I owned a piece of commercial real estate that was foreclosed on. I recently learned that the bank was planning on selling the note. A longtime friend, who also happens to be a client at my broker-dealer, is willing to buy the note from the bank and work with me on paying him back. We've talked about his holding the property until the income from it lets him recoup what he would pay for the note and then selling it back to me for a nominal amount. Or we may enter into an agreement for me to buy it from him now for what he will pay for the note but with a very favorable payment plan. Would this be OK?
FINRA Rule 3240 prohibits borrowing money from clients or lending money to them. While the purchase by the client of the note may not, in and of itself, be considered "borrowing money" from the client, you should at a minimum disclose this to your firm's compliance department.
More problematic, however, are the arrangements you and he are considering if he buys the note. I think either of the options you have presented would be considered to be borrowing money from the client and I would recommend against both proposals.
It's possible that your firm may permit you to purchase the property from the client if it was truly an arm's length transaction, but that would be solely up to your firm. If you were to go forward with this without letting your firm know and getting written approval from the compliance department, I can almost guarantee you that you will be fired and fined by FINRA.
Can I be arrested for violating a FINRA rule? I know I could be fined or have my license suspended, but what else can FINRA do to me?
Technically speaking, you cannot be arrested for a FINRA rule violation. FINRA's rules are those of a self-regulatory organization and are not criminal statutes. Criminal laws can be established only by the states or the federal government.
With that said, however, you should be aware that certain FINRA rule violations may also constitute violations of criminal laws. If, for example, you were to be found to have violated FINRA Rule 2020 ("Use of Manipulative, Deceptive or other Fraudulent Devices"), it’s likely that FINRA might refer the matter to state or federal authorities who could in turn charge with a violation of the state (or federal) anti-fraud statutes and prosecute you criminally.
Additionally, while most violations result only in FINRA sanctions, on occasion a state regulatory agency might begin their own investigation and impose their own sanctions. For example, if FINRA found you to have been acting in an unregistered capacity, it's possible that a state regulatory agency might also impose sanctions for your failure to register in the state. Again, however, something like that would generally not rise to the level of a criminal violation of the state regulations.
In addition to fines and suspensions, additional types of sanctions that FINRA can impose include censures, bars, expulsions or revocations of licenses, cease and desist orders, ordering disgorgement or reimbursement of commissions, requiring enhanced or special supervisory oversight, or anything else that might be appropriate.
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