By Robert R. Boeche, Partner; and Alex S. Lagotta, Associate of Shustak Reynolds & Partners, P.C. posted on Tuesday, December 3, 2024.

Robert R. Boeche II

Partner

Location: San Diego, California
Phone: (619) 696-9500 (Ext. 122)
Direct: (619) 546-5502
Email: [email protected]

FINRA recently announced in Regulatory Notice (“Reg. Notice”) 24-12, amendments to Rule 3240 (the “Rule”) which generally prohibits borrowing from or lending to customers by registered persons. [1] These amendments include: modernizing the "immediate family" definition; narrowing exceptions for personal and business relationships; and introducing stricter notice and approval requirements for permissible arrangements. In addition, the Rule’s scope now extends to arrangements made before and after the broker-customer relationship, with new obligations on member firms to assess risks associated with such arrangements. These amendments will take effect on April 28, 2025 (the “Compliance Date”). [2]

Background

FINRA Rule 3240 generally prohibits registered persons from borrowing money from or lending money to their customers. [3] The Rule has five tailored exceptions, available only when a member firm has written procedures allowing such exceptions and, when required, the registered person notifies the member firm and obtains the member firm’s approval. [4]

FINRA previously launched a retrospective review of Rule 3240 to assess its effectiveness as part of a larger retrospective review of FINRA’s rules and administrative processes that help protect senior investors from financial exploitation. [5] Following its review, FINRA published Regulatory Notice 21-43, summarizing the predominant themes that emerged during the retrospective review, issued guidance concerning approvals of permissible borrowing or lending arrangements, and sought comment on proposed amendments to Rule 3240. [6] Following the commentary period, FINRA filed a proposed rule change with the SEC to amend Rule 3240, and the SEC recently approved those amendments. [7]

Revisions to Rule 3240 Exceptions

As mentioned, Reg. Notice 24-12 announced changes to existing exceptions to Rule 3240. Specifically, FINRA implemented the following amendments:  

• Immediate Family Exception: Expanded to include domestic partners, step, and adoptive relationships, and those financially supported by the registered person. [8]
• Close Personal Relationship: Narrowed to apply only to pre-existing, “bona fide” personal relationships outside the broker-customer context. FINRA also provides examples of such “bona fide” personal relationships within the Rule itself. [9]
• Business Relationship: Applies to arrangements based on pre-existing business ties, not linked to the broker-customer relationship. [10]

Revisions to Firm Notice and Approval

FINRA also modified the notice and approval requirements for member firms when a registered person desires to enter into an arrangement with a customer, or when a registered person has an existing arrangement and desires to enter into a broker-customer relationship with said person.

For new arrangements, Rule 3240 now requires the registered person to provide the member firm with written notice and the firm provide either written approval or disapproval of the arrangement to the associated person.  [11] For pre-existing arrangements, a registered person, prior to initiating a broker-customer relationship at the member firm with a person with whom the registered person has an existing borrowing or lending arrangement, must notify the member firm in writing of the existing arrangement and obtain the member firm’s approval in writing of the broker-customer relationship. [12]

For new and pre-existing arrangements, FINRA now requires member firms to perform a reasonable assessment of the risk created by such an arrangement prior to providing approval or disapproval of an arrangement. [13]

Both records of notice and approval must also be maintained by the member for at least three years after the arrangement has terminated or for at least three years following the registered person’s association with the member has terminated. [14]

Revisions to “Customer” and the “Broker-Customer” Relationship

Lastly, FINRA expanded the definition of "customer” for the purposes of Rule 3240. The definition of “customer” now includes individuals who have a securities account assigned to the registered person at any member firm, as well as those who had such an account in the previous six months. [15] This extension also applies to borrowing or lending arrangements entered into within six months after a broker-customer relationship ends, further tightening the restrictions on such transactions. [16]

Recommendations

In light of the aforementioned amendments to Rule 3240, Broker-dealers may want to consider the following prior to the Compliance Date:

• Update Procedures: Review and update firm policies on borrowing and lending arrangements, ensuring they align with the new restrictions and exceptions.
• Training: Educate registered persons about the rule’s amendments, especially regarding the narrower exceptions and the updated definition of "immediate family."
• Review Relationships: Assess existing broker-customer relationships and borrowing arrangements to ensure compliance by the April 2025 deadline.
• Documentation: Ensure all notices and approvals are documented and retained, including pre-existing arrangements.
• Risk Assessment: Conduct a "reasonable assessment" of any potential conflicts before approving borrowing or lending arrangements.

Should you have questions concerning compliance with Rule 3240, our firm regularly advises clients on FINRA and SEC regulations, and we are closely monitoring these developments. With offices in San Diego, Irvine, Los Angeles, San Francisco, and New York, Shustak Reynolds & Partners, P.C. represents investment advisers, broker-dealers, registered representatives, and high-net-worth investors across the country. We are prepared to help our clients understand and navigate these changes with strategic advice and robust legal representation. Contact Shustak Reynolds & Partners, P.C. today for a confidential consultation.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney Robert R. Boeche can be reached in the firm’s San Diego office at (619) 696-9500.

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[1] See, Regulatory Notice 24-12, available at https://www.finra.org/rules-guidance/notices/24-12.
[2] Id.
[3] See, FINRA Rule 3240, available at https://www.finra.org/rules-guidance/rulebooks/finra-rules/3240.
[4] Id.
[5] See, Regulatory Notice 24-12, available at https://www.finra.org/rules-guidance/notices/24-12.
[6] See, Regulatory Notice 21-43, available at https://www.finra.org/rules-guidance/notices/21-43.
[7] See, Regulatory Notice 24-12, available at https://www.finra.org/rules-guidance/notices/24-12.
[8] See, FINRA Rule 3240, available at https://www.finra.org/rules-guidance/rulebooks/finra-rules/3240 (version April 28, 2025, onwards). See also, Regulatory Notice 24-12, available at https://www.finra.org/rules-guidance/notices/24-12.
[9] Id.
[10] Id.
[11] Id.
[12] Id. See also, Regulatory Notice 24-12, available at https://www.finra.org/rules-guidance/notices/24-12.
[13] Id.
[14] Id.
[15] Id.
[16] Id.

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