The Financial Industry Regulatory Authority (FINRA) has adopted significant amendments to Rule 3240, which governs borrowing and lending arrangements between registered persons and their customers. These updates, effective April 28, 2025, are designed to reinforce the general prohibition against such arrangements and introduce several key modifications, including stricter notice and approval requirements, a modernized definition of “immediate family,” and narrower exceptions for personal and business relationships.

The amendments stem from FINRA’s retrospective review aimed at enhancing investor protection, particularly for senior investors vulnerable to financial exploitation. These changes reflect FINRA’s evolving approach to balancing customer protection with limited, permissible exceptions to the prohibition. This article provides a comprehensive overview of the amendments and their impact on broker-dealers and registered persons.

General Prohibition on Borrowing From or Lending to Customers

Rule 3240 continues to broadly prohibit registered persons from borrowing money from or lending money to their customers. However, the new amendments clarify and extend this prohibition in several important ways:

1. Pre-existing Arrangements: The amended rule now explicitly applies the prohibition to borrowing or lending arrangements that pre-date the establishment of a new broker-customer relationship. This change ensures that registered persons cannot evade the rule by entering into such arrangements before onboarding a client.

2. Expanded Definition of “Customer”: The definition of “customer” has been broadened to include any individual with a securities account assigned to the registered person within the last six months. This extension effectively covers borrowing or lending arrangements initiated up to six months after a broker-customer relationship ends, closing potential loopholes.

3. Owner-Financing Arrangements: FINRA has codified its interpretation that borrowing or lending arrangements include owner-financing agreements, bringing additional clarity to the rule’s scope.

These changes are part of a broader effort by FINRA to eliminate conflicts of interest that can arise from borrowing or lending arrangements, particularly those that might exploit vulnerable customers or create improper incentives for registered persons.

Modernized “Immediate Family” Definition

One of the few exceptions to the borrowing and lending prohibition is for arrangements involving immediate family members. The amendments modernize the definition of “immediate family” to reflect contemporary family structures, replacing “husband or wife” with “spouse or domestic partner,” including step and adoptive relationships, and expanding the definition to cover any person living in the same household and materially supported by the registered person. These updates provide greater clarity and inclusivity in determining who qualifies as immediate family under the rule.

Narrowed Personal and Business Relationship Exceptions

The amendments also tighten the exceptions for personal and business relationships:

1. Personal Relationship Exception: The revised rule restricts this exception to arrangements based on a bona fide, close personal relationship that existed before the broker-customer relationship was formed and is maintained outside of it. This ensures that the relationship is genuinely personal and not influenced by the professional dynamic.

2. Business Relationship Exception: The business relationship exception now applies only to bona fide business relationships that are independent of the broker-customer relationship. This revision aims to prevent registered persons from leveraging their professional roles to secure favorable lending or borrowing terms under the guise of a business connection.

FINRA has also provided illustrative examples and factors to help evaluate whether a borrowing or lending arrangement is based on a close personal or business relationship.

Enhanced Notice and Approval Requirements

The notice and approval requirements for permissible borrowing and lending arrangements have been updated to increase transparency and accountability. Key changes include:

1. Written Notice Requirement: All notices must now be submitted in writing, and member firms are required to retain these notices for record-keeping purposes.

2. Approval Clarification: While registered persons must obtain prior approval from their member firm for borrowing or lending arrangements based on personal or business relationships, member firms are not obligated to approve the arrangement. This clarifies the firm’s discretion in deciding whether to permit such arrangements.

3. Pre-existing Arrangements: Registered persons must notify their member firm and obtain written approval if they have an existing borrowing or lending arrangement with a client before establishing a new broker-customer relationship. This requirement aligns with the rule’s broader application to pre-existing arrangements.

Member firms are also obligated to conduct a “reasonable assessment” of the risks posed by any borrowing or lending arrangement and make a “reasonable determination” on whether to approve it. FINRA’s previous guidance in Regulatory Notice 21-43 provides further insights on the factors firms should consider when evaluating such arrangements.

Conclusion

The amendments to Rule 3240 signal FINRA’s commitment to strengthening protections for investors, particularly those at risk of financial exploitation. By tightening exceptions and enhancing oversight, these changes aim to mitigate conflicts of interest and safeguard the integrity of broker-customer relationships.

Firms and registered persons should take the necessary steps to review and update their policies and procedures before the amendments take effect on April 28, 2025. Firms are encouraged to adopt best practices, including clear guidelines on permissible arrangements, to ensure compliance and protect their customers.

Endnotes
[1] FINRA, Regulatory Notice 24-12 (October 23, 2024)
[2] FINRA Rule 3240(a)(2)(A)-(E)
[3] FINRA, Regulatory Notice 19-27 (August 2019)
[4] FINRA, Regulatory Notice 21-43 (December 2021)
[5] Securities Exchange Act Release No. 101065 (September 17, 2024), 89 FR 77547 (September 23, 2024)

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