FINRA Rule 3240 governs borrowing and lending arrangements between registered investment advisors (RIAs) and customers of their member firm. For the most part, this type of borrowing and lending is disfavored. Indeed, it is strictly prohibited unless certain conditions are met.
Rule 3240 establishes clear guidelines for when exceptions apply, and when borrowing or lending may be allowed. Here, our experienced securities fraud attorneys discuss this rule and the conditions that must be present before brokers can borrow from or lend to the customers of their firm.
The Member Firm Must Have a Written Policy In Place
A registered broker may only borrow from or lend to one of their firm’s customer if that member firm has a written policy in place that governs such activity. If there are no written procedures in place at a member firm, then no borrowing or lending may occur. If there are written guidelines, the broker in question must be sure to follow all of those internal requirements.
The Specific Borrowing/Lending Arrangement Must Meet Certain Conditions
All individual borrowing arrangements and lending arrangements between associated persons and customers of their member firm must meet one of the five conditions that are expressly laid out within Rule 3240. These conditions are as follows:
- The customer must be an immediate family member of the broker;
- The customer must be a financial institution that regularly engages in the business of borrowing and lending;
- The customer and broker must both be employed at the member firm;
- The lending arrangement must exist based on a personal relationship that exists completely outside of the broker-customer relationship; or
- The lending arrangement must exist because of an approved business relationship that exists completely outside of the broker-customer relationship.
To be clear, the proposed lending arrangement must meet at least one of those five criteria. If the proposed loan does not meet any of the conditions listed above, then it should not go forward, as it is prohibited by Rule 3240.
Proper Notification Must Be Given and Advanced Approval Must Be Received
Finally, all broker-customer borrowing and lending arrangements must follow certain notification requirements. Indeed, a broker seeking to obtain a loan from a customer or to lend money to a customer must notify their member firm of the details of the proposed transaction before actually executing the transaction. At that point, the compliance personnel of the member firm will be responsible for reviewing the proposed arrangement and determining if it should be approved. If approval is not given, then the individual broker must not go forward with the proposed lending arrangement. Ultimately, the firm has final veto power, as it may become legally liable should something go wrong.
Get Legal Help Today
At Sonn Law Group, we fight hard to protect the rights and interests of investors. If you lost money because of a negligence or fraudulent lending arrangement with your broker, we can help. Please do not hesitate to call us today at 844-689-5754 or contact us directly online to request a free, no-obligation review of your claim.