Following up on a retrospective review launched in 2019, FINRA released Regulatory Notice 21-43, which shows their proposed amendments to FINRA Rule 3240: Borrowing from or Lending to Customers. With these changes, FINRA is hoping to reduce instances of abuse as well as to modernize the rule. Based on the feedback they received during their retrospective review, FINRA decided to propose 3 main changes.
Pre-Existing Arrangements
The first proposed change deals with expanding Rule 3240(a) to cover arrangements that pre-exist a new broker-customer relationship. The proposed changes would add verbiage to specifically state that no person associated with a member firm in any registered capacity may initiate a broker-customer relationship with a person with whom the registered person has an existing borrowing or lending arrangement.
Definition of a “Customer”
The second proposed change to FINRA Rule 3240 would expand the definition of “customer” to include any customer that has, or in the previous six months had, a securities account assigned to the registered person at any member. This would extend the rule’s limitations to arrangements entered into within six months after a broker-customer relationship terminates, whether the customer is staying with, or leaving, the member firm. This proposed change aligns with how “customer” is defined for purposes of Rule 3241.
Persons Related to Broker or Customer
The third proposed change would expand Rule 3240’s requirements for borrowing or lending arrangements to cover instances that involve similar conflicts as ones presented by arrangements between registered persons and their customers. To be more specific, “[a] registered person instructing or asking a customer to enter into a borrowing or lending arrangement with a person related to the registered person . . . or to have a person related to the customer . . . enter into a borrowing or lending arrangement with the registered person would present similar conflict of interest concerns as borrowing or lending arrangements between the registered person and the customer and would not be consistent with this Rule unless the conditions set forth in [Rule 3240(a)(1), (2), and (3)] are satisfied.”
This change was proposed to address instances where registered persons attempted to circumvent the rule by structuring arrangements with persons related to the broker or the customer.
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