Finra Proposes Rule Change for Stricter Limits for Brokers Borrowing From Clients
On Tuesday, January 2, 2024, the Financial Industry Regulatory Authority (“FINRA”) filed a proposed rule with the Securities and Exchange Commission (the “Commission”) seeking to tighten Rule 3240, which governs borrowing and lending between registered financial professionals and their customers.
According to FINRA, between 2018 and 2021, there were an average of 15 enforcement cases per year tied to customer loan violations. In all but one case, the broker was the borrower. The amounts ranged from $1,800 to $1.35 million.
Rule 3240 was last amended in 2010 when it became part of the consolidated FINRA rulebook.
FINRA is proposing to amend Rule 3240 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.
Under the proposed change, an exception for “business relationships” would also be narrowed and will require reps and their broker-dealers to meet factors that prove such relationships are “bona fide.”
The Finra proposal also bolsters requirements for when and how the brokers must notify or seek approval from their firms for loans that do qualify for an exemption and would require firms to “perform a reasonable assessment of the risks created by the arrangement” before granting approvals.
Finra is also proposing to prohibit brokers from starting a customer relationship with an individual if a lending arrangement is in place provided it does not qualify for an exemption. It would also limit any broker from taking a loan or providing a loan to a customer within six months of the customer relationship ending.
One of the few exceptions to Rule 3240’s general prohibition is for borrowing or lending arrangements with a customer who is a member of the registered person’s immediate family. The changes would broaden the immediate-family exception to include domestic partners and step- and adoptive relationships and replace “husband or wife” with “spouse or domestic partner.”
If the Commission approves the proposed rule change, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice.
To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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