FINRA Rule 2150

The rule was last amended effective April 3, 2017 — incorporating clarifications to the investment adviser compensation exception in paragraph (c)(2) and adding Supplementary Material provisions that codify guidance on the inapplicability of the guarantee prohibition to issuer-extended security guarantees, the permissibility of after-the-fact member firm reimbursements, and the application of other FINRA rules to sharing arrangements. No structural amendments have been made since 2017.

Rule 2150(a) — The Improper Use Prohibition

Rule 2150(a) states simply and without qualification that no member or person associated with a member shall make improper use of a customer's securities or funds. The brevity of this prohibition is deliberate — by prohibiting all improper use without defining the precise boundaries of what constitutes improper use, the rule gives FINRA and its enforcement programme the flexibility to address the full range of conduct through which customer assets can be misappropriated or abused.

The most severe and most commonly enforced application of Rule 2150(a) is the conversion of customer assets — the intentional taking of a customer's securities or funds for the registered representative's or firm's own benefit without the customer's authorisation. Conversion is theft — the appropriation of another party's property without consent — and FINRA treats it as among the most serious violations in its entire disciplinary framework. Registered representatives who convert customer funds — stealing cash from customer accounts, forging customer signatures to transfer funds to themselves, or misappropriating securities from customer portfolios — are routinely permanently barred from the securities industry and referred to criminal authorities for prosecution.

Beyond outright conversion the improper use prohibition encompasses a broader range of conduct that falls short of outright theft but nonetheless constitutes an improper appropriation of customer assets. Using customer securities as collateral for the firm's own borrowings without customer authorisation, pledging customer assets for purposes not approved by the customer, or directing customer funds into transactions that benefit the firm at the customer's expense without disclosure — all constitute improper use even when the registered representative may not have intended to steal the customer's assets outright.

FINRA examiners review member firms' customer account statements, wire transfer records, and internal controls over cash handling specifically to identify patterns that may indicate improper use of customer assets — the improper use prohibition is a consistent examination focus area and one of the most frequently cited bases for FINRA enforcement actions.

Rule 2150(b) — The Prohibition Against Guarantees

Rule 2150(b) prohibits any member or person associated with a member from guaranteeing a customer against loss in connection with any securities transaction or in any securities account of that customer.

The guarantee prohibition addresses one of the most persistent and most harmful forms of fraudulent inducement in the securities industry — the promise by a registered representative that a customer's investment will not lose money, that the representative will personally compensate the customer for any losses, or that the customer is protected against adverse outcomes. Guarantees against loss are prohibited because they are fundamentally incompatible with the nature of securities investment — securities markets inherently involve risk and the promise to eliminate that risk is either fraudulent or creates a personal liability for the representative that itself generates serious conflicts of interest.

The guarantee prohibition applies regardless of form — an oral promise in a sales conversation that the customer cannot lose money, a written side letter promising to cover losses, or an email assurance that the investment is guaranteed all violate Rule 2150(b). The prohibition applies to guarantees of any specific transaction and to guarantees of the overall account — a representative who assures a customer that their entire portfolio will be protected against loss has violated the rule just as clearly as one who guarantees a specific stock purchase.

Supplementary Material .01 addresses an important and frequently misunderstood carve-out — a guarantee that is extended to all holders of a particular security by the issuer as part of that security generally would not be subject to the guarantee prohibition. A government-guaranteed certificate of deposit, a bond with a principal guarantee from a creditworthy third party, or any other security whose investment terms include a guarantee from the issuer or a creditworthy guarantor is not prohibited by Rule 2150(b) — the prohibition targets guarantees by the registered representative or member firm, not guarantees that are inherent features of the security itself.

The Member Reimbursement Exception — Supplementary Material .02

Supplementary Material .02 provides an important clarification about the relationship between the guarantee prohibition and the member firm's ability to reimburse customers after the fact — distinguishing between prohibited pre-transaction guarantees and permissible post-transaction remediation.

