by Howard Haykin

William Shakespeare wasn’t the first person to question the wisdom of loaning money. Nor has he been the last. The Financial Industry Regulatory Authority, or FINRA, reminds us every month that brokers regularly borrow from customers – even though they do so in violation of their own firm policies and industry regulations.

Loans to friends, and customer loans to brokers, are fraught with risk. The trust agreement between the lender and the borrower is often violated - by a late repayment or by no repayment at all. These dynamics have everything to do with human nature, and little to do with the securities industry.

WHY BROKERS BORROW FROM CUSTOMERS.    Brokers who may be financially strapped or in need of a “tide me over” loan frequently turn to customers for loans. Why? They’re distinctly aware of their customers’ financial conditions, spending needs and levels of financial sophistication. Many customers often have significant pools of readily available money. And the personal aspect of their relationships make customers - particularly senior individuals - relatively easy marks.

Yet, the fact that many brokers fail to repay customer loans bears out the above common observations about money-lending. Take for example, this Merrill Lynch broker who, after borrowing $69,000 from 2 customers, filed for bankruptcy and failed to repay the customers. After each complained to the firm, Merrill Lynch repaid the loans and fired the broker.  [FINRA Case #2018058520801]  Or the Ameriprise broker who borrowed $150,000 from a customer to invest in an private e-cigarette company. Though he promised to repay the principal within one year, with 10% interest, and to share 10% of any profits earned on his initial investment, the broker never repaid the customer.  [FINRA Case #2017055910301]