New York Securities Fraud Lawyers Blog
FINRA has recently proposed changes to its Rule 3240, which allows for scenarios where brokers can borrow from or lend to their clients. FINRA’s rule proposal would strengthen and clarify the general prohibition against these types of arrangements and would narrow the exceptions that fall under the prohibition. In its request for comments, the SEC cited Malecki Law’s previous comment addressed to FINRA, dated February 14, 2022 (see Footnote 32 on page 23).
The current comment period closed last week, on February 12, 2024. Malecki Law submitted its public comment on the proposal last week, along with three other organizations. If your broker requests that you lend them money or borrow money from them, you may need to contact a Securities Fraud law firm in New York, like Malecki Law, to analyze whether that arrangement is allowed under FINRA Rule 3240.
This is not the first time FINRA attempted to make Rule 3240 more stringent. FINRA made a similar proposal in December 2021, and that comment period ended on February 14, 2022. Malecki Law also submitted on public comment on that proposal. Click here for the related Malecki Law firm blog post and click here for the related Regulatory Notice 21-43.
FINRA Rule 3240 Currently
As FINRA Rule 3240(a)(1)(2) sits now, five exceptions allow for borrowing/lending arrangements between brokers and their customers:
(A) if the customer is an immediate family member; (B) if the customer is either a financial institution that regularly provides credit, among other things and if the customer is also acting in the course of that type of business; (C) if both the customer and broker are registered representatives for the same brokerage firm; (D) if the borrowing/lending arrangement came to be due to a personal relationship between the parties, outside of their broker-customer relationship; and/or (E) if the borrowing/lending arrangement is due to a business relationship kept outside of the ordinary broker-customer relationship. If you entered into a borrowing or lending arrangement with your broker and it does not seem to fit within the aforementioned exceptions, you need to reach out to a Securities Fraud lawyer, like the lawyers at Malecki Law, to review your situation.
Moreover, under the current rule, if a specific borrowing/lending arrangement falls into one of these five exceptions, brokers must consider potential notification and approval requirements under Rule 3240(b):
Under 3240(b)(1), the broker is required to notify their employer brokerage firm of any arrangement that falls under exceptions (C), (D), and/or (E), described above. Further, the brokerage firm then must pre-approve the borrowing/lending arrangement in writing with any potential modifications it wishes to make.
Under 3240(b)(2), if the borrowing/lending arrangement falls under exception (A) described above, the brokerage firm can establish that notification and/or approval is not required by disclosing this information in its written procedures.
Under 3240(b)(c), if the borrowing/lending arrangement falls under exception (B) described above, the brokerage firm can also establish that notification and/or approval is not required by disclosing this information in its written procedures. However, there is an additional requirement here, as the loan at issue has to be made on “commercial terms that the customer generally makes available to members of the general public…”
FINRA Rule 3240 Change Proposals
In its proposal, FINRA outlines and explains various rule and definition changes. An overarching theme is to “strengthen the general prohibition against borrowing and lending arrangements” and to narrow some of the existing exceptions that fall under the blanket prohibition. Further, FINRA proposes to “modernize” the immediate family exception by changing some definitions thereunder. Lastly, FINRA proposes to update any existing notice and approval requirements for brokers to receive approval for these types of arrangements. If your broker borrowed funds from you, you should have a Securities Fraud attorney, like the attorneys at Malecki Law, review the borrowing arrangement to determine whether it was allowed under the relevant rules.
Malecki Law’s View
In its recent comment letter, filed on the SEC’s website on February 12, 2024, Malecki Law explained that it believes lending/borrowing arrangements between brokers and their customers should be strictly prohibited, due to the unproportionate nature of such arrangements. Further, Malecki Law points out that the financial industry is divided into sectors for a reason, there are banking arms, there are brokerage arms, and so on. Thus, Malecki Law explains that registered representatives in the brokerage community are not properly equipped to deal with lending/borrowing arrangements, meanwhile, other areas of the industry are.
In its comment letter, Malecki outlines its suggestions to make certain rule changes narrower or to be redrafted to meet the intent behind the rule change. For example, Malecki Law suggests that the Personal and Business Relationship Exceptions should be narrowed even further, because the suggested drafting may not satisfy the intent behind the rule change when used practically.
Based on the foregoing, if there cannot be a total ban on these types of lending/borrowing arrangements between brokers and customers, Malecki Law agrees with the overarching intent behind FINRA’s proposal because it is a step in the right direction. However, Malecki Law urges FINRA to continue to narrow FINRA Rule 3240, as it would be more aligned with the mission of investor protection. If your broker suggested that you either borrow money from them or lend money to them, you need to consult with a New York Securities Fraud law firm, like Malecki Law, to discern whether this was permissible conduct under FINRA Rule 3240.
Contributions by Jacqueline N. Candella, Associate at Malecki Law