A representative's conduct toward one customer engages more than one of the prohibitions in FINRA Rule 2150. How do those prohibitions relate to one another?

They merge into a single charge, brought under whichever of the prohibitions carries the heaviest sanction

Each stands on its own, so meeting the terms of one does not answer a breach of another

The improper-use prohibition governs, the other two being particular cases of it

They apply in sequence, a later prohibition being reached only once the earlier ones have been met in full

What do the three prohibitions in FINRA Rule 2150 have in common in the purpose they serve?

Each protects a member firm's own assets from claims its customers bring against it for losses on their accounts

Each limits how much of its own capital a member firm may commit in transactions in its customers' accounts

Each closes a route by which a representative's personal financial interest can corrupt duties owed to customers

Each requires a disclosure in the account agreement before a customer may open an account with the member firm

When FINRA adopted Rule 2150 in 2009, it added Supplementary Material on points of the rule's reach that FINRA staff guidance had already addressed. How did those provisions relate to that guidance?

They codified the guidance already given on those points, writing it into the rule itself

They withdrew that guidance, leaving the points to be settled case by case in enforcement

They reversed that guidance, bringing within the rule conduct it had treated as outside

They suspended that guidance for a trial period, due to lapse unless FINRA renewed it

FINRA Rule 2150(a) prohibits improper use of a customer's securities or funds without saying what improper use is. What does that drafting achieve?

It confines the prohibition to theft, other misuse being left to the firm's contract with the customer

It leaves FINRA free to reach the whole range of conduct by which customer assets are misused

It confines the prohibition to conduct a prior FINRA disciplinary decision has already found improper

It leaves each member firm to define improper use for itself in its own written supervisory procedures

A member firm, without telling its customers, routes their uninvested cash into transactions that earn the firm a profit at the customers' expense. No balance is taken, and every dollar stays payable to the customers on demand. How does FINRA Rule 2150(a) apply?

It is improper use only if the firm fails to pay out a customer's balance in full when that customer asks for it

It is not improper use, because no customer balance was taken and every dollar remained payable to the customers on demand

It is improper use, the prohibition reaching undisclosed use of customer funds to benefit the firm at the customers' expense

It is not improper use, because the firm itself and not an individual representative made the arrangement for the cash

In FINRA's application of Rule 2150(a), what is conversion of customer assets?

The negligent loss of a customer's securities or funds through a failure in the firm's controls over cash handling

The moving of a customer's assets between accounts without notice, though all of them stay in the customer's name

Any use of a customer's securities or funds for which the firm holds no signed authorisation, whatever the intent

The intentional taking of a customer's securities or funds for one's own benefit without the customer's authorisation

A registered representative is found to have forged customers' signatures to move cash from their accounts to himself. What outcome does such conduct routinely bring?

A permanent bar from the securities industry and a referral to criminal authorities for prosecution

A referral back to the member firm for internal discipline, FINRA acting only if the firm then fails to

A suspension of up to two years, a permanent bar being kept for a second finding of the same conduct

A fine equal to the sums taken, with a bar reserved for cases in which restitution is not then made

Why does FINRA Rule 2150(b) treat a promise to protect a customer against investment loss as incompatible with the securities business?

Such a promise must be booked as a firm liability, which would distort the member's net capital computation and its reserve formula

Securities markets inherently involve risk, so a promise that the investment cannot lose is at odds with what is being sold

Such a promise moves the market risk onto the customer's custodian bank, which the customer protection rules do not permit to bear it

Such a promise is an extension of credit to the customer, which the margin rules do not allow a member firm or its staff to grant

How does FINRA Rule 2150(b) treat a representative's assurance, given orally in a sales conversation with nothing put in writing, that the customer cannot lose money on the stock he is recommending?

As a matter for the firm's supervision of sales practices rather than a breach of the rule

As outside the rule, which reaches only guarantees set down in a signed writing or a side letter

As a prohibited guarantee, the rule applying to a guarantee against loss whatever form it takes

As outside the rule unless the customer relied on it and later suffered a loss on that stock

A representative sells a customer a bond whose principal is guaranteed by a creditworthy third party, the guarantee running to every holder of the issue, and describes it accurately. How does FINRA Rule 2150(b) apply?

It does, unless the guarantor is a government agency, a guarantee from a private third party being treated as the firm's own

It does not, provided the firm first obtains the customer's written acknowledgement of the guarantee's terms

It does, because the representative has in effect assured the customer that her principal is protected against any loss

It does not, the prohibition reaching guarantees by the representative or firm rather than guarantees built into a security

A representative assures a customer that, whatever happens to individual holdings, her portfolio as a whole will not end the year below its starting value. No particular security is named. How does FINRA Rule 2150(b) treat the assurance?

