Federal Register / Vol. 89, No. 184 / Monday, September 23, 2024 / Notices 77547 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Exchange Act Release No. 99351 (Jan. 16, 

2024), 89 FR 3968 (Jan. 22, 2024) (File No. SR– 

FINRA–2024–001) (‘‘Notice’’), https://

www.govinfo.gov/content/pkg/FR-2024-01-22/pdf/ 

2024-01068.pdf. 

4See infra note 28 and accompanying text. 

5See Notice. 

6 Id. 

7The comment letters are available at https://

www.sec.gov/comments/sr-finra-2024-001/ 

srfinra2024001.htm. 

8See letter from Ilana Reid, Associate General 

Counsel, FINRA, to Daniel Fisher, Branch Chief, 

Division of Trading and Markets, Commission, filed 

with the Commission on February 21, 2024. This 

letter is available at https://www.finra.org/sites/ 

Continued 

Dated: September 17, 2024. 

Edward R. Hawkens, 

Chief Administrative Judge, Atomic Safety 

and Licensing Board Panel, Rockville, 

Maryland. 

[FR Doc. 2024–21648 Filed 9–20–24; 8:45 am] 

BILLING CODE 7590–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[SEC File No. 270–360, OMB Control No. 

3235–0409] 

Submission for OMB Review; 

Comment Request; Extension Rule 

17Ad–15 

Upon Written Request, Copies Available 

From: Securities and Exchange 

Commission, Office of FOIA Services, 

100 F Street NE, Washington, DC 

20549–2736. 

Notice is hereby given that pursuant 

to the Paperwork Reduction Act of 1995 

(‘‘PRA’’) (44 U.S.C. 3501 et seq.), the 

Securities and Exchange Commission 

(‘‘Commission’’) has submitted to the 

Office of Management and Budget 

(‘‘OMB’’) a request for approval of 

extension of the previously approved 

collection of information provided for in 

Rule 17Ad–15 (17 CFR 240.17Ad–15) 

(‘‘Rule 17Ad–15’’) under the Securities 

Exchange Act of 1934 (15 U.S.C. 78a et 

seq.) (‘‘Exchange Act’’). 

Rule 17Ad–15 requires every 

registered transfer agent to establish 

written standards for the acceptance of 

guarantees of securities transfers from 

eligible guarantor institutions. Every 

registered transfer agent is also required 

to establish procedures, including 

written guidelines where appropriate, to 

make certain that the transfer agent uses 

those standards to determine whether to 

accept or reject guarantees from eligible 

guarantor institutions. In implementing 

these requirements, the Commission 

aims to ensure that registered transfer 

agents treat eligible guarantor 

institutions equitably. 

Additionally, Rule 17Ad–15 requires 

every registered transfer agent to make 

and maintain records in the event the 

transfer agent determines to reject 

signature guarantees from eligible 

guarantor institutions. Registered 

transfer agents’ records must include, 

following the date of rejection, a record 

of the rejected transfer, along with the 

reason for rejection, the identification of 

the guarantor, and an indication 

whether the guarantor failed to meet the 

transfer agent’s guarantee standards. 

Rule 17Ad–15 requires registered 

transfer agents to maintain these records 

for a period of three years. The 

Commission designed these mandatory 

recordkeeping requirements to assist the 

Commission and other regulatory 

agencies with monitoring registered 

transfer agents and ensuring compliance 

with the rule. This rule does not involve 

the collection of confidential 

information. 

The Commission estimates that 

approximately 315 registered transfer 

agents will spend a total of 

approximately 12,600 burden hours per 

year complying with recordkeeping 

requirements of Rules 17Ad–15 (based 

on approximately 40 burden hours per 

year per registered transfer agent). The 

Commission also estimates the aggregate 

annual internal cost of compliance for 

the approximately 315 registered 

transfer agents is approximately 

$4,019,400 (based on 40 hours annual 

burden × $319 hourly wage × 315 

respondents). This reflects a decline in 

aggregate annual internal cost of 

compliance of $650,760 due to the 

decrease in the number of registered 

transfer agents from 366 to 315. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

under the PRA unless it displays a 

currently valid OMB control number. 

