Borrowing From or Lending to Customers
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's requirements were first adopted in 2003 as NASD Rule 2370 (SR-NASD-2003-92, effective November 10, 2003) and were carried into the Consolidated FINRA Rulebook, with several changes, as FINRA Rule 3240 effective June 14, 2010 (SR-FINRA-2009-095). The rule reflects FINRA's ongoing concern about borrowing and lending arrangements as vehicles for financial exploitation of senior investors, which is why FINRA included Rule 3240 in its 2019 retrospective review of the rules that most directly apply to the financial exploitation of senior investors (Regulatory Notice 19-27).
Rule 3240 applies to both borrowing — where the registered person borrows money from a customer — and lending — where the registered person lends money 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 person associated with a member in any registered capacity may borrow money from or lend money to any customer of that person unless three conditions are all met: the member firm has written procedures allowing such borrowing and lending, the specific arrangement falls within one of the rule's five tailored exceptions, and the notification and approval requirements of paragraph (b) of the rule are satisfied.
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 exceptions are permissive rather than mandatory. They become available only where the member's written procedures allow borrowing and lending between its registered persons and their customers, and a member firm may choose to prohibit all or some types of these arrangements altogether.
The third condition means that fitting an exception is not enough on its own. Where paragraph (b) requires the registered person to notify the member and the member to pre-approve the arrangement in writing, an arrangement entered into without that notice and approval is not a permitted arrangement and violates the rule.
In Regulatory Notice 19-27 (August 2019), FINRA asked for comment on whether Rule 3240 should address borrowing and lending arrangements entered into before a broker-customer relationship exists, and whether it should continue to apply for a specified period after an individual ceases to be a customer — a cooling-off period. The current text of the rule contains neither provision: the prohibition is framed around borrowing from or lending to a customer of the registered person.
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 rule defines immediate family broadly: parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew — and any other person whom the registered person supports, directly or indirectly, to a material extent.
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 covers a customer that is a financial institution regularly engaged in the business of providing credit, financing, or loans — such as a bank or credit union — or any other entity or person that regularly arranges or extends credit in the ordinary course of business, provided that the customer is acting in the course of that business.
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 permits a lending arrangement that is based on a personal relationship with the customer — such as a close friend or neighbour — such that the loan would not have been solicited, offered, or given had the customer and the registered person not maintained a relationship outside of the broker-customer relationship.
The test is counterfactual: it asks whether the loan would have happened without the relationship outside the account, so a relationship that exists only because of the broker-customer relationship cannot support the exception. Arrangements under this exception require prior notice to the member and the member's written pre-approval.
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 remaining exception covers a customer who is also a registered person of the same member as the registered person — two colleagues at one firm, one of whom holds an account the other services. Like the personal relationship and business relationship exceptions, it requires prior notice to the member and the member's written pre-approval.
Notice and Approval Requirements — Prior Notice and Written Pre-Approval
Rule 3240 itself requires prior notice and written pre-approval for three of the five exceptions — the same-member, personal relationship and business relationship exceptions in paragraphs (a)(2)(C), (D) and (E). For the immediate family and financial institution exceptions, a member's written procedures may indicate that registered persons need not notify the member or receive its approval either before or after entering into the arrangement — and for the financial institution exception only where the loan has been made on commercial terms that the customer generally makes available to members of the general public similarly situated as to need, purpose and creditworthiness. For that purpose the member may rely on the registered person's representation that the terms of the loan meet those standards.
For an arrangement under paragraphs (a)(2)(C), (D) or (E), the registered person must notify the member before entering into it, and the member must pre-approve the arrangement in writing. The prior 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 approval must come before the arrangement is entered into — the rule's term is pre-approve — and the obligation continues once an arrangement exists: the registered person must also notify the member, and the member must pre-approve in writing, any modification to the arrangement, including any extension of its duration.
Supplementary Material .01 makes the written pre-approval a record the member must keep: it must be preserved for at least three years after the date the borrowing or lending arrangement has terminated, or for at least three years after the registered person's association with the member has terminated.
The Exploitation Risk — Senior and Vulnerable Investors
FINRA treats borrowing and lending arrangements as a potential vehicle for the financial exploitation of senior investors: its 2019 retrospective review of the rules that most directly apply to that exploitation (Regulatory Notice 19-27) took in Rule 3240 alongside 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
A member firm's written procedures are the gateway to every exception — without procedures allowing borrowing and lending between registered persons and customers, no arrangement is permitted — and for the arrangements that require it, the firm must receive prior notice and give its written pre-approval. The firm's supervision of these arrangements forms part of the supervisory system 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, for the arrangements that require notice, 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.
