FINRA Rule 3240 Amendments: Key Updates and Implementation Considerations
FINRA recently adopted important changes to FINRA Rule 3240 to tighten restrictions on borrowing and lending arrangements between registered persons and their customers. The changes go into effect on April 28, 2025, and broker-dealers should be taking steps now to prepare. This client alert breaks down what the changes mean and outlines key implementation considerations.
Background: Current Rule 3240
General Prohibition and Exceptions
FINRA Rule 3240 generally prohibits borrowing or lending arrangements between registered persons and their customers (General Prohibition). However, the rule provides five tailored exception arrangements that broker-dealers can choose to permit:
Immediate Family Exception: The customer is a member of the registered person’s immediate family.
Financial Institution Exception: The customer is a financial institution engaged in lending, offering loans on terms comparable to those available to the public.
Registered Person Exception: Both the customer and registered person are registered persons of same member firm.
Personal Relationship Exception: The arrangement is based on a personal relationship formed outside of the broker-customer relationship."
Business Relationship Exception: The arrangement is based on a business relationship outside of the broker-customer relationship.
Broker-dealers are not required to permit the exceptions but may do so by adopting written procedures and ensuring certain notification and approval requirements are met. The exceptions, and their conditions, are primarily intended to cover situations where a borrowing or lending arrangement came about because of the broker-customer relationship and the associated risks can be mitigated by the protections of the rule.
Retrospective Rule Review: A Need for Change
As part of a retrospective rule review initiated in 2019 and initial proposal in Regulatory Notice 21-43, FINRA identified potential gaps in the rule and instances where the exceptions were being exploited to circumvent the intent of the rule. To address these weaknesses, FINRA adopted rule changes expanding the scope of the General Prohibition, narrowing some of the exceptions, and strengthening notice and approval requirements.
Expanding the Scope of the General Prohibition
The amendments expand the scope of the General Prohibition to capture problematic borrowing or lending arrangements that previously fell into gray areas. While some of these areas were addressed through interpretive positions and enforcement activity, the rule changes eliminate much of this ambiguity.
Pre-Existing Arrangements
The amendments explicitly expand the rule to cover borrowing or lending arrangements that pre-exist a new broker-customer relationship. A person with such an arrangement with a registered person is not permitted to become a customer of that registered person unless the conditions of the rule are met. If the conditions are not met, the rule would not prevent such a person from becoming a customer of another registered person at the same firm. However, firms should still consider operational and supervisory controls to ensure such arrangements are not merely an attempted circumvention of the General Prohibition or firm policies.
Indirect Arrangements with Related Persons
New Supplementary Material 3240.05 extends the scope of the General Prohibition to indirect arrangements where a registered person instructs or asks a customer to (1) enter into a borrowing or lending arrangement with a person related to the registered person, or (2) have person related to the customer enter into the arrangement with the registered person. Such indirect arrangements will be prohibited unless the conditions of the rule are met. A “related person” is not defined, but FINRA included examples of a related person being an immediate family member or the person’s business or outside business with respect to the registered person.
Owner-Financing Arrangements
New Supplementary Material 3240.03 explicitly provides that owner-financing arrangements are a type of borrowing or lending arrangement covered by the rule. Such arrangements would include situations where a registered person purchases real estate from their customer, the customer agrees to finance the purchase, and the registered person provides a promissory note for the entire purchase price or arranges to pay in installments. This amendment codifies an existing interpretation that developed through several FINRA disciplinary actions. Firms should note that codification of this type of arrangement does not preclude FINRA from interpreting the rule to cover other arrangement structures that appear to entail borrowing or lending between a customer and registered person.
Expanding the “Customer” Definition: 6-Month Lookback
To prevent circumvention of the rule and align with the FINRA Rule 3241, the amendments expanded the definition of “customer” under the rule to include six-month lookback. For purposes of Rule 3240, a “customer” will now include both a current customer of the registered person and any person who had an account with the registered person within the past six months. This change aims to prevent attempts circumvention tactics, such as by transferring the customer to another registered person or closing the customer’s account to facilitate the borrowing or lending arrangement.
Narrowing the Personal and Business Relationship Exceptions
Consistent with FINRA’s efforts to tighten Rule 3240, the retrospective rule review revealed that the personal and business relationship exceptions were being exploited. To address those concerns, these exceptions were narrowed by imposing new conditions intended to ensure that the relationships are legitimate and not created under false pretenses:
Personal Relationship Exception
This exception will now be limited to relationships that are (1) bona fide, (2) close, and (3) maintained outside of, and formed prior to, the broker-customer relationship. Importantly, a bona fide and close personal relationship that develops after the broker-customer relationship is established will not qualify for this exception.
Business Relationship Exception
This exception will also require that the business relationship be bona fide and maintained outside of the broker-customer relationship, but the relationship need not be formed prior to the establishment of the broker-customer relationship to qualify.
Guidance on Bona Fide Relationships
To provide clarity and direction for firms, FINRA also adopted new Supplementary Material .04 outlining factors for determining whether a relationship is “bona fide” and examples for both types of relationships. Relevant factors for assessing whether a relationship is bona fide include:
when the relationship began;
its duration and nature; and
evidence suggesting the relationship is not bona fide or was formed to bypass the rule.
FINRA also provided some examples of qualifying relationships:
Qualifying Personal Relationship: A childhood or long-term friend, a godparent, or similar close relationships.
Qualifying Business Relationship: A loan from a registered person to a small outside business that the registered person co-owned for years for the sole purpose of providing the business with additional operating capital. In contrast, a loan to or from a customer from whom the registered person purchases non-commercial goods or services, such as hairstyling services, would not qualify.