The public may view background 

documentation for this information 

collection at the following website: 

www.reginfo.gov. Find this particular 

information collection by selecting 

‘‘Currently under 30-day Review—Open 

for Public Comments’’ or by using the 

search function. Written comments and 

recommendations for the proposed 

information collection should be sent 

within 30 days of publication of this 

notice to: (i) www.reginfo.gov/public/do/ 

PRAMain and (ii) Austin Gerig, 

Director/Chief Data Officer, Securities 

and Exchange Commission, c/o 

Oluwaseun Ajayi, 100 F Street NE, 

Washington, DC 20549, or by sending an 

email to: PRA_Mailbox@sec.gov. 

Dated: September 18, 2024. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2024–21685 Filed 9–20–24; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–101065; File No. SR– 

FINRA–2024–001] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving a 

Proposed Rule Change To Amend 

FINRA Rule 3240 (Borrowing From or 

Lending to Customers) To Strengthen 

the General Prohibition Against 

Borrowing and Lending Arrangements 

September 17, 2024. 

I. Introduction 

On January 2, 2024, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change 

(SR–FINRA–2024–001) to amend FINRA 

Rule 3240 (Borrowing From or Lending 

to Customers).3 As stated in the Notice, 

the proposed rule change would 

strengthen the general prohibition 

against borrowing and lending 

arrangements, narrow some of the 

existing exceptions to that general 

prohibition, amend the immediate 

family exception,4 and enhance the 

requirements for notifying and obtaining 

member firms’ approval of such 

arrangements.5

The proposed rule change was 

published for public comment in the 

Federal Register on January 22, 2024.6

The public comment period closed on 

February 12, 2024. The Commission 

received comment letters related to this 

filing.7 On February 21, 2024, FINRA 

consented to an extension of the time 

period in which the Commission must 

approve the proposed rule change, 

disapprove the proposed rule change, or 

institute proceedings to determine 

whether to approve or disapprove the 

proposed rule change to April 19, 2024.8


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default/files/2024-02/SR-FINRA-2024-001- 

Extension1.pdf. 

9See Exchange Act Release No. 99988 (Apr. 18, 

2024), 89 FR 31242 (Apr. 24, 2024) (File No. SR– 

FINRA–2024–001) (‘‘Order Instituting 

Proceedings’’). 

10See letter from Ilana Reid, Associate General 

Counsel, Office of General Counsel, FINRA, dated 

April 26, 2024, https://www.sec.gov/comments/srfinra-2024-001/srfinra2024001-463852-1226394.pdf 

(‘‘FINRA Comment Response’’). 

11See letter from Ilana Reid, Associate General 

Counsel, Office of General Counsel, FINRA, to Dan 

Fisher, Division of Trading and Markets, 

Commission, dated July 15, 2024, https://

www.finra.org/sites/default/files/2024-07/SRFINRA-2024-001-Extension2.pdf. 

12See Rule 3240(a)(2)(A) (the ‘‘immediate family 

exception’’); Rule 3240(a)(2)(B) (the ‘‘financial 

institution exception’’); Rule 3240(a)(2)(C) (the 

‘‘registered person exception’’); Rule 3240(a)(2)(D) 

(the ‘‘personal relationship exception’’); Rule 

3240(a)(2)(E) (the ‘‘business relationship 

exception’’). 

13See Rule 3240(a)(1). 

14See Rule 3240(a)(2). 

15See Rules 3240(a)(3) and 3240(b). 

16Proposed Rule 3240 and proposed Rule 

3240(a). 

17See Notice at 3969. 

18Proposed Rule 3240(a). 

19Proposed Rule 3240.02. 

20Proposed Rule 3240.05. 

21Proposed Rule 3240.03. 

22See Notice at 3969. 

23Proposed Rule 3240(a). 

24See Notice at 3969. 

25Proposed Rule 3240.02. 

