If you are a FINRA-registered financial advisor, you are likely familiar with FINRA Rule 3240 regarding borrowing and lending arrangements between advisors and customers. However, in our experience many financial advisors do not fully understand the requirements and limitations of Rule 3240, and sometimes find themselves in hot water with FINRA after violating the rule, even unintentionally.
First, who is included in Rule 3240? The rule only governs registered persons. If you are merely associated with FINRA, the rule does not apply, but if you are connected to a FINRA member in a registered capacity, you must abide by the stipulations of Rule 3240.
Per Rule 3240, prior to pursuing any borrowing and lending agreements with a customer, you must confirm that your firm has rules in place allowing such transactions. Review your firm's policies first, and make sure that what you are planning to do is permitted. Don't assume you know your firm's policy—you may regret it later.
If your firm allows for such arrangements, you may proceed with the borrowing or lending agreement if it meets one of the following stipulations:
- The customer is a member of your immediate family, including parents, grandparents, siblings, aunts, uncles, cousins, and children.
- The customer is a person or institution whose normal course of business includes borrowing and lending.
- You and the customer are both registered advisors with the same firm.
- Your lending arrangement is solely a product of your personal relationship with the customer, inconsequential to your customer/advisor relationship.
- Your lending arrangement is based solely on a business relationship unrelated to your relationship under your firm.
Finally, if your relationship with the customer falls in one of the above categories, you must notify your firm about the arrangement before conducting the transaction and receive written approval to proceed. Note that each firm's policies regarding providing notice and receiveing approval are different, and your firm may not require written notice and approval be given for every situation; however, even if this is the case you would be wise to verify this with your firm, review the firm's written proceudres and document that you did so.
This brings us to our final point—document everything. We strongly recommend that you collect written evidence of your arrangement, your relationship with the customer, the steps you take to get approval from your firm, and any correspondence with the firm regarding the lending or borrowing arrangement. If you have in fact followed the rules, this provides you with a safeguard if a dispute or accusation arises.
If you still have questions about Rule 3240, need guidance for your own borrowing or lending arrangement, or are defending a regulatory investigation into your activities, contact The Beck Law Firm, LLC to see how we can be of help.