On September 17, 2024, the SEC approved a FINRA proposed rule change to amend FINRA Rule 3240 (Borrowing From or Lending to Customers). The title for FINRA Rule 3240 will be modified to (Prohibition on Borrowing From or Lending to Customers) in an effort to emphasize the rule is first and foremost a general prohibition against such arrangements. The rule amendments are intended to strengthen the general prohibition against borrowing and lending arrangements between registered persons and customers of the broker-dealer.
Among other changes, the amendment narrows some of the existing exceptions to that general prohibition, enhances the requirements for notifying and obtaining broker-dealer approval of such arrangements, and modernizes the immediate family definition by replacing ‘husband or wife’ to ‘spouse or domestic partner’, to now include step and adoptive relationships, and limits the ‘any other person’ clause to only those who reside in the same household as the registered person and who are financially supported by the registered person.1
Assuming a broker-dealer’s written policies and procedures permit such arrangements, registered persons would need to notify their broker-dealerin writing of any borrowing and lending arrangements under FINRA Rule 3240 that require notification and approval. Upon receipt of the written notification, firms will be obligated to:
- Perform a reasonable assessment of the risks
- Reasonably determine whether to approve or disapprove the arrangement; and
- Retain the written notifications and approval records for at least three years after the date that the borrowing or lending arrangement has terminated or for at least three years after the registered person terminates with the member firm.
Broker-dealers should amend their WSPs to incorporate the amendments of the Rule and train their registered persons accordingly. It is particularly important for registered persons to understand these changes if they are registered with a broker-dealer that permits borrowing and lending arrangements between their registered persons and their clients.
FINRA will announce the effective date of the rule change in a future Regulatory Notice.
In preparation for support of the rule changes, RegEd is adding a custom questionnaire and making modifications to the Annual Compliance Questionnaire (ACQ) offering to ease the process of identifying and assessing risk, making a determination and communicating decisions on any exceptions. Additionally, all retention requirements may be satisfied with the appropriate retention policy in place.
1 https://www.sec.gov/files/rules/sro/finra/2024/34-101065.pdf
How RegEd Can Help
RegEd’s Compliance Questionnaires provides a robust set of integrated, workflow-driven, enterprise tools that enable firms to initiate, distribute and track annual compliance questionnaires required by FINRA, and other critical questionnaires integral to maintaining a strong compliance program. The solution enables stakeholders to identify and analyze deficiencies and outliers and report on the results. Using the system’s risk-based flagging tool, key stakeholders can easily identify, prioritize, address and report on critical compliance deficiencies, using a weighted ranking.
About RegEd
RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.
Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.
Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please visit www.reged.com.