26Proposed Rule 3240.05. 

27 Id. 

28Notice at 3969. 

29Proposed Rule 3240.03. 

On April 18, 2024, the Commission 

published an order instituting 

proceedings to determine whether to 

approve or disapprove the proposed 

rule change.9 On April 26, 2024, FINRA 

responded to the comment letters 

received in response to the Notice.10 On 

July 15, 2024, FINRA consented to an 

extension of the time period in which 

the Commission must approve or 

disapprove the proposed rule change to 

September 18, 2024.11 This order 

approves the proposed rule change. 

II. Description of the Proposed Rule 

Change 

A. Background 

FINRA Rule 3240 generally prohibits, 

with exceptions, registered persons from 

borrowing money from, or lending 

money to, their customers. The rule has 

five tailored exceptions,12 available only 

when the registered person’s member 

firm has written procedures allowing 

the borrowing and lending of money 

between such registered persons and 

customers of the member firm,13 the 

borrowing or lending arrangements meet 

the conditions applicable to the relevant 

exception 14 and, when required, the 

registered person notifies the member 

firm prior to entering into a borrowing 

or lending arrangement and obtains the 

member firm’s pre-approval in 

writing.15

B. Proposed Rule Change 

1. The General Prohibition on 

Borrowing From or Lending to 

Customers 

The proposed rule change would 

amend the title of FINRA Rule 3240 

from ‘‘Borrowing From or Lending to 

Customers’’ to ‘‘Prohibition on 

Borrowing From or Lending to 

Customers,’’ and change the title of Rule 

3240(a) from ‘‘Permissible Lending 

Arrangements; Conditions’’ to ‘‘General 

Prohibition; Permissible Borrowing or 

Lending Arrangements; Conditions.’’ 16

FINRA stated that the proposed rule 

change would make the regulatory 

purpose more prominent by 

emphasizing that the rule is ‘‘first and 

foremost’’ a general prohibition against 

borrowing or lending arrangements 

between registered persons and their 

customers (a ‘‘broker-customer 

relationship’’).17

The proposed rule change would also 

make substantive changes to FINRA 

Rule 3240 to extend the application of 

the rule to: (1) borrowing or lending 

arrangements that pre-exist the 

initiation of a broker-customer 

relationship; 18 (2) borrowing or lending 

arrangements entered into within six 

months after a broker-customer 

relationship ends by defining a 

‘‘customer’’ to include ‘‘any customer 

that has, or in the previous six months 

had, a securities account assigned to the 

registered person at any member;’’ 19 (3) 

indirect borrowing or lending 

arrangements with related parties of the 

registered person or customer; 20 and (4) 

owner-financing arrangements.21 The 

Commission describes each aspect of 

the proposed rule changes in turn. 

a. Pre-Existing Borrowing and Lending 

Arrangements 

Currently, Rule 3240(a) states ‘‘[n]o 

person associated with a member in any 

registered capacity may borrow money 

from or lend money to any customer of 

such person. . . .’’ The proposed rule 

change would amend Rule 3240(a) to 

extend the rule’s general requirements 

concerning borrowing and lending 

arrangements—including the general 

prohibition—to borrowing and lending 

arrangements that pre-exist a new 

broker-customer relationship.22

Specifically, the proposed rule change 

would amend Rule 3240(a) to prohibit 

registered persons from initiating a 

broker-customer relationship with a 

person with whom the registered person 

has an existing borrowing or lending 

arrangement unless the conditions of 

the proposed rule are met.23

b. Expansion of the Definition of 

Customer 

The proposed rule change would 

similarly extend the application of the 

rule to borrowing or lending 

arrangements entered into within six 

months after a broker-customer 

relationship ends.24 Specifically, the 

proposed rule change would add new 

FINRA Rule 3240.02 (Customer) to 

define ‘‘customer,’’ for purposes of Rule 

3240, as including ‘‘any customer that 

has, or in the previous six months had, 

a securities account assigned to the 

registered person at any member.’’ 25

c. Borrowing and Lending Arrangements 

With Related Parties of the Registered 

Person or Customer 

The proposed rule change would add 

new FINRA Rule 3240.05 

(Arrangements with Persons Related to 

Either the Registered Person or the 

Customer) to extend Rule 3240 to 

indirect borrowing or lending 

arrangements involving related parties 

of the customer or registered person. 

