The relationship between a broker and their client should be one based on trust. Sometimes brokers develop close personal relationships with their clients. For some clients, such as the elderly or homebound, their broker may be the closest person to them. But some brokers have used this personal relationship as an opportunity to borrow money from customers. FINRA forbids this practice unless the customer meets certain criteria. Let’s take a look at FINRA’s borrowing rule, FINRA Rule 3240, and the exceptions to it.
FINRA Rule 3240 mandates that brokers cannot borrow money from customers or lend money to customers unless the situation meets one of the following criteria:
- The broker-dealer has written procedures that allow customers and brokers to freely borrow money from and lend money to one another
- The customer is a member of the broker’s immediate family (which FINRA defines as 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, or any person the broker materially supports).
- The customer is a financial institution that regularly extends lines of credit as part of its business operations.
- The customer is also a registered representative at the same broker-dealer as the broker.
- The broker and customer have a personal relationship such that they would not have engaged in the lending or borrowing relationship if they had not had a personal relationship.
- The broker and customer are engaged in a business relationship outside of the broker-customer relationship.
Even when these criteria are met, as part of FINRA Rule 3240, registered representatives must inform their broker-dealer that they would like to enter into a lending relationship, and the broker-dealer must approve it in writing before it goes through. What does this approval process look like? The broker should seek the brokerage firm’s approval in writing. Once approved, if the broker wants to modify the arrangement in any way (such as extending the timeframe of the lending arrangement), this must also be approved.
Some firms waive this process if the customer is a financial institution. Similarly, some firms waive this process if the lender is in the broker’s immediate family. This caveat is troubling, however. Why? It is an unfortunate reality that some unscrupulous brokers will not hesitate to rip off a dear old aunt or unsuspecting cousin.
FINRA Rule 3240’s exception regarding the “business relationship” is also troubling. This is particularly problematic because there is always the possibility that the broker could be in the “business” of “selling away,” soliciting money from customers in order to invest it into unapproved securities products that could lead to significant losses to customers. For more information on selling away and unapproved private securities transactions, see our article “A Comprehensive Guide to ‘Selling Away.’”
As part of our examination of FINRA Rule 3240, FINRA’s rule against borrowing, it is important to understand why some brokers resort to borrowing money from customers. Since brokers receive commissions from selling different investment products, a broker’s income is inconsistent. Some brokers might even be paying back loans from their broker-dealers. While this situation does not excuse a broker’s behavior, it highlights just one reason why the commission-based fee structure is problematic. It incentivizes some unscrupulous brokers, some of whom might be desperate for money, to push unsuitable investment products on vulnerable investors to make a quick buck.
If your broker borrowed money from you and you believe that they violated FINRA Rule 3240, don’t hesitate to contact a securities attorney. Call (877) 238-4175 or email firstname.lastname@example.org for your free case consultation with the securities attorneys of Fitapelli Kurta.