The self-regulatory agency overseeing broker-dealer firms has filed a rule change with the SEC seeking to amend 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 intention is 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.
Broker-customer relationship
FINRA is 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.
And it wants the expansion 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, the agency said.
It also wants to revisit the 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”.
The revised rule would replace “husband or wife” with “spouse or domestic partner” and amend the definition so it “includes step and adoptive relationships”.
Under the proposed changes, reps and their broker-dealers would need 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 was formed with the purpose of circumventing the purpose of Rule 3240, FINRA said.
Immediate family exception
The proposed rule also expressly prohibits owner-financing arrangements; these 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 said 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”. As it stands now, “immediate family” means “parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person whom the registered person supports, directly or indirectly, to a material extent”.
The revised rule would replace “husband or wife” with “spouse or domestic partner” and amend the definition so it “includes step and adoptive relationships”.