Specifically, the proposed rule change 

would provide that a registered person 

instructing or asking a customer to enter 

into a borrowing or lending arrangement 

with a person related to the registered 

person (e.g., the registered person’s 

immediate family member or outside 

business) or to have a person related to 

the customer (e.g., the customer’s 

immediate family member or business) 

enter into a borrowing or lending 

arrangement with the registered person 

would present similar conflict of 

interest concerns as borrowing or 

lending arrangements directly between 

the registered person and the 

customer.26 Accordingly, the proposed 

rule change would expressly state that 

such arrangements would not be 

consistent with Rule 3240 unless the 

conditions set forth in Rule 3240 are 

satisfied.27 FINRA stated that the 

proposed rule change would address the 

potential for customer abuse that arises 

in these more indirect borrowing and 

lending arrangements.28

d. Owner-Financing Arrangements 

The proposed rule change would add 

Rule 3240.03 (Owner-Financing 

Arrangements) to expressly state that, 

for purposes of Rule 3240, borrowing or 

lending arrangements include ownerfinancing arrangements.29 For example, 

Rule 3240 would apply to situations 


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30See Notice at 3969. 

31See Rule 3240(a)(2)(A). 

32Rule 3240(c). 

33See Notice at 3970; see also FINRA Rule 3241. 

34See Notice at 3970. 

35See Notice at 3977. FINRA Rule 3241 governs 

registered persons who are named a customer’s 

beneficiary or hold a position of trust for a 

customer. FINRA Rule 3241 and FINRA Rule 3240 

are both designed to prevent harm to customers due 

to registered persons being in a position of power 

and responsibility in their lives. See Notice at 3977 

n.56. 

36Proposed Rule 3240(c). 

37 Id. 

38Rule 3240(a)(2)(D). 

39Rule 3240(a)(2)(E). 

40Proposed Rule 3240(a)(2)(D). 

41Proposed Rule 3240(a)(2)(E). 

42See infra Section II.B.4.e. 

43Proposed Rule 3240.04. 

44 Id. 

45 Id. 

46See Notice at 3970. 

47 Id. 

48Rule 3240(a)(2)(D). 

49Rule 3240(a)(2)(E). 

50Rule 3240(a)(2)(C). 

51Rule 3240(b)(1)(A). 

52See Notice at 3970. 

53See proposed Rule 3240(b)(1)(A). 

where a registered person purchases real 

estate from their customer, the customer 

agrees to finance the purchase, and the 

registered person provides a promissory 

note for the entire purchase price or 

arranges to pay in installments.30

Accordingly, such owner-financing 

arrangements would not be consistent 

with Rule 3240 unless the conditions set 

forth in Rule 3240 are satisfied. 

2. The ‘‘Immediate Family’’ Definition 

Currently, Rule 3240 has an exception 

from the general prohibition for 

borrowing or lending arrangements with 

a customer who is a member of the 

registered person’s immediate family.31

Rule 3240(c) defines ‘‘immediate 

family’’ to mean ‘‘parents, grandparents, 

mother-in-law or father-in-law, husband 

or wife, brother or sister, brother-in-law 

or sister-in-law, son-in-law or daughterin-law, children, grandchildren, cousin, 

aunt or uncle, or niece or nephew, and 

any other person whom the registered 

person supports, directly or indirectly, 

to a material extent.’’ 32

FINRA stated that, in order to 

‘‘modernize’’ the ‘‘immediate family’’ 