As a prohibited guarantee, the rule reaching assurances about a whole account as well as about one transaction

As a prohibited guarantee only where the representative also holds discretion over the account

As outside the rule, which reaches only a guarantee tied to a specific purchase or sale of a security

As outside the rule, a promise about overall performance being a forecast rather than a guarantee

A customer lost money on a trade, and no promise of any kind had been made beforehand. The registered representative who recommended the trade now repays the loss out of his own savings. How does FINRA Rule 2150 treat the repayment?

As a private matter between the two of them, the rule reaching only promises that are made before a trade

As outside the reimbursement exception, which is open to member firms and not to associated persons individually

As within the reimbursement exception, the decision to pay having been made after the trade and not before it

As within the reimbursement exception, provided his branch manager approves the payment in writing beforehand

A member firm reviews a customer's complaint, concludes that a recommended transaction was unsuitable and decides to make the customer whole. What must the firm consider about reporting the payment?

Whether the payment exceeds the customer's original investment, only the excess being treated as reportable

Nothing further, a payment that the firm decides on of its own accord, with no claim filed, falling outside every reporting requirement

Whether it can reasonably be construed as a settlement, in which case it must be reported as one, Rule 4530 included

Whether the customer signed a release, without which the payment may have to be reported to FINRA as a new written customer complaint

A member firm's order-entry clerk keys a purchase of 1,000 shares where the customer ordered 100, and the price falls before the mistake is caught. The firm cancels the excess shares and absorbs the loss on them. How does FINRA Rule 2150 bear on this?

It permits it only if the customer agrees in writing to the correction before the firm cancels the excess shares and books the loss

It permits it only once the customer has complained in writing, the firm otherwise guaranteeing the customer's account

It prohibits it, because absorbing a loss on a customer's trade is itself a guarantee of that customer against loss on the trade

It does not stand in the way, the firm being free to correct a bona fide error whatever the guarantee prohibition provides

A member firm advertises to new customers that it will refund any loss on a stock its representatives recommend if the stock falls within a year of purchase. How does FINRA Rule 2150 treat the offer?

As a prohibited guarantee, the promise being made before the transactions rather than decided on afterwards

As permitted, provided the offer is set out in the account agreement that each new customer signs

As permitted, an offer made to every new customer alike being a marketing term rather than a guarantee

As permitted, provided the refund is capped at the commission the customer paid on the purchase

Why does FINRA Rule 2150(c) regard a representative's share in the PROFITS of a customer's account as a conflict of interest?

It lets him report the account's gains as his own income, which hides them from the firm's own books

It gives him a reason to encourage risk-taking in the account that may not be appropriate for the customer

It makes him a joint owner of the account, so the customer can no longer give orders in it without him

It turns his commissions into a fixed fee, so that he no longer has any reason to service the account

How can a representative's share in the LOSSES of a customer's account distort his conduct toward that customer?

He has a reason to stop making recommendations at all, his own capital being at stake on every trade he proposes

He has a reason to move the account wholly into cash at once, giving up any chance of a later recovery in value

He has a reason to avoid acknowledging losses, or to trade to win back his own share rather than in her interest

He has a reason to steer the account into his firm's own products, whose fees would offset his share of losses

How does FINRA Rule 2150(c) treat a representative's share of the gains in a customer's account that is paid not to him but to a company he owns, described as a consulting fee?

As sharing only if the company also bears a matching share of any losses the account goes on to suffer

As outside the prohibition, being a fee paid for services rather than a share in the account itself

As outside the prohibition, the payment going to a separate company and not to the representative in person

As sharing in the account's profits indirectly, which the prohibition reaches as fully as sharing in them directly

Rule 2150(c) lets a representative share in a customer's account only in direct proportion to the capital he contributes to it. What is the proportion requirement meant to guard against?

An arrangement paying him more than his capital warrants, in effect an undisclosed performance fee

A member firm's capital being drawn into customer accounts through the representatives it employs

A customer contributing so little capital that the representative comes to control the account

A representative taking on a share of losses larger than he can meet from his own resources

For how long must the authorisation records for a sharing arrangement under FINRA Rule 2150 be preserved?

At least three years after the date on which the account is closed

At least six years after the date on which the account is closed

At least six years after the date on which the sharing itself ends

At least three years after the date on which the sharing itself ends

A representative obtains a customer's signed consent to share in her account and begins sharing at once. His firm's compliance department, told afterwards, approves the arrangement in writing two weeks later. How does FINRA Rule 2150 treat the sharing?

