested a loan, how the funds were received and used, and any compensation received since October 1, 2019.

“There are no rules, statutes or regulations saying that an advisor cannot apply for a government sponsored loan whether or not it is recoverable,” Schatzow said. “I just think it is an insane waste of the resources of FINRA spending their time and energy essentially doing the work of a criminal investigation or an enforcement arm of a government regulator.”

The federal government set aside $ 670 billion in April for small businesses that were affected by lockdown orders nationwide during the pandemic

Given the feeling of panic in the spring, some companies may have taken out loans on behalf of a parent company not to include them on the books of a brokerage entity regulated by FINRA, said Stephen Murphy, director. general manager of Foreside Financial Group, which provides governance, risk management and compliance technologies to advisors. The roll-out of financing on a first-come, first-served basis has also sparked a rush in loan applications.

“Decisions weren’t always well documented, applications were sometimes read with teary eyes, and in retrospect maybe different interpretations could be made now,” says Murphy.

If the funds weren’t used exclusively on employee payroll, FINRA might fear the company might violate FINRA 2010 regulations, which demands that businesses be run fairly and honorably, adds Murphy. Or if the business really needed the loan to avoid going out of business, it could violate FINRA’s capital requirements.

“Were companies using these PPP loans to cover up past misdeeds? Did companies take this opportunity to pay themselves a premium rather than reinvesting it in the company? Murphy asks. “I think it comes down to the notion of ethical management of your business.”

According to data released by the Small Business Association, which administered the loans, more than 1,400 wealth management companies received loans of at least $ 150,000.

Sanctuary Wealth Group, which includes brokerage firm Sanctuary Securities, has received between $ 1 million and $ 2 million from the federal program but has not received a letter from FINRA, according to a spokesperson.

American Portfolios, Kovack Financial and Geneos Wealth Management, all brokers who have received PPP loans, did not respond to a request for comment.

Other companies have dealt internally with employees who abused the coronavirus relief program. In September, JPMorgan Chase found evidence employee and customer wrongdoing involving PPP loans, and Wells Fargo laid off more than 100 employees in October that poorly raised funds.

However, it’s not FINRA’s job to deal with these cases, says Schatzow.

“FINRA should really focus on investor protection and the safety of financial institutions,” he said. “It just seems to come out of left field. “


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