definition,33 the proposed rule change 

would amend the definition to make it 

consistent with the definition in FINRA 

Rule 3241,34 which addresses similar 

potential conflicts of interest to Rule 

3240.35 Specifically, the proposed rule 

change would amend Rule 3240(c) to 

replace ‘‘husband or wife’’ with ‘‘spouse 

or domestic partner’’ and include ‘‘step 

and adoptive relationships.’’ 36 In 

addition, the proposed rule change 

would amend the ‘‘any other person’’ 

clause to limit it to ‘‘any other person 

who resides in the same household as 

the registered person’’ and who the 

registered person ‘‘financially supports, 

directly or indirectly, to a material 

extent.’’ 37

3. The Close Personal Relationship and 

Business Relationship Exceptions 

Currently, Rule 3240 has an exception 

from the general prohibition for 

borrowing or lending arrangements 

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’’ (the ‘‘personal 

relationship exception’’).38 Similarly, 

the rule’s general prohibition currently 

does not apply to borrowing or lending 

arrangements based on a ‘‘business 

relationship outside of the brokercustomer relationship’’ (the ‘‘business 

relationship exception’’).39

The proposed rule change would 

narrow the personal relationship 

exception to apply only to personal 

relationships that are ‘‘bona fide’’ and 

‘‘close,’’ and maintained outside of, and 

formed prior to, the broker-customer 

relationship.40 The proposed rule 

change would also narrow the business 

relationship exception to borrowing and 

lending arrangements that are based on 

a ‘‘bona fide business relationship’’ 

maintained outside of the brokercustomer relationship.41

In addition to narrowing the personal 

relationship and business relationship 

exceptions, the proposed rule change 

would add new Rule 3240.04 (Close 

Personal Relationships; Business 

Relationships), which would provide a 

list of non-exhaustive factors 42 to help 

firms evaluate whether a borrowing or 

lending arrangement is based on a bona 

fide close personal relationship or a 

bona fide business relationship. The 

non-exhaustive factors in proposed Rule 

3240.04 are: ‘‘when the relationship 

began, its duration and nature, and any 

facts suggesting that the relationship is 

not bona fide or was formed with the 

purpose of circumventing the purpose 

of Rule 3240.’’ 43 Proposed Rule 3240.04 

would also provide examples of ‘‘close 

personal relationships,’’ including, ‘‘a 

childhood or long-term friend or a 

godparent, and other similarly close 

personal relationships.’’ 44 Additionally, 

proposed Rule 3240.04 would provide 

an example of a ‘‘business relationship’’ 

to include ‘‘a loan from a registered 

person to a small outside business that 

the registered person co-owned for years 

for the sole purpose of providing the 

business with additional operating 

capital.’’ 45

FINRA stated that the proposed rule 

change would ‘‘help establish the scope 

of the close personal relationship and 

business relationship exceptions, focus 

on the most relevant factors when 

evaluating whether a close personal 

relationship or business relationship 

exists, and ensure that members 

consider meaningfully the potential 

issues involved in the proposed 

arrangement.’’ 46

4. Notification and Approval 

Requirements 

Currently, Rule 3240(b) requires 

notification and approval for certain of 

the excepted borrowing or lending 

arrangements.47 Generally, the 

exceptions for borrowing or lending 

arrangements involving personal 

relationships, business relationships, 

and registered persons require member 

firm notification and approval. In 

contrast, the exceptions for borrowing or 

lending arrangements with immediate 

family members and financial 

institutions do not require member firm 

notification and approval. The proposed 

rule change would make the following 

changes to the notification and approval 

requirements. 

a. Approval Requirements for the Close 

Personal Relationship, Business 

Relationship, and Registered Persons 

Exceptions 

Current Rule 3240(b)(1)(A) provides 

that a registered person shall notify the 

member firm of borrowing or lending 

arrangements made within the personal 

relationship exception,48 business 

relationship exception,49 or the 

registered persons exception 50 prior to 

entering into such arrangements, and 

that the member firm shall pre-approve 

in writing such arrangements.51 The 

proposed rule change would amend 

Rule 3240(b)(1) to make clear that, while 

registered persons cannot proceed with 

such arrangements without their 

member firm’s prior approval, the 

member firm is not required to approve 

the arrangement.52 Specifically, the 

proposed rule change would delete the 

‘‘shall pre-approve’’ language and 

instead require the registered person to 

provide notice ‘‘prior to entering into 

such arrangements’’ or ‘‘prior to the 

modification of such arrangements’’ and 

‘‘obtain the member’s approval.’’ 53

Further, the proposed rule change 

would amend the notification and 

approval requirements in Rule 

3240(b)(1) to cover borrowing or lending 

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54See proposed Rule 3240(b)(1)(B). 