Nothing in Rule 2150 precludes a member firm — but not an associated person individually — from determining on an after-the-fact basis to reimburse a customer for transaction losses. A member firm that reviews a customer complaint, determines that a transaction was unsuitable or otherwise improper, and decides to make the customer whole has not violated Rule 2150(b) — the after-the-fact reimbursement is a remediation of an identified problem rather than a pre-transaction guarantee against loss.

The critical distinction is temporal and motivational — a promise before the transaction to protect the customer from losses creates the prohibited guarantee, while a post-transaction decision to compensate for documented losses is remediation. The pre-transaction promise creates the expectation and the conflict — it may induce the customer to accept risk they would otherwise decline and it creates a personal liability for the representative that corrupts their professional judgment. The post-transaction reimbursement corrects a specific identified problem without those corrupting effects.

The supplementary material limits the reimbursement exception to member firms — not associated persons individually. An associated person who reimburses a customer from their own personal funds for investment losses has created the same conflict of interest that the guarantee prohibition is designed to prevent — the personal liability creates an ongoing financial stake in the customer's account that can corrupt the associated person's future recommendations. A member firm's institutional decision to make a customer whole from firm resources does not create the same personal conflict.

The member firm must comply with all reporting requirements applicable to such payment — if the payment can reasonably be construed as a settlement it must be reported as a settlement under the applicable reporting requirement including FINRA Rule 4530's settlement reporting obligation.

Nothing in Supplementary Material .02 precludes a member from correcting a bona fide error — technical execution errors, administrative mistakes, or processing errors that result in losses are correctable by the firm regardless of the guarantee prohibition.

Rule 2150(c) — Sharing in Accounts

Rule 2150(c) governs the sharing of profits or losses in customer accounts — prohibiting any member or associated person from sharing directly or indirectly in the profits or losses of any customer account except under specific pre-authorised conditions.

The sharing prohibition addresses the fundamental conflict of interest that arises when a registered representative has a personal financial stake in a customer's account performance — the representative's economic interests become aligned with particular outcomes in the customer's account in ways that can distort their recommendations and actions. A registered representative who shares in a customer's profits has an incentive to encourage risk-taking that may not be appropriate for the customer. A representative who shares in a customer's losses has an incentive to avoid acknowledging losses or to make additional trading decisions motivated by the desire to recover their shared loss rather than the customer's best interests.

The Three Conditions for Permissible Sharing

Rule 2150(c)(1)(A) permits sharing in customer accounts only when three specific conditions are all simultaneously satisfied — creating a documented authorisation framework that ensures sharing arrangements are transparent, informed, and proportionate.

The first condition is prior written authorisation from the member firm employing the associated person — the firm must specifically approve the sharing arrangement before it commences. This firm-level approval ensures that the member's compliance programme reviews and sanctions the sharing arrangement — preventing registered representatives from entering into undisclosed sharing arrangements that their firms would prohibit if they knew about them.

The second condition is prior written authorisation from the customer — the customer must specifically consent in writing to the sharing arrangement before it begins. The customer's informed written consent ensures they understand that their representative has a personal financial stake in the account — information that is material to the customer's assessment of every recommendation they receive from that representative.

The third condition is the proportionality requirement — the member or associated person may share in the profits or losses only in direct proportion to the financial contributions made to the account by the member or associated person. A representative who contributes twenty percent of the capital in a shared account may share in twenty percent of the profits or losses — no more and no less. This proportionality requirement prevents the creation of arrangements where the representative's compensation is disproportionately large relative to their actual capital contribution — effectively converting the sharing arrangement into an undisclosed performance fee arrangement that would otherwise be prohibited.

Supplementary Material .03 requires that the written authorisations be preserved for at least six years after the date the account is closed — ensuring that FINRA examiners can verify that proper authorisation was obtained even long after the sharing arrangement has ended.

The Immediate Family Exception

Rule 2150(c)(1)(B) exempts accounts of the immediate family of a member or associated person from the proportionality requirement of the sharing prohibition — but not from the other two conditions.

