Don’t Ask Forgiveness Versus Permission

Can Clients Co-Sign Loans For Advisors?  And Beware of Unauthorized Crypto Investing.

Since the launch of Nightmare on Compliance Street, I’ve had lots of emails from Wealth Solutions Report readers, and I’d like to say, thank you so much for submitting your questions. 

We have two questions this week to go over. So let’s get started.

Don’t Seek Forgiveness Versus Permission

Should I ask permission for a
client to co-sign on my home loan?

Dear Sander:

I’m a registered representative with a bad credit rating stemming from a past medical issue. I want to buy a new house, but I can’t get a mortgage with my current credit. My best friend, who is also a client of the firm, wants to co-sign the mortgage loan for me. 

I know that I can’t borrow money from a client, but technically co-signing a loan isn’t borrowing money. 

But having a client co-sign a loan isn’t mentioned in our written supervisory procedures. Should I bring this to the attention of my supervisor or the compliance department for approval, or should I just get the mortgage and the house and plead ignorance later if this is ever discovered?

Confused in California

Sander Ressler’s Advice:  Well, Confused, you’re not confused when it comes to being correct that borrowing money from a client is a prohibited act by FINRA.  But I’m also not surprised that your written supervisory procedures don’t address having a client co-sign on a loan.  

It may not be borrowing money in the traditional sense, but you’re still treading in potentially murky regulatory territory. 

“Having a client co-sign on your mortgage may not be borrowing money in the traditional sense, but you’re still treading in potentially murky regulatory territory.”

While the old cliche that it’s better to ask for forgiveness than permission may be true elsewhere, it is certainly not true in the securities industries.  Definitely speak with your supervisor and your compliance department to gain some clarity on this issue. 

Just so we’re crystal clear, if there’s a compliance issue that you need clarity on, get it from your firm upfront – Do not ignore it and hope it never comes up in future.

Imagine if there’s an investigation of this issue down the road:  If you have already received direction from your firm, you will be inoculated with the reasonable justification that you were following the advice of your compliance department.

 “We must protect ourselves!”

By the same token, if you don’t raise the issue, and proceed anyway, you have absolutely nothing to fall back on. 

This could result in a barrage of unsavory regulatory consequences that no one wants to experience at any point in their career.  

One of my guiding principles is always to protect yourself in this business and don’t try to interpret rules on your own. You may regret it.

Cryptic Policies on Crypto Investing

Dear Sander:

My clients are calling me nonstop to express their exuberant interest in investing in cryptocurrencies, which you probably know is a hot topic in the industry right now. 

My firm prohibits recommending investments in cryptocurrencies, but my clients want my advice. What should I do? 

Tired of Crypto

Cryptocurrencies – An opportunity for clients
or a compliance nightmare for me?

Sander Ressler’s Advice:  Full disclosure, I’m not an expert on cryptocurrencies, and I suspect that there are very few people who actually are. That being said, you don’t have to be an expert to see that the public is responding to the buzz around cryptocurrencies, and many investors are experiencing a fear of missing out on the next best thing. 

Common sense dictates that this is not a recipe for knowledge-based investment. This is gambling, pure and simple.

As a registered representative, your job is to understand the investment so you can make a reasonable evaluation on whether it’s a good investment for your client’s needs and goals. 

Your firm’s prohibitions aside, unless your client has an investment goal of speculation, and is willing to lose a large part of their principle, they should steer clear from investing in cryptocurrencies. 

If they want to gamble their money away, I suggest they take a flight to Las Vegas, where the odds are better known, and certainly the gains are easier to understand.

“If your clients want to gamble their money away, I suggest they take a flight to Las Vegas, where the odds are better known, and certainly the gains are easier to understand.”

I encourage you to keep submitting your questions, anonymously, and thank you again!

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