As a violation, because a principal of the firm had to witness the customer's signature to the consent

As compliant, the firm having approved the arrangement in writing and the customer having consented

As a violation, the firm's written authorisation being required before the sharing commences

As compliant, a firm's approval being required only within thirty days of the sharing beginning

Why does FINRA Rule 2150 make a customer's own written consent a condition of a representative sharing in the profits or losses of her account?

Her consent stands in place of the suitability review the firm would otherwise make of his recommendations

Her consent moves the liability for any losses in the account from the member firm across onto her

Her consent is what lets the firm carry the account as a joint account held in both of their names

His personal stake in the account is material to how she should weigh each recommendation he makes

How does FINRA Rule 2150 treat a representative's share of the profits in his mother's account where that share is larger than his share of the capital in it?

As permissible in that respect, his mother's account being exempt from the rule's proportion limit

As permissible only if his mother holds the account jointly with him rather than in her sole name

As impermissible, his share of the profits having to match the share of the capital he put in

As impermissible, a representative being barred from sharing in a parent's account at all

For FINRA Rule 2150's immediate family exception, which of these people counts as a representative's immediate family?

A former spouse with whom the representative no longer has any ties

A cousin to whose support the representative contributes, directly or indirectly

An adult brother who is financially independent of the representative

A close friend whom the representative supports financially each month

A representative acting as an investment adviser, with every authorisation FINRA Rule 2150 requires in place, proposes to take twenty percent of the gains in a client's account. The client has $250,000 invested with him and a net worth of $600,000. How does the rule treat the fee?

As not permitted, an adviser's fee having to be a set percentage of assets

As permitted, the authorisations being all that the adviser exception requires

As not permitted, the client not being a qualified client under SEC Rule 205-3

As permitted, provided the fee stays at or below twenty percent of the gains

A representative's sharing arrangement meets every condition of FINRA Rule 2150, and the shared account is held at a broker-dealer other than his employer. What does meeting Rule 2150 settle about the account under other FINRA rules?

Its position under every other rule, apart from Rule 3280 on private transactions

Everything, the Rule 2150 authorisations doing duty for any consent required elsewhere

Its Rule 3210 position, though not whether it is an outside business activity

Nothing: whether rules such as Rule 3210 are met must be evaluated separately

FINRA Rule 2150 protects customer securities and funds themselves. What does FINRA Rule 2060 protect, as the two rules divide that ground?

Information about customer assets, against its misuse

Institutional customers' assets, against misuse by firms

Assets in fiduciary accounts, against misuse by trustees

The firm's own assets, against claims by its customers

A member firm fully meets SEC Rule 15c3-3's customer protection requirements. Why does FINRA Rule 2150's improper-use prohibition still matter at that firm?

Rule 15c3-3 binds the firm's finance and operations staff, while Rule 2150 binds its sales personnel

Systemic protections are open to circumvention by individual misconduct, which the improper-use prohibition reaches

Rule 15c3-3 covers only the accounts of retail customers, leaving institutional accounts to Rule 2150

Rule 15c3-3 protects customers only once the firm has failed, Rule 2150 while the firm is solvent

A customer agrees to buy securities on a subscription-way basis, paying by a check made out to the issuer, and a principal has not yet reviewed the recommended purchase. What does FINRA's guidance on Rule 2150(a) say about when the firm collects the customer's check or funds?

The firm may collect the check before approval only if the customer first signs a written waiver of any right to cancel the purchase

The firm must collect the check at the time the purchase is recommended, then hold it only while a principal completes the review

The firm may wait until a principal has approved the purchase, and only then collect the customer's check or funds for it

The firm may wait only where the issuer has agreed in writing to accept the application with the customer's payment to follow

An investment partnership registers as a broker-dealer and will trade only for its own account. Its general partner is to take a twenty percent incentive fee on the capital the limited partners contributed. How does FINRA Rule 2150(c)'s sharing prohibition apply to the fee?

It does not reach the fee, as a fee fixed in advance by the partnership agreement is a contract term rather than a share in an account

It allows the fee only in direct proportion to the general partner's own capital, as with any share in the profits of an account

It prohibits the fee outright, as each limited partner is a customer of the partnership in whose account the general partner may not share

It does not reach the fee, as a customer means a person who uses a broker-dealer's services, and the partnership serves no such person

FINRA Rule 2150 | Financial Regulation Courses

SERIES 7 | FINANCIAL REGULATION COURSES

FINRA Rule 2150 — Improper Use of Customers' Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts — is the foundational customer asset protection rule of the FINRA rulebook, establishing three distinct and independently operative prohibitions that together define the ethical boundaries governing a broker-dealer's relationship with the securities and funds belonging to its customers — prohibiting the improper use of customer assets, prohibiting guarantees against investment losses, and prohibiting the sharing of profits or losses in customer accounts except under specifically defined and documented circumstances.