55Rule 3240(b)(2). 

56See Notice at 3971. 

57See proposed Rule 3240(b)(2). 

58See Notice at 3971 n.21. 

59The ‘‘financial institution exception’’ states that 

no person associated with a member firm in any 

registered capacity may borrow money from or lend 

money to any customer of such person, unless 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. See Rule 3240(a)(2)(B). 

60See Rule 3240(b)(3). 

61See Notice at 3971. 

62See proposed Rule 3240(b)(3). 

63See Notice at 3971 n.21. 

64See id. at 3971. 

65 Id. 

66 Id.; see proposed Rules 3240(b)(1)(A) and 

(b)(1)(B) and proposed Rule 3240.01. 

67See proposed Rule 3240.01. 

68See Notice at 3971 n.21 (stating that ‘‘Rule 

3240.01 would also be amended to provide that the 

record-retention requirements are for purposes of 

Rule 3240(b), not just Rule 3240(b)(1). As explained 

above, Rule 3240(b)(1) requires notice and approval 

of arrangements that are within the personal 

relationship, business relationship, and registered 

persons exceptions. While Rule 3240(b)(2) and (3) 

do not expressly require notice and approval of 

arrangements within the immediate family member 

and financial institution exceptions, those 

subparagraphs imply that members may choose to 

require such notice and approval of those 

arrangements.’’). 

69Proposed Rule 3240.06. 

