Rule 3240 Updated

Overview of FINRA Rule 3240

In 2003, the Financial Industry Regulatory Authority (FINRA) adopted Rule 3240 which put restrictions on whether and when registered individuals could borrow from or lend to customers. The rule generally prohibited such arrangements but allowed them in certain prescribed circumstances so long as the broker-dealer had policies and procedures allowing such arrangements, the registered person notified the firm, and the firm provided approval of the arrangement.

FINRA adopted amendments to Rule 3240 on October 23, 2024. FINRA stated that the amendments are intended to strengthen the prohibition, narrow the exceptions to the prohibition, modernize certain definitions, and enhance notice and approval requirements.

The original rule provided exceptions for the following types of situations, provided the firm has procedures allowing for such arrangements and where the registered person notified the firm in writing in advance. The specific exceptions noted in the original rule are as follows:

• the customer is a member of such person’s immediate family;
• the customer (i) is a financial institution regularly engaged in the business of providing credit, financing, or loans, or other entity or person that regularly arranges or extends credit in the ordinary course of business and (ii) is acting in the course of such business;  
• the customer and the registered person are both registered persons of the same member;
• the lending arrangement is based on a personal relationship with the customer, 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; and
• the lending arrangement is based on a business relationship outside of the broker-customer relationship.

Where the exception is based on the close personal relationship, business relationship or registered person exception, the registered person is required to receive written approval for the arrangement from the firm.

Key Revisions to FINRA Rule 3240

The 2024 amendments, which will become effective on April 28, 2025, clarified that Rule 3240’s general prohibition and requirements apply both to new borrowing or lending arrangements with existing customers and those that pre-exist a new broker-customer relationship.

The amendments are as follows:

 Definition of “Customer”

The amended rule defines a “customer” to include anyone that has, or in the previous six months had, a securities account assigned to the registered person at any FINRA member firm. This extends the rule’s limitations to borrowing or lending arrangements entered into within six months after a broker-customer relationship terminates.

Owner-Financing Arrangements

The amendment codifies an existing interpretation that borrowing or lending arrangements include owner-financing arrangements.

Modernized Definition of Family Member

The amendment modernized the definition of family member in the following ways:

• The terms husband and wife were replaced by spouse or domestic partner.
• Step or adoptive relatives were included in the definition.
• Clarified that the “any other person” clause refers to “any other person who resides in the same household as the registered person and the registered person financially supports, directly or indirectly, to a material extent.”

Narrowing of Exceptions: Personal and Business Relationships

• Personal Relationship Exception: The personal relationship exception applies to arrangements that are based on a “bona fide, close personal relationship between the registered person and the customer maintained outside of, and formed prior to, the broker/customer relationship;”
• Business relationship Exception: The business exception applies to arrangements that are based on a “bona fide business relationship outside of the broker-customer relationship”.

Clarification Regarding Notice and Approvals

• The amendments clarified that while a registered person must receive approval before entering into certain borrowing/lending arrangements, firms are not required to approve such a request.
• The amendments require that any notice and approvals be in writing and be maintained by the firm.
• The amendments clarify that prior to initiating a broker-customer relationship with a person with whom the registered person has an existing borrowing or lending arrangement, they are required to notify the firm in writing of the existing arrangement and obtain the firm’s approval in writing.
• The amendments require that, prior to approving an arrangement, firms must perform a “reasonable assessment” of the risks created by borrowing or lending arrangements, including modifications to arrangements and arrangements that preexist the broker-customer relationship.

Firm Procedures for Family and Financial Institution Exceptions

The amendment allows a  firm’s procedures to indicate that registered individuals are not required to notify the firm or receive approval of arrangements when relying on the family or financial institution exception.

How Firms Can Prepare for the Rule 3240 Amendments

Firms will need to review and revise their existing policies to comply with the updated requirements, conduct risk assessments for lending arrangements, and ensure proper documentation.

Oyster Consulting’s regulatory compliance consultants have the expertise you need to assess, test and update your policies and procedures. Our experts will conduct a comprehensive risk assessment for lending arrangements and will ensure that your program meets the documentation requirements.  

Minimizing Risks with GRC Software

Oyster Solutions GRC software provides risk assessments to identify, categorize, and prioritize potential risks. This proactive approach will enable you to address and manage risks before they escalate into major issues. Enterprise GRC software has become indispensable for modern broker-dealer and investment advisor compliance teams. By centralizing data, automating tasks, and providing real-time insights, GRC tools empower firms to proactively manage and mitigate risks, enhance compliance, and build a culture of ethical and responsible business practices