Financial advisors are held to strict ethical and regulatory standards regarding their financial entanglements with clients. FINRA recently suspended former Laguna Niguel, California broker Jacob Lee Harper for 22 months and assessed a deferred fine of $17,500 after he allegedly bypassed these critical safeguards.

www.finra.org/rules-guidance/oversight-enforcement/disciplinary-actions

The Allegations Without admitting or denying the findings, Harper consented to FINRA’s sanctions regarding allegations that he borrowed $50,000 from two of his customers. While Harper claimed these customers were also friends, FINRA rules strictly prohibit brokers from borrowing money from clients without prior written approval from their member firm, unless the client is an immediate family member or a lending institution.

What This Means for Investors The rule against borrowing from customers exists to prevent conflicts of interest and the exploitation of the broker-client relationship. When a financial advisor asks a client for a personal loan, an investment in an outside business, or any off-the-books financial favor, it is a massive red flag.

If you or a family member have loaned money to a financial advisor or engaged in private financial transactions outside the purview of the brokerage firm, you may be the victim of broker misconduct. Brokerage firms have a legal duty to supervise their representatives; when they fail to detect improper loans or selling away, the firm can sometimes be held liable for the investor’s losses in FINRA arbitration.