70 Id. 

customer relationship. Specifically, 

proposed Rule 3240(b)(1)(B) would 

require registered persons, prior to the 

initiation of a broker-customer 

relationship at the member firm with a 

person with whom the registered person 

has an existing borrowing or lending 

arrangement, to notify the member firm 

in writing of any existing borrowing or 

lending arrangements within the close 

personal relationship, business 

relationship, and registered persons 

exceptions and obtain the member 

firm’s approval in writing of the brokercustomer relationship.54

b. Notification and Approval 

Requirements for the Immediate Family 

Member Exception 

Current Rule 3240(b)(2) provides, in 

pertinent part, that a member firm’s 

written procedures may indicate that 

registered persons are not required to 

notify the member firm or receive 

member firm approval of borrowing or 

lending arrangements within the 

immediate family exception.55 The 

proposed rule change would amend 

Rule 3240(b)(2) to apply the same 

approach to borrowing or lending 

arrangements within the immediate 

family exception that pre-exist the 

broker-customer relationship.56

Specifically, the proposed rule change 

would amend Rule 3240(b)(2) to provide 

that the member firm’s procedures may 

indicate that registered persons are not 

required to notify the member firm or 

receive member firm approval of such 

arrangements either prior to or 

subsequent to initiating a brokercustomer relationship.57 FINRA stated, 

however, that Rule 3240(b)(2) implies 

that member firms may choose to 

require such notice and approval of 

those arrangements.58

c. Notification and Approval 

Requirements for the Financial 

Institution Exception 

Current Rule 3240(b)(3) provides, in 

pertinent part, that a member firm’s 

written procedures may indicate that 

registered persons are not required to 

notify the member firm or receive the 

member firm’s approval of borrowing or 

lending arrangements within the 

financial institution exception,59

provided that ‘‘the loan has been made 

on commercial terms that the customer 

generally makes available to members of 

the general public similarly situated as 

to need, purpose and 

creditworthiness.’’ 60 The proposed rule 

change would amend Rule 3240(b)(3) to 

also cover borrowing or lending 

arrangements within the financial 

institution exception that pre-exist the 

broker-customer relationship.61

Specifically, the proposed rule change 

would amend Rule 3240(b)(3) to provide 

that the member firm’s written 

procedures may also indicate that 

registered persons are not required to 

notify the member firm or receive the 

member firm’s approval of borrowing or 

lending arrangements within the 

financial institution exception entered 

into either prior to or subsequent to 

initiating a broker-customer 

relationship, provided that the loan has 

been made on commercial terms that the 

customer generally makes available to 

members of the general public similarly 

situated as to need, purpose and 

creditworthiness.62 FINRA stated, 

however, that Rule 3240(b)(3) implies 

that member firms may choose to 

require such notice and approval of 

those arrangements.63

d. Notifications in Writing and Record 

Retention 

Currently, Rule 3240 does not require 

that registered persons who must notify 

their member firms of borrowing and 

lending arrangements to do so in 

writing.64 Furthermore, the current rule 

does not require member firms to retain 

any notices of borrowing and lending 

arrangements that they may receive 

from registered persons; it only requires 

member firms to retain written 

approvals.65 The proposed rule change 

would require registered persons to 

notify their member firms in writing of 

those borrowing and lending 

arrangements under Rule 3240 that 

require notification and approval (i.e., 

the exceptions involving registered 

persons, close personal relationships, 

and business relationships).66

The proposed rule change would also 

amend Rule 3240.01 to require member 

firms to retain the written notifications 

and approvals 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’s association with the 

member has terminated.67 The proposed 

rule change would also require record 

retention of notices and approvals 

related to the immediate family and 

financial institution exceptions, unless 

the member firm’s procedures indicate 

that registered persons are not required 

to notify the member firm and/or 

receive member firm approval.68

e. Reasonable Assessment by Member of 

the Risks Created by the Borrowing or 

Lending Arrangement 

The proposed rule change also would 

add new Rule 3240.06 (Obligations of 

Member Receiving Notice). Proposed 

Rule 3240.06 would require a member 

firm, upon receiving written notice 

under Rule 3240, to ‘‘perform a 

reasonable assessment of the risks 

created by the borrowing or lending 

arrangement with a customer, 

modification to the borrowing or 

lending arrangement with a customer, or 

existing borrowing or lending 

arrangement with a person who seeks to 

be a customer of the registered 

person.’’ 69 It would further provide that 

the member firm make a ‘‘reasonable 

determination of whether to approve the 

borrowing or lending arrangement, 

modification to the borrowing or 

lending arrangement, or, where there is 

an existing borrowing or lending 

arrangement with a person who seeks to 

be a customer of the registered person, 

the broker-customer relationship.’’ 70 In 

the Notice, FINRA stated that a member 

firm’s ‘‘reasonable assessment’’ should 

consider several non-exhaustive factors, 

such as: 

(1) any potential conflicts of interest 

in the registered person being in a 

borrowing or lending arrangement with 

a customer; 

(2) the length and type of relationship 

between the customer and registered 

person; 


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71See Notice at 3971. 

72See id. 

73See id. at 3972. 

74 In approving this rule change, the Commission 

has considered the rule’s impact on efficiency, 

competition, and capital formation. See 15 U.S.C. 

78c(f). 75 15 U.S.C. 78o–3(b)(6). 

76See id. at 3969. 

77See letter from William Jacobson, Clinical 

Professor of Law and Director, Cornell Securities 

Law Clinic, dated February 12, 2024, at 2, https:// 

www.sec.gov/comments/sr-finra-2024-001/ 

srfinra2024001-428040-1059142.pdf (‘‘CSLC’’) 

(emphasizing that by extending the prohibition to 

situations where financial arrangements pre-date 

the formal establishment of a broker-customer 

relationship, ‘‘the amendment aims to prevent 

potential conflicts of interest or abuses.’’); see also 

letter from Joseph C. Pfeiffer, President, Public 

Investor Advocate Bar Association, dated February 

12, 2024, at 1, https://www.sec.gov/comments/srfinra-2024-001/srfinra2024001-426619-1057382.pdf 

(‘‘PIABA’’). 

