SERIES 7 | SERIES 65 | FINANCIAL REGULATION COURSES
FINRA Rule 3240 — Borrowing From or Lending to Customers — establishes a general prohibition against borrowing and lending arrangements between registered persons and their customers, recognising that such arrangements create fundamental conflicts of interest that can compromise the objectivity of investment recommendations, create undue financial influence over a customer's account activity, facilitate the financial exploitation of vulnerable customers — particularly elderly and cognitively impaired investors — and expose the registered person and member firm to significant regulatory, legal, and reputational risk.
The rule was adopted in 2003 as FINRA Rule 3240 and substantially strengthened by amendments adopted October 23, 2024 and effective April 28, 2025 — reflecting FINRA's ongoing concern about borrowing and lending arrangements as vehicles for financial exploitation of senior investors, its retrospective review of the rule's effectiveness in preventing harm, and its determination that the prior framework's exceptions were too broadly available and insufficiently supervised to adequately protect customers.
Rule 3240 applies to both borrowing — where the registered person takes money or property from a customer — and lending — where the registered person provides money or property to a customer — recognising that the conflict of interest and exploitation risk runs in both directions. A registered person who borrows money from a customer may feel financially obligated to the customer in ways that compromise the objectivity of investment advice and make honest assessment of the customer's interests more difficult. A registered person who lends money to a customer may use the loan relationship to exercise undue influence over the customer's account decisions — or may use the customer's financial dependency to extract excessive fees, commissions, or account activity.
The General Prohibition — The Baseline Rule
Rule 3240's foundational requirement is the general prohibition — no registered person may borrow money from or lend money to any customer unless the member firm has written procedures permitting such arrangements and the specific arrangement falls within one of the rule's five tailored exceptions.
The general prohibition is not a guideline or a default position that can be overridden by mutual consent between the registered person and the customer — it is a categorical prohibition that applies regardless of whether both parties voluntarily agree to the arrangement. A customer's willingness to lend money to their registered representative does not make the arrangement permissible — because the customer's willingness may itself be influenced by the registered person's position of trust and the implicit financial authority that the advisory relationship confers.
The 2025 amendments extended the scope of the general prohibition to explicitly cover arrangements made before the broker-customer relationship is established — where a registered person enters a new broker-customer relationship with someone with whom they already have an existing borrowing or lending arrangement. Previously such pre-existing arrangements were subject to ambiguity about whether the rule applied. The amendments require registered persons who have pre-existing borrowing or lending arrangements with a person before establishing a new broker-customer relationship to notify their member firm and obtain written approval — ensuring that the supervisory framework applies from the beginning of the customer relationship.
The amendments also extended the prohibition to arrangements entered into within six months after the broker-customer relationship ends — preventing registered persons from circumventing the rule by terminating the formal account relationship before entering into a borrowing or lending arrangement with the former customer. The definition of customer was updated to include anyone who has or within the previous six months had a securities account assigned to the registered person at any FINRA member firm.
The Five Exceptions — When Borrowing and Lending May Be Permitted
Rule 3240 recognises that the general prohibition is not appropriate in all circumstances — some borrowing and lending arrangements between registered persons and customers arise from genuine personal or commercial relationships that are independent of the broker-customer relationship and do not create the conflicts and exploitation risks the general prohibition is designed to address. The rule therefore provides five tailored exceptions — available only when the member firm has established written procedures permitting such arrangements and, where required, has reviewed and approved the specific arrangement.
The immediate family exception permits borrowing or lending arrangements between a registered person and a customer who is a member of the registered person's immediate family. The 2025 amendments modernised the definition of immediate family — replacing the prior gendered terms of husband and wife with spouse or domestic partner and updating the definition to reflect contemporary family structures. The immediate family exception recognises that financial arrangements between close family members are a normal aspect of family life that should not be categorically prohibited simply because a family member happens to be the registered person's customer.
The financial institution exception permits a registered person to borrow from a customer that is a financial institution engaged in the business of lending in the ordinary course of business — such as a bank or credit union — provided the loan is made on terms comparable to those offered to members of the general public. This exception recognises that registered persons should be able to obtain ordinary commercial loans from financial institutions that happen to be customers without triggering the conflicts of interest the prohibition is designed to address — because the terms of the loan are set by the institution's standard commercial criteria rather than by the personal influence the registered person might otherwise exercise.
The personal relationship exception — substantially narrowed by the 2025 amendments — permits borrowing or lending arrangements between a registered person and a customer with whom the registered person has a personal relationship independent of the broker-customer relationship — such as a close friend or neighbour — provided the arrangement is clearly based on that personal relationship and the registered person can demonstrate that the personal relationship predated and is independent of the broker-customer relationship. The 2025 amendments narrowed this exception by requiring a closer nexus between the personal relationship and the arrangement and by imposing more rigorous notice and approval requirements.
