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FINRA proposes rule change on broker-client lending and borrowing

On Behalf of | Jan 10, 2024 | FINRA Compliance

The Financial Industry Regulatory Authority is attempting to strengthen the rules regulating borrowing and lending between brokers and their clients, AdvisorHub reports.

FINRA recently filed a proposal with the Securities and Exchange Commission to amend Rule 3240, which generally prohibits registered persons from borrowing money from or lending money to their customers.

The proposed rule change would add further restrictions to these practices.  According to FINRA, the intent is to “strengthen the general prohibition against borrowing and lending arrangements, narrow some of the existing exceptions to that general prohibition, modernize the immediate family exception, and enhance the requirements for giving notice to members and obtaining members’ approval of such arrangements.”

The authority also said it wants to emphasize that the rule is a prohibition by changing the title of Rule 3240(a) from “Permissible Lending Arrangements; Conditions” to “General Prohibition; Permissible Borrowing or Lending Arrangements; Conditions.”  In addition, the rule’s title would be amended from “Borrowing From or Lending to Customers” to “Prohibition on Borrowing From or Lending to Customers.”

The proposal strengthens the general prohibition by preventing a registered representative from initiating a customer relationship with someone with whom the representative already has a borrowing or lending arrangement. It would prohibit borrowing or lending within six months of the termination of a broker-customer relationship and ban borrowing or lending arrangements with someone related to the broker or the customer.

The proposed rule would tighten “tailored exceptions” to the borrowing and lending ban by narrowing the definitions of an immediate family member and personal and business relationships. Currently, “immediate family” means “parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person whom the registered person supports, directly or indirectly, to a material extent.”

The revised rule would replace “husband or wife” with “spouse or domestic partner” and amend the definition so that it “includes step and adoptive relationships.”

The proposal also strengthens requirements that representatives notify their firms about borrowing and lending arrangements.

FINRA has attempted to crack down on brokers borrowing from clients in the past.  It filed an average of 15 enforcement cases per year between 2018 and 2021 for customer loan violations, with most of the cases involving the broker as the borrower.

The rule change must be approved by the SEC, which will now review the proposal.

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