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Regulation and Compliance > Federal Regulation > FINRA

FINRA Moves to Tighten Brokers' Ability to Borrow Client Money

By Melanie Waddell

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What You Need to Know

  • FINRA's proposed rule change is intended to make clear that borrowing to or lending from clients is generally prohibited.
  • The plan would narrow some exceptions to the prohibition.
  • It would also broaden the immediate-family exception to include domestic partners, step and adoptive relationships.

The Financial Industry Regulatory Authority wants to further restrict a broker’s ability to borrow from or lend money to their clients.

The broker-dealer self-regulator has filed a rule change with the Securities and Exchange Commission seeking to amend Rule 3240, which generally prohibits, with exceptions, registered persons from borrowing money from or lending money to their customers.

As FINRA explains, Rule 3240 “has five tailored exceptions” to borrowing or lending money from customers.

FINRA states that its plan would “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 proposed rule change, according to FINRA, would amend the rule’s title from “Borrowing From or Lending to Customers” to “Prohibition on Borrowing From or Lending to Customers,” and change the title of Rule 3240(a) from “Permissible Lending Arrangements; Conditions” to “General Prohibition; Permissible Borrowing or Lending Arrangements; Conditions.”

These changes, FINRA states, “would emphasize that the rule is, first and foremost, a general prohibition.”

The plan seeks to strengthen the general prohibition in three ways.

First, Rule 3240(a) would be amended “to clarify that the rule’s general requirements concerning borrowing and lending arrangements — including the general prohibition — apply to arrangements that pre-exist a new broker-customer relationship,” FINRA states.

Second, FINRA would define “customer” to include “any customer that has, or in the previous six months had, a securities account assigned to the registered person at any member.”

This change, FINRA states, “would extend the rule’s limitations to borrowing or lending arrangements entered into within six months after a broker-customer relationship terminates.”

Third, FINRA plans to add Rule 3240.05 (Arrangements with Persons Related to Either the Registered Person or the Customer).

Proposed Rule 3240.05 “would address the potential for customer abuse that arises when a registered person induces a customer to enter into a borrowing or lending arrangement with a person or entity related to the registered person or, likewise, induces a customer to have a person or entity related to the customer enter into an arrangement with the registered person,” FINRA explains.

FINRA’s plan would also redefine the term “immediate family.”

As it stands now, “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.”

Melanie Waddell

@Think_MelanieW

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