What: FINRA has proposed to amend Rule 3240 to strengthen the general prohibition against borrowing and lending arrangements between registered persons and customers.
Who: FINRA member broker-dealers.
When: The proposal to the SEC was initially filed on January 2, 2024. If the SEC approves the change, FINRA will announce the effective date in a Regulatory Notice.
Why: FINRA cited anecdotal evidence from member firms, law clinics, and previous enforcement cases as well as its experience in examining and enforcing for compliance with Rule 3240 that it believed suggests that there is some ambiguity about the scope of Rule 3240 and certain risks to investors due to conflicts of interest and the superior information that registered persons have about potential risks and returns.
How: Among various changes, the proposal adds several new limitations: 1) clarifying that the prohibition applies to arrangements that precede a new broker-customer relationship, 2) extending the rule to arrangements entered into within six months following the end of broker-customer relationship, and 3) to arrangements with parties related (family and businesses) to the registered person and customer. The proposal also narrows existing exceptions based on certain personal and business relationships.
Why it matters: Firms should monitor further developments with this proposal. If the SEC ultimately approves the requested rule change, written supervisory procedures and controls related to this topic will need to be reviewed and may require modifications for compliance with the final requirements. In addition, assuming the final rule change tracks with the proposal, there may be potential operational and training considerations (e.g., account opening and pre-existing arrangements, account terminations and subsequent arrangements, and related-party arrangements).
CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.
Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com