The business relationship exception permits borrowing or lending arrangements where both the registered person and the customer are engaged in a business relationship unrelated to the broker-customer relationship and the borrowing or lending arrangement arises from that independent business relationship. This exception recognises that registered persons may have legitimate commercial relationships with customers — as business partners, co-investors in real estate, or participants in commercial ventures — that involve ordinary business financing arrangements without creating the conflicts of interest the rule is designed to prevent.
The customer-initiated hardship exception — applicable in limited circumstances where a customer independently initiates a request to lend money to the registered person based on a demonstrated hardship — was narrowed by the 2025 amendments and remains the most restrictive of the five exceptions, requiring the most rigorous documentation of the customer's independent initiation of the arrangement.
Notice and Approval Requirements — The Enhanced Framework
All five exceptions under Rule 3240 require prior notice to and approval from the member firm before the arrangement is entered into — a prerequisite that the 2025 amendments substantially strengthened relative to the prior framework.
Before entering into any borrowing or lending arrangement that falls within one of the five exceptions, the registered person must provide prior written notice to the member firm — disclosing the identity of the customer, the nature and amount of the proposed arrangement, and the basis for claiming an applicable exception. The prior written notice requirement ensures that the member firm has the opportunity to assess the compliance implications of the arrangement before it is entered into rather than discovering it after the fact.
The member firm must then conduct a reasonable assessment of the risks posed by the proposed arrangement and make a reasonable determination of whether to approve it — considering factors including the nature of the relationship between the registered person and the customer, the financial circumstances of both parties, the potential for the arrangement to create conflicts of interest or undue influence over the customer's account activity, and any other factors relevant to the potential for customer harm.
The 2025 amendments enhanced these assessment requirements — requiring firms to document their risk assessment and approval determination and to maintain ongoing monitoring of approved arrangements for indications of harm or conflict of interest.
The Exploitation Risk — Why the Rule Was Strengthened
The 2025 amendments to Rule 3240 were driven primarily by FINRA's concern about the use of borrowing and lending arrangements as vehicles for financial exploitation of senior investors — the same investor protection concern that motivated FINRA Rule 2165's temporary hold mechanism and the trusted contact requirements of FINRA Rule 4512.
A registered person who borrows money from an elderly or cognitively impaired customer is in a particularly dangerous position of trust — the customer may feel unable to demand repayment because of the advisory relationship, may not fully understand the terms or risks of the arrangement, or may be induced into the arrangement through the undue influence that the registered person's position of authority creates. The borrowing arrangement transforms the registered person from a fiduciary-like advisor into a financial debtor to the customer — a relationship dynamic that fundamentally compromises the objectivity of investment advice and creates powerful incentives for the registered person to prioritise their own financial interests over the customer's.
The connection between Rule 3240 and the broader elder financial exploitation protection framework — including Rule 2165, Rule 4512, and the supervisory requirements of Rule 3110 — reflects FINRA's integrated approach to protecting vulnerable investors from the multiple forms of financial harm that can arise from the trust relationships that the securities industry creates between registered persons and their customers.
Supervisory Obligations
Member firms that permit any of the five exceptions to the general prohibition must establish and maintain written procedures governing the notice, assessment, approval, and ongoing monitoring of permissible borrowing and lending arrangements — and those procedures must be incorporated into the firm's written supervisory procedures required by FINRA Rule 3110.
The supervisory system must be capable of detecting borrowing and lending arrangements that have not been disclosed to the firm through the required notice process — because the failure to notify the firm is itself a violation of Rule 3240 and may indicate an attempt to conceal a potentially problematic arrangement from supervisory scrutiny. Transaction surveillance systems, account statement reviews, and periodic registered person compliance questionnaires are all tools that member firms use to identify undisclosed arrangements for supervisory review.
Examination Relevance and Key Takeaways
FINRA Rule 3240 is tested on the Series 7 and Series 65 examinations in the context of conflicts of interest, customer protection, and the restrictions applicable to registered persons' personal financial relationships with customers.
The key points to retain are these.
FINRA Rule 3240 — Borrowing From or Lending to Customers — establishes a general prohibition against borrowing and lending arrangements between registered persons and their customers — applicable to both borrowing from and lending to customers. The prohibition applies regardless of customer consent. The 2025 amendments effective April 28 2025 extended coverage to pre-existing arrangements and to arrangements entered into within six months after the broker-customer relationship ends.
Five tailored exceptions are available only when the member firm has written procedures permitting such arrangements and the registered person provides prior written notice and obtains firm approval — the immediate family exception, the financial institution exception, the personal relationship exception, the business relationship exception, and the customer-initiated hardship exception. The 2025 amendments narrowed the personal relationship and hardship exceptions and enhanced notice and approval requirements for all exceptions — requiring documented risk assessment and ongoing monitoring. The rule's strengthening reflects FINRA's concern about borrowing and lending arrangements as vehicles for financial exploitation of senior and vulnerable investors — connecting Rule 3240 to the broader elder investor protection framework of Rule 2165 and Rule 4512.
