FINRA Proposes Enhancing Requirements on Lending and Borrowing between Representatives and Customers

FINRA proposed rule amendments to strengthen the general prohibition against borrowing and lending arrangements with customers, narrow certain exceptions to those prohibitions and enhance the notification requirements for approval of such arrangements.

The amendments to FINRA Rule 3240 ("Borrowing From or Lending to Customers" to be newly named: "Prohibition on Borrowing From or Lending to Customers") are intended to prevent conflicts of interest and exploitation of customers, particularly senior investors.

The proposed amendments (i) clarify that the rule applies to borrowing and lending arrangements that predate the broker customer relationship, (ii) redefine the term "customer" to include anyone that has, or in the previous six months had, a securities account assigned to the registered person, (iii) modernize the term "immediate family member" (e.g., by replacing "husband or wife" with "spouse or domestic partner"), (iv) narrow the personal relationship exception "to arrangements that are based on a 'bona fide, close personal relationship between the registered person and the customer maintained outside of, and formed prior to, the broker-customer relationship'" and (v) narrow the business relationship exception to arrangements that are based on a "bona fide business relationship outside of the broker-customer relationship." (FINRA offers additional guidance with examples of (iv) and (v) above.) FINRA also proposed to add Rule 3240.03 ("Owner-Financing Arrangements") to clarify that Rule 3240 applies to "owner-financing arrangements."

FINRA proposed several changes to the notification and approval requirements under the rule. Generally, firms are required to establish written procedures to govern such borrowing and lending arrangements and to document the assessment of risk and determination of whether to approve these arrangements. Firms are required to maintain written notices and approvals of these arrangements for at least three years after their termination or after the termination of the registered person's association with the member firm.

Comments are due 21 days from the date of publication in the Federal Register.