FINRA Strengthens Restrictions on Lending/Borrowing Arrangements with Customers
Commentary by Steven Lofchie
FINRA amended its rule on borrowing and lending arrangements between registered persons and their customers; the amendments narrow exceptions and establish new procedures for approval of such arrangements.
FINRA said 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 the exploitation of customers, particularly senior investors. The amendments include:
- Expanded Scope: The rule explicitly applies to borrowing and lending arrangements that predate the representative-customer relationship. The definition of "customer" is expanded to include anyone who has, or in the prior six months had, a securities account assigned to the registered person.
- Definitions: The term "immediate family member" was updated, replacing "husband or wife" with "spouse or domestic partner," and including step- and adoptive relationships. The definition now covers individuals who reside with and are materially supported by the registered person.
- Narrowed Exceptions: The personal relationship exception is limited to arrangements based on a bona fide, close personal relationship that was formed outside of, and prior to, the registered person-customer relationship. The business relationship exception is restricted to bona fide business relationships outside of the broker-customer context. FINRA provided additional guidance with examples to clarify these exceptions.
The amendments also impose enhanced notification and approval requirements:
- Notice and Approval: Registered persons must provide written notice of any borrowing or lending arrangement, and firms are required to assess the risks and make a reasonable determination of whether to approve the arrangement. All notices and approvals must be retained in writing by the firm.
- Documentation Requirements: Firms are required to establish written procedures governing these arrangements and maintain records of notices and approvals for at least three years after the termination of the arrangement or the registered person's association with the firm.
The amendments apply to new borrowing and lending arrangements and modifications made on or after April 28, 2025.
Commentary
Compliance officers should promptly consider how to build the new requirements into their existing procedures, including obtaining periodic representations from registered persons on their credit relationships, and reviewing the process for approving or disapproving any new or amended credit relationships.
Firms may also want to consider whether their revised processes should include questions that go beyond borrowing and lending, for example, asking whether a registered representative has any outside business relationship with a customer that might not be revealed by the firm's existing questions processes relating to outside business activities.