Rule 2150 addresses three of the most serious categories of misconduct that registered representatives and member firms can commit against their customers — the misappropriation or conversion of customer assets, the creation of false expectations about investment outcomes through guarantees of return, and the creation of personal financial conflicts through undisclosed sharing arrangements in customer accounts. Each prohibition addresses a distinct pathway through which a registered representative's personal financial interests can corrupt their professional obligations to the customers they serve.

FINRA adopted the rule effective December 14, 2009, carrying the corresponding provisions of NASD Rule 2330 into the consolidated rulebook with minor changes — among them deleting from the investment adviser compensation exception in paragraph (c)(2) a provision about the registration status of members and associated persons acting as investment advisers — and adding Supplementary Material that codified existing staff guidance on the inapplicability of the guarantee prohibition to issuer-extended security guarantees and on the application of other FINRA rules to sharing arrangements, and clarified after-the-fact member firm reimbursements, the correction of bona fide errors and the retention of written authorisations. Its later amendments, the most recent effective April 3, 2017, updated the rule's cross-references to other FINRA rules — that last one to reflect the adoption of FINRA Rule 3210 — without changing its substance.

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.

Holding Customer Checks for Principal Review

Rule 2150(a) also bears on how long a firm may keep a customer's money before sending it on. In Regulatory Notice 15-23 FINRA explained that, before a March 2015 SEC staff no-action letter, a check that a registered representative received for a purchase of securities on a subscription-way basis had to be sent to the issuer by noon local time on the business day following receipt, and it granted limited relief from Rule 2150(a) and NASD Rule 2830(m) so that a firm may hold a customer's check payable to the issuer for up to seven business days from the date an office of supervisory jurisdiction receives a complete and correct application package, allowing a principal to complete the suitability review of the sale.

The relief is conditional in every part. The firm must be holding the application and the check in order to complete principal review under FINRA Rules 2111 and 3110; the representative who recommended the purchase must make reasonable efforts to safeguard the check and, once he has the information needed, promptly prepare and forward a complete and correct application package to the office of supervisory jurisdiction; the firm must have policies and procedures reasonably designed to ensure that he does so; a principal must review the purchase and decide whether to approve or reject it; and the firm must keep a copy of each check and record the dates on which the check was received, the package reached the office of supervisory jurisdiction and the check was transmitted to the issuer or returned to the customer. FINRA stated that if any of the conditions is not present the relief will not apply and it will enforce Rule 2150(a) as appropriate.

FINRA also emphasised that firms are not required to collect and hold checks or funds before principal review and approval at all — a firm may instead wait until a principal has approved the transaction before collecting the customer's check or funds for the purchase.

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) 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.

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.

Financial Contributions, Asset-Based Fees and the Meaning of Customer

FINRA staff guidance issued under the predecessor NASD Rule 2330(f), which FINRA adopted as Rule 2150(c) with only minor changes, shows how narrowly the proportionality condition reads the words financial contributions. In a 2004 interpretive letter the staff considered a member firm that proposed to take twenty-five percent of the profits in a customer's account in return for discounts on its transaction fees and charges and on the use of its computer-based trading platform, and concluded that discounting costs, fees or charges otherwise due to the member from the customer is not a direct financial contribution — the exception requires the member to contribute financially to, or invest in, the account itself.

The staff identified a second and independent defect in the same arrangement. The exception requires the member to share in both the profits and the losses of the account in direct proportion to its financial contribution, and the firm proposed to share in losses only to the extent of the value of its discounts — so the arrangement would have failed the proportionality condition even if the firm had made a direct financial contribution.

The rule is equally specific about fees that are not a share in the account. In Notice to Members 01-24 the staff clarified that brokerage fees calculated on the basis of a share of the total assets in an account would not be considered sharing in the profits or gains of that account for the purposes of the rule.

The prohibition also depends on there being a customer. In a 1999 interpretive letter the staff concurred that an investment partnership registering as a broker-dealer, which would trade only for its own account, had no customers for the purposes of the rule, so that its general partner's twenty percent incentive fee on the capital contributed by its limited partners was not sharing in a customer account — the phrase customer carried by the member refers to a person who uses the services of a broker-dealer, not to a person who is registered as one.

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 four hundred thousand dollars under the management of the adviser immediately after entering into the contract, or that the adviser reasonably believes, immediately before entering into it, to have a net worth of more than two million seven hundred thousand dollars — the amounts set by the SEC order effective June 29, 2026, which the SEC adjusts for inflation by order approximately every five years. 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.