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FINRA Seeks to Strengthen Rules on Broker/Client Lending

FINRA Seeks to Strengthen Rules on Broker/Client Lending. Alternative Investment, Financial Services, Advisor, Brokerage, Broker-Dealer, Broker, Financial Services, Securities and Exchange Commission, SEC, Financial Regulations

The Financial Industry Regulatory Authority (FINRA) submitted a new rule proposal to the Securities and Exchange Commission (SEC), which oversees FINRA, seeking to further limit borrowing and lending between brokers and clients.

According to a recent filing, the new proposed rule will amend Rule 3240, currently entitled, “Borrowing From or Lending to Customers.” One of the provisions of the rule would change the name to “Prohibition on Borrowing From or Lending to Customers.” According to FINRA, this will “emphasize that the rule is, first and foremost, a general prohibition.”

The proposal focuses largely on strengthening the general prohibition in three ways. First, it will prohibit a registered representative from initiating a customer relationship with someone whom the rep already has a borrowing or lending arrangement.

Second, it would redefine “customer” to, according to FINRA, more closely align with the definition from Rule 3241 (Registered Person Being Named a Customer’s Beneficiary or Holding a Position of Trust for a Customer) and would prohibit borrowing or lending within six months of the termination of a broker/customer relationship.

Finally, the proposal seeks to add Rule 3240.05, which generally bans a rep from engaging in borrowing or lending with a client’s relative, and similarly prohibits reps from arranging for their clients to enter into a borrowing or lending relationship with a rep’s relative. FINRA says that this will “address the potential for customer abuse that arises” in such situations.

The rule proposal also seeks to expand Rule 3240 to ban owner-financing arrangements, such as the sale of a piece of real estate to a broker with repayments to be made over time.

One exception to the general prohibition is borrowing or lending with a rep’s immediate family. The new proposal seeks to update the definition of “immediate family” to include step and adoptive relationships, and to replace “husband or wife” with “spouse or domestic partner.”

The SEC, which is responsible for approving any FINRA rule changes, must now review the proposal and may open a comment period. It is not yet known when the SEC will take action.

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