Immediate family for this purpose includes parents, parents-in-law, spouses, children, and any relative to whose support the member or associated person otherwise contributes directly or indirectly. A registered representative who shares in a parent's or spouse's account may do so in whatever proportions are agreed — the disproportionate sharing that would be problematic in a non-family account does not create the same conflict of interest concern when the representative and the customer are close family members whose financial interests are naturally intertwined.

The immediate family exception does not eliminate the authorisation requirements — prior written authorisation from both the member firm and the customer is still required even for immediate family sharing arrangements.

The Investment Adviser Exception — Performance Fees

Rule 2150(c)(2) provides a specific exception for members and associated persons acting as investment advisers — permitting them to receive compensation based on a share in profits or gains in a customer account if three conditions are met.

The associated person must obtain prior written authorisation from their member firm. The member or associated person must obtain prior written authorisation from the customer. And all conditions of SEC Rule 205-3 under the Investment Advisers Act of 1940 must be satisfied — Rule 205-3 being the SEC's rule governing performance fee arrangements for registered investment advisers.

SEC Rule 205-3 permits performance-based compensation arrangements only with qualified clients — generally individuals or companies with at least one million dollars invested with the adviser or a net worth exceeding two million dollars. This qualified client threshold ensures that performance fee arrangements — which can create incentives for excessive risk-taking — are limited to sophisticated investors who can evaluate and accept those incentive structures.

Supplementary Material .04 reminds members and associated persons that participation in a permitted sharing arrangement does not affect the applicability of other FINRA rules — including Rule 3210 governing accounts at other broker-dealers, Rule 3270 governing outside business activities, and Rule 3280 governing private securities transactions. A sharing arrangement that satisfies Rule 2150's conditions may still raise compliance issues under these other rules that must be separately evaluated.

Connection to Rule 2060 and the Broader Asset Protection Framework

Rule 2150 connects directly to FINRA Rule 2060 — which prohibits the improper use of information obtained in fiduciary capacities — as described in the FINRA Rule 2060 entry of this dictionary. Where Rule 2060 protects the information about customer assets from misuse Rule 2150 protects the assets themselves. Together the two rules form a comprehensive framework for the member's obligations when entrusted with both customer assets and information about those assets.

Rule 2150 also connects to the customer protection obligations of SEC Rule 15c3-3 — which requires broker-dealers to segregate customer securities from firm assets and to maintain adequate reserves of cash to cover customer credit balances. Rule 15c3-3's segregation and reserve requirements are the systemic-level protections that prevent improper use at the institutional level — Rule 2150's prohibition on improper use addresses the individual-level conduct that could circumvent those systemic protections through individual misconduct.

Examination Relevance and Key Takeaways

FINRA Rule 2150 is tested on the Series 7 examination in the context of customer asset protection, guarantees against loss, sharing in customer accounts, and the conditions under which sharing is permissible.

The key points to retain are these.

FINRA Rule 2150 — Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts — contains three independent prohibitions. Rule 2150(a) prohibits improper use of customer securities or funds — the most serious application is conversion of customer assets which routinely results in permanent bars and criminal prosecution. Rule 2150(b) prohibits guarantees against loss in any securities transaction or account — the prohibition applies to all forms of guarantee by the representative or firm regardless of whether oral or written. Guarantees that are inherent features of the security itself extended by the issuer are not prohibited under Supplementary Material .01.

A member firm — but not an individual associated person — may reimburse a customer after the fact for identified transaction losses without violating the guarantee prohibition under Supplementary Material .02 — provided applicable settlement reporting requirements are met. Rule 2150(c) prohibits sharing in profits or losses in customer accounts except when three conditions are all satisfied simultaneously — prior written firm authorisation, prior written customer authorisation, and sharing only in direct proportion to the financial contribution to the account. The proportionality requirement is waived for immediate family accounts. The investment adviser exception in Rule 2150(c)(2) permits performance-based compensation from qualified clients when all conditions of SEC Rule 205-3 are satisfied. Written authorisations for sharing arrangements must be preserved for at least six years after account closure under Supplementary Material .03.