These tightened exceptions aim to ensure that only genuine and legitimate personal and business relationships qualify, reducing the risk of abuse.
Modernizing the “Immediate Family” Definition
The amendments modernize the “immediate family” definition which both expands and refines the scope of the term. On the one hand, the revised definition replaces “husband or wife” with “spouse or domestic partner” and includes step and adoptive relationships. On the other hand, it also limits the clause “any other person” to individuals living in the same household and financially supported by the registered person. The amended definition aligns with the same term in Rule 3241 eliminating confusion and potential inconsistencies between the rules.
Notification and Approval Requirements: Enhanced Controls
For broker-dealers that permit exception arrangements, the current rule requires registered persons to provide notice and obtain written from their firm before entering into or modifying certain of the exception arrangements (registered person, personal and business relationship exceptions). Firms have discretion to impose notice and approval requirements for the other exception arrangements, a point that FINRA reiterated when proposing and adopted the rule amendments. The amendments also introduced several critical changes to the conditions for permitting exception arrangements:
Notices Must be in Writing and Retained
The amended rule extends the in writing requirement to all exception arrangement notices. Similarly, the amended rule extends the record retention requirement to all exception arrangement notices. Currently, the in writing and record retention requirement applied only to the firm’s approvals. As such, the amended rule will require that all notices and approvals be in writing and retained as records for at least three years after the arrangement ends or the registered person’s association with the firm terminates, whichever is earlier.
Approval at Firm’s Discretion
The amendments clarify that approval of any exception arrangement is solely at the firm’s discretion, even if the registered person provides proper notice. While not accurate, terminology of the current rule has created confusion by suggesting that firms must approve any properly noticed exception arrangement. The amended rule eliminates this confusion.
Notice and Approval for Customer Pre-Existing Arrangements
To address notice and approval requirements for pre-existing arrangements, the amended rule provides the logical timing requirement that such notices and approvals must occur before initiation of the new broker-customer relationship. The notice and approval requirements will otherwise apply to pre-existing arrangements in the same manner as new or modified arrangements.
Reasonable Assessment and Determination for Approving Arrangements
One of the most substantive additions to the rule will be the explicit obligation for firms to reasonably assess and determine whether to approve each exception arrangement. Specifically, upon receipt of a written notice, firms will be required to reasonably assess the risks created by the borrowing or lending arrangement (or any modifications) and (2) make a reasonable determination of whether to approve it, or the new broker-customer relationship, as the case may be.
In conducting the reasonable assessment, FINRA set forth a non-exhaustive list of factors that firms should consider, including:
Potential conflicts of interest with the arrangement;
The nature and duration of the customer-registered person relationship;
Material terms of the borrowing or lending arrangement;
The customer’s or the registered person’s ability to repay the loan;
Customer’s age;
History of borrowing or lending arrangements involving the registered persons and any customers;
Based on the firm’s business relationship with the customer, any observations of mental or physical impairments that render the customer unable to protect the customer’s own interests;
Disciplinary history or indicia of improper activity or conduct with respect to the customer or the customer’s account (e.g., excessive trading); and
Indicia of customer vulnerability or undue influence by the registered person.
Notably, FINRA will not accept claims that the arrangement is necessary due to a lack of viable alternatives as sufficient to substantiate approval of an arrangement. Further, FINRA also expects firms to try to discuss the arrangement with the customer as part of the assessment.
No Retroactive Application
As noted above, the rule amendments take effect on April 28, 2025. The rule changes apply to any new borrowing or lending arrangements and broker-customer relationships established on or after the effective date, and to any modifications to existing arrangements on or after the effective date.
However, FINRA is not prohibiting firms from conducting their own re-evaluation of previously approved arrangements and, under Rule 3110, firms must monitor and follow-up on red flags of problematic activity involving all arrangements regardless of the timing of the changes to Rule 3240. Firms should consider that FINRA has not hesitated to enforce the current rule aggressively where customer harm is involved. Moreover, firms should be mindful that the rule can still be interpreted broadly and arrangements that could be viewed as borrowing or lending arrangements should be scrutinized.
Implementation Considerations: Preparing for Compliance
All firms must ensure compliance with the amended Rule 3240, regardless of whether they permit exception arrangements. Firms should review and assess their policies and procedures for consistency with the expanded scope of the General Prohibition, narrowed exceptions and enhanced notice and approval requirements. The review should also incorporate the firm’s policies covering FINRA Rule 3241 given that certain of the amendments to Rule 3240 were designed to be consistent with the similar concepts in Rule 3241. Any inconsistencies should be addressed.
Firms permitting exceptions may wish to revaluate their policies on permitting any exception arrangements as well as any firm-developed conditions; consider changes to the notice and recordkeeping requirements; and review their current process for assessing arrangements for consistency with the factors outlined in Regulatory Notice 21-43 and make adjustments, as necessary. The updated notice and approval conditions, including the reasonable assessment and determination obligations may necessitate technology builds that should be identified early on to provide time for implementation and testing before effective date.
All firms should proactively communicate any policy changes to their registered persons and provide adequate training to understand what constitutes a borrowing or lending arrangement, if any of exception arrangements are permitted, and the process for providing written notice and receiving approval.
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If you have any questions or need help with your firm’s rule implementation, please reach out for more information or assistance.
Gavin Meyers is an experienced financial services regulatory lawyer and former FINRA attorney with a focus on representing broker-dealers, investment advisers, FinTech, and digital asset firms and projects on regulatory, enforcement and compliance matters.
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