78PIABA at 1–2. 

79PIABA at 1. 

80See letter from Claire McHenry, President, 

North American Securities Administrators 

Association, Inc., dated February 12, 2024, at 4, 

Continued 

(3) the material terms of the 

borrowing or lending arrangement; 

(4) the customer’s or the registered 

person’s ability to repay the loan; 

(5) the customer’s age; 

(6) whether the registered person has 

been a party to other borrowing or 

lending arrangements with customers; 

(7) whether, based on the facts and 

circumstances observed in the member’s 

business relationship with the customer, 

the customer has a mental or physical 

impairment that renders the customer 

unable to protect his or her own 

interests; 

(8) any disciplinary history or indicia 

of improper activity or conduct with 

respect to the customer or the 

customer’s account (e.g., excessive 

trading); and 

(9) any indicia of customer 

vulnerability or undue influence of the 

registered person over the customer.71

Moreover, the factors that a member 

firm considers ‘‘should allow for a 

reasonable assessment of the associated 

risks so that the member can make a 

reasonable determination of whether to 

approve the borrowing or lending 

arrangement, modification to the 

borrowing or lending arrangement, or, 

where there is an existing borrowing or 

lending arrangement with a person who 

seeks to be a customer of the registered 

person, the broker-customer 

relationship.’’ 72 FINRA also stated in 

the Notice that it ‘‘would expect a 

member to try to discuss the 

arrangement with the customer[,]’’ as 

part of the member firm’s reasonable 

assessment of the risks.73

III. Discussion and Commission 

Findings 

After careful review of the proposed 

rule change and the comment letters, 

and FINRA’s response to comments, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Exchange Act and 

the rules and regulations thereunder 

that are applicable to a national 

securities association.74 Specifically, as 

explained in more detail below, the 

Commission finds that the proposed 

rule change is consistent with Section 

15A(b)(6) of the Exchange Act, which 

requires, among other things, that 

FINRA rules be designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, and, in general, to 

protect investors and the public 

interest.75

The proposed rule change would 

strengthen the general prohibition 

against borrowing and lending 

arrangements between registered 

persons and their customers. 

Specifically, it would narrow the types 

of permissible borrowing and lending 

arrangements by covering relationships 

that pre-exist a new broker-customer 

relationship, as well as borrowing or 

lending arrangements entered into 

within six months after a brokercustomer relationship ends. The 

proposed rule change would also extend 

the application of the rule to indirect 

borrowing and lending arrangements 

involving related parties of the customer 

or registered person and to ownerfinancing arrangements. In addition, the 

proposed rule change would modify the 

relationship categories in the immediate 

family exception. Furthermore, it would 

require borrowing and lending 

arrangements based on the close 

personal relationship and business 

relationship exceptions be ‘‘bona fide.’’ 

It also would require: registered persons 

to notify their member firms in writing 

and obtain member firms’ approval of 

certain borrowing and lending 

arrangements; member firms to retain 

records of notices and approvals; and 

member firms to conduct a reasonable 

assessment of the risks associated with 

certain arrangements. Accordingly, and 

as explained in more detail below, the 

Commission finds that the proposed 

rule change is consistent with Section 

15A(b)(6) of the Exchange Act. The 

Commission addresses the proposed 

rule change’s specific provisions, and 

any related comments, in turn. 

A. The General Prohibition on 

Borrowing From or Lending to 

Customers 

FINRA is proposing to amend the title 

of FINRA Rule 3240 to ‘‘Prohibition on 

Borrowing From or Lending to 

Customers,’’ and change the title of Rule 

3240(a) to ‘‘General Prohibition; 

Permissible Borrowing or Lending 

Arrangements; Conditions.’’ 

Commenters did not specifically 

comment on this proposed rule change. 

By emphasizing that FINRA Rule 3240 

imposes a general prohibition on 

registered persons borrowing from or 

lending to their customers, the proposed 

rule change highlