Truthfulness is the Best Approach

If you are registered with FINRA, the quickest way to torpedo your career is to lie to FINRA. Two recent settlements with FINRA demonstrate why every financial advisor needs to hire a lawyer right away and tell that lawyer the truth.¹ That is critical.

Daniel Schmid/FINRA Settlement
The first settlement was by Daniel Schmid. According to the Schmid Acceptance and Waiver (“AWC”),² FINRA found that the financial advisor borrowed money from a firm customer in violation of his firm’s policies. FINRA Rule 3240 prohibits a financial advisor from borrowing or lending money to an advisor’s customer without the firm’s express prior written consent (which is unlikely to ever be given) and satisfying a number of conditions. In fact, almost all firms prohibit financial advisors from borrowing money from their customers.

According to the AWC, Mr. Schmid borrowed $25,000 from a customer of the firm (not necessarily one of Mr. Schmid’s customers) to finance a business venture. We do not know from the AWC whether Mr. Schmid knew at the time he obtained the loan whether he was obtaining a loan from a customer of the firm. The AWC does say, however, that (1) Mr. Schmid did not seek prior approval from his firm, Northwestern Mutual, (2) the loan violated the firm’s policies (“which prohibited associated persons from borrowing from customers exception within certain circumstances that did not apply to the loan”), and (3) Mr. Schmid repaid the loan after three months.

Because all relevant facts are not necessarily set forth in the AWC, this might have been a misunderstanding that resulted in a violation of FINRA’s rules. It is unclear whether the firm’s policies are the same as FINRA Rule 3240 – prohibiting borrowing from a financial advisor’s own customers – or whether the firm’s policies prohibited borrowing from any customer of the firm. In either case, financial advisors are advised to get prior firm approval for any loan and any outside business activity.

All this might have led to a suspension and fine, but it appears that Mr. Schmid took certain actions that made things much worse. According to the AWC, FINRA issued Rule 8210 requests to Mr. Schmid about the loan and outside business venture, which Mr. Schmid flatly denied existed. FINRA found that Mr. Schmid failed to produce “several responsive documents that proved he received the loan from the customer for the business venture.” If Mr. Schmid thought that FINRA would not be able to get evidence of the loan and business venture from other sources, he was wrong. Although FINRA cannot compel responses from businesses or individuals who are not under its jurisdiction, businesses and individuals often voluntarily provide information and documents to FINRA. Presumably, this is how FINRA learned of the inadequacy of Mr. Schmid’s production.
FINRA brought Mr. Schmid in for “on the record” testimony. According to the AWC, Schmid initially affirmed the statements he had made in writing (i.e., that he had not borrowed money from a firm customer for an outside business activity), but he eventually admitted to receiving the loan. According to the AWC, Mr. Schmid also admitted he provided false written responses and false testimony, and withheld responsive documents from his production to FINRA.

The Schmid AWC is a settlement with FINRA in which Schmid agrees to a permanent bar from associating with any FINRA registered firm in all capacities.³ When FINRA says permanent, they mean permanent.

Troy Bystol/FINRA Settlement
The second settlement was by Troy Bystol. According to the Bystol AWC, Mr. Bystol borrowed $400,000 from a personal friend who was also a customer of his. Mr. Bystol did not give his firm notice of the loan nor did he obtain prior written approval for the loan from his firm. The AWC states that Mr. Bystol “answered ‘no’ on [the firm’s] annual audit questionnaire when asked whether he had entered into any borrowing arrangements with clients other than immediate family members.” Finally, the AWC states that Mr. Bystol has not repaid the principal of the loan or all of the interest payments.⁴

The Bystol AWC is a settlement in which Mr. Bystol consented to a FINRA suspension of three months and a $5,000 fine.

Why Truthfulness Matters
The Bystol AWC is a substantially better settlement than the Schmid AWC. FINRA found that, while Mr. Bystol did not provide a truthful answer to his firm in the annual attestation, he did not lie to them. In contrast, FINRA found that Mr. Schmid lied to them multiple times.

Please note that this is not meant to be legal advice via a backdoor critique of Mr. Schmid’s legal defense. We do not know a lot of what could be very relevant facts about both of these matters.

We are describing these contrasting cases to help financial advisors and others who work in the financial services industry to take appropriate steps before responding to FINRA 8210 requests. These two examples show:

• It is critically important not to just fire off responses to FINRA 8210 requests without first hiring a lawyer. Those responses might be incorrect or partially incorrect. A lawyer can help you determine whether and how to respond and explain to you the consequences of not answering truthfully.
• When hiring a lawyer, look for someone you trust because you need to fully disclose to that lawyer all the facts – let the lawyer figure out whether those facts are specifically relevant or not.

We have assisted financial advisors in making mid-term corrections to responses they provided on their own to FINRA. Sometimes those responses can be tweaked to correct misstatements, sometimes not. We have assisted clients in extracting themselves from these types of situations and ensuring that they not make statements that FINRA could consider false or misleading.

Critical to our legal representation is ensuring that we have a relationship of trust with our clients. Our clients can be confident that anything they tell us will not change how zealously we will represent them. Our clients often tell us about extremely painful and personal circumstances because they know that we will handle that information in the most respectful and confidential way.

You can contact us for a free consultation to see how we can help you with FINRA 8210 requests. 847-906-3460 or Info@SECDefenseAttorney.com

¹ We have no connection to either of the parties or attorneys described in this post. Consequently, our knowledge is limited to the facts reported in the AWCs.
² https://data-portal.finra.org/fda_documents/2024083956101%20Daniel%20Schmid%20CRD%206658306%20AWC%20lp.pdf
³ The Schmid AWC was the subject of a Financial Advisor IQ article: https://www.financialadvisoriq.com/c/5242994/752094?referrer_module=emailMorningNews&module_order=2&login=1&code=VEdsellVQlRSVU5FWldabGJuTmxRWFIwYjNKdVpYa3VZMjl0TENBeE5EY3lORFUwTXl3Z05qY3lNekU1TkRFdw
⁴ https://data-portal.finra.org/fda_documents/2025088613801%20Troy%20Bystol%20CRD%204502626%20AWC%20lp.pdf