The U.S. Financial Industry Regulatory Authority Inc. (FINRA) is tightening the rules around lending activity between brokerage reps and their clients.
The self-regulatory organization has adopted rule changes designed to strengthen the restrictions against borrowing arrangements with clients. The changes narrow some of the exemptions to the basic prohibition against these kinds of deals, and stiffen the approval requirements for those that are allowed.
FINRA’s existing rules include a general prohibition on reps lending to clients as well as borrowing from them. However there are exemptions, such as for immediate family members, which are subject to notice and approval requirements.
As part of a larger project designed to ensure that its rules guard against the financial exploitation of senior investors, FINRA reviewed these requirements — and, as a result, issued new guidance and launched a consultation on possible rule changes.
Now, it’s adopting those revisions, which, among other things, clarify that the prohibition applies to arrangements that pre-date broker-client relationships; extend the restriction for six months after a rep-client relationship terminates; revises the definition of immediate family; and narrows the exemptions for personal and business relationships outside the broker-client relationship.
Additionally, the revisions toughen the requirements for firms to approve arrangements that qualify for an exemption.
Among other things, they clarify that firms aren’t obliged to approve eligible arrangements, and they establish new obligations for firms to make a “reasonable” decision whether to approve these kinds of deals.
The revised rules take effect on April 28, 2025.