Applying the Immediate Family Definition — In-Laws, Nieces and Nephews
The definition of immediate family in paragraph (c) of Rule 3240 reaches well beyond parents, a husband or wife, and children. Besides grandparents, grandchildren, and brothers and sisters, it names mother-in-law or father-in-law, brother-in-law or sister-in-law, son-in-law or daughter-in-law, cousin, aunt or uncle, and niece or nephew.
Suppose a registered representative's nephew is a customer of the representative, and the representative lends him money towards the purchase of a car. A nephew is named in the definition, so the customer is a member of the representative's immediate family and the loan can fall within the immediate family exception in paragraph (a)(2)(A). The same is true where the customer is the representative's sister-in-law or son-in-law, because those in-law relationships are named in the definition too. As with every exception, the member's written procedures must allow borrowing and lending between its registered persons and customers.
A Loan by Another Name — Labels and Devices FINRA Has Seen
FINRA describes Rule 3240 as a regulatory framework that gives member firms greater control over, and supervisory responsibilities for, lending arrangements between registered persons and their customers.
In Regulatory Notice 19-27, FINRA gave examples of disciplinary actions it had brought against registered persons for violating Rule 3240 through lending arrangements with senior investors. In one, a registered person attempted to mischaracterize a loan from a senior investor as proceeds from the sale of farm equipment. The registered person had received a $10,000 cashier's check from the investor and claimed that it was not a loan but the purchase price of farm equipment, equipment that was never delivered to the customer. FINRA brought the action under Rule 3240, describing the payment as a loan that the registered person had attempted to present as proceeds of a sale.
FINRA has also learned of instances where registered persons attempted to avoid the rule's obligations in other ways: by having another registered person handle the account, or by listing a spouse on the loan documents. In the same Notice, FINRA asked for comment on whether Rule 3240 should apply where a customer is reassigned to a different registered representative.
Sanctions — The Borrowing and Lending Guideline and Undue Influence
FINRA's Sanction Guidelines once had no guideline for borrowing and lending violations, even though there were large numbers of litigated and settled cases involving borrowing and lending arrangements between registered representatives and customers. FINRA's 2017 revision of the Sanction Guidelines (Regulatory Notice 17-13) introduced a Borrowing From or Lending to Customers guideline. Its purpose is to give adjudicators guidance on assessing sanctions in these cases.
The same revision introduced a principal consideration that asks whether a respondent has exercised undue influence over a customer. It is to be considered for all violations addressed by the Sanction Guidelines, not only borrowing and lending. FINRA said it reaffirms that financial exploitation of senior and other vulnerable customers should result in strong sanctions. Suppose a registered representative is found to have violated Rule 3240 by borrowing from an elderly customer whom he had pressed into making the loan. Under the Sanction Guidelines as revised in 2017, the adjudicator setting the sanction would consider whether the representative had exercised undue influence over the customer.
Written Pre-Approval in Practice — Notice Alone Is Not Enough
For an arrangement under the same-member, personal relationship or business relationship exception, paragraph (b)(1) imposes two separate requirements. The registered person must notify the member before entering into the arrangement, and the member must pre-approve the arrangement in writing. An arrangement is permitted only if the requirements of paragraph (b) are satisfied, so both steps must be complete before the arrangement is entered into.
Suppose that on 3 March a registered representative tells her firm she intends to borrow $20,000 from a neighbour who is also her customer. She would not have sought the loan but for their friendship outside the account. Her branch manager tells her by telephone that the loan looks fine, and she takes it on 5 March. The firm's written approval is issued on 12 March. She gave notice first, but when she entered into the arrangement the member had not pre-approved it in writing. Paragraph (b) was therefore not satisfied when the loan was made. A telephone assurance is not written pre-approval, and approval in writing issued after the loan was made is not pre-approval.
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. An arrangement is permitted only where the member's written procedures allow it, it fits one of the five exceptions, and the notice and approval requirements of paragraph (b) are met.
The five exceptions are the immediate family exception, the financial institution exception, the exception for customers who are registered persons of the same member, the personal relationship exception and the business relationship exception. Prior notice and written pre-approval are required for the last three, while a member's written procedures may excuse immediate family and financial institution arrangements from notice and approval.
Approved arrangements stay under the member's control: any modification, including an extension of the arrangement's duration, needs notice and written pre-approval, and the written pre-approval must be kept for at least three years after the arrangement or the registered person's association with the member ends. The rule 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.
