On September 17, 2024, the Securities and Exchange Commission (SEC) approved a proposed rule change to amend Financial Industry Regulatory Authority, Inc.’s (FINRA) Rule 3240, citing Malecki Law in their approval order.
Rule 3240 previously prohibited registered persons from borrowing from or lending money to their customers, with the five exceptions of immediate family members, a financial institution that regularly provides credit, both the customer and broker are registered representatives for the same brokerage firm, a personal relationship outside of the broker-customer relationship, or a business relationship outside of the broker-customer relationship. If your broker proposed a borrowing or lending arrangement, you should contact a Securities Fraud law firm, like Malecki law in New York, to consult whether the arrangement is proper under FINRA Rule 3240.
FINRA’s proposal aimed to amend the rule to “strengthen the general prohibition against borrowing and lending arrangements,” narrow the five exceptions above, modernize the first exception of “immediate family member,” and improve the notice requirements. In addition, FINRA proposed Rule 3240 to include pre-existing borrowing or lending arrangements, arrangements entered six months after the broker-customer relationship terminates, indirect arrangements with parties related to the registered person or customer, and owner-financing arrangements.
Malecki Law submitted its public comment on FINRA’s proposed Rule 3240 change, expressing that lending and borrowing arrangements should be strictly prohibited between brokers and their customers. In its comment, Malecki Law advocates for the change, but suggests making certain changes even narrower or redrafting them to meet the intent of the rule change. For example, Malecki Law believes the “Immediate Family” exception was too broad in the proposal and explained that “Immediate Family” should not be used as an exception because a substantial aspect of financial frauds are conducted by family members. Malecki Law also suggested that the drafting of Personal and Business Relationship Exceptions should be narrowed. The law firm’s public comment can be found here, and its related blog is available here. If you are experiencing issues with your broker-customer lending or borrowing arrangement, you should consult a seasoned Securities Fraud lawyer, like the professionals at Malecki Law.
The SEC released an order approving the proposed rule change to amend FINRA Rule 3240. In its order, the SEC included comments by Malecki Law displaying it’s call “for strong safeguards to protect investors ‘from predatory lending or undue influence in a broker-customer relationship.’” The opinion references Malecki Law’s concern that the proposed change would not require notice of approval with immediate family members citing Malecki Law’s stance that familial relationships are not a barrier to committing fraud. Ultimately, the Commission believes the proposed rule change is reasonably designed to prevent fraudulent acts, but adds that while not explicitly required, member firms may require notification and approval of arrangements in their written procedures for the immediate family and financial institution exceptions based on their assessment of the associated risks with such arrangements. If you are concerned about your proposed or current borrowing or lending arrangement with your broker, you should consult with experienced Securities Fraud attorneys, like the ones at Malecki Law.
Malecki Law is committed to protecting public investors and encourages FINRA to continue strengthening Rule 3240 by narrowing its scope even further to prevent fraudulent and manipulative acts and practices. If you have been wronged by a lending or borrowing arrangement with your broker, you need to consult with a New York Securities Fraud law firm, like Malecki Law, to assist in your claim.
Contributions by Claire Sterin, New York Law School Securities Arbitration Seminar and Field Placement Extern.