The Financial Industry Regulatory Authority (FINRA) has proposed a rule change to further restrict brokers from borrowing money from or lending money to their clients.
The self-regulatory organization has proposed changes to Rule 3240, which currently allows several exceptions for registered persons engaging in such financial arrangements with customers. The plan includes:
- strengthening the general prohibition,
- narrowing existing exceptions,
- modernizing the immediate family exception, and
- enhancing notice and approval requirements.
The proposed amendments to Rule 3240 include clarifying that the general requirements apply to arrangements predating a new broker-customer relationship. The definition of “customer” would also be expanded to cover any customer who had a securities account assigned to the registered person in the previous six months, extending limitations to arrangements within six months after the termination of a broker-customer relationship. Additionally, a new rule (3240.05) is introduced to address potential customer abuse when a registered person induces clients to enter financial arrangements with persons related to them.
As part of the changes, FINRA additionally plans to redefine the term “immediate family,” replacing “husband or wife” with “spouse or domestic partner” and broadening the definition to include step and adoptive relationships.
The overarching goal is to emphasize that Rule 3240 is primarily a general prohibition, reinforcing restrictions on borrowing and lending arrangements to protect clients and maintain the integrity of the financial industry.
To read the full details of Rule 3240, click here.