Thursday, January 4, 2024
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Finra Moves To Tighten Rules On Loans Between Brokers And Clients

The Financial Industry Regulatory Authority has proposed to further restrict brokers’ ability to borrow from or lend money to their clients or even family members.

Finra filed a proposed rule with the Securities and Exchange Commission on Tuesday that seeks to amend and tighten Rule 3240, which generally prohibits, with exceptions, registered persons from borrowing money from or lending money to their customers.

The proposed changes, Finra said, “would emphasize that the rule is, first and foremost, a general prohibition.”

The changes seek to narrow some of the existing exceptions, modernize the “immediate family” exception and enhance the requirements for giving notice to broker-dealers and obtaining broker-dealer approval of such arrangements, Finra said.

For instance, exceptions that give reps the ability to borrow if arrangements are based on business and personal relationships “with the customer, such that the loan would not have been solicited, offered, or given had the customer and the registered person not had a personal or business relations,” now will require reps and their broker-dealers to meet factors that prove such relationships are “bona fide.”

The proposed factors would include, but would not be limited to, when the relationship began, its duration and nature, and any facts suggesting that the relationship is not bona fide or was formed with the purpose of circumventing the purpose of Rule 3240, Finra said.

Finra is also proposing to expand the prohibition to stop reps from initiating a broker-customer relationship with a person with whom they already have a borrowing or lending arrangement.

The self-regulatory organization also wants to expand the prohibition to include any customer that has had an account assigned to the rep at any registered broker-dealer within six months of the proposed loan.

This would also extend the rule’s limitations to borrowing or lending arrangements entered into within six months after a broker-customer relationship terminates, Finra said.

The proposed rule also expressly prohibits owner-financing arrangements, which would apply to situations where a registered person purchases real estate from a customer, the customer agrees to finance the purchase and the registered person provides a promissory note for the entire purchase price or arranges to pay in installments, Finra added.

Finra noted that the prohibitions also apply to situations where there is “potential for customer abuse that arises when a registered person induces a customer, or the family member of a customer, to enter into a borrowing or lending arrangement with a rep or registered person.”

One of the few exceptions to the prohibitions are if the rep is borrowing from or lending to “immediate family.” The changes would broaden the immediate-family exception to include domestic partners, step- and adoptive relationships and replace “husband or wife” with “spouse or domestic partner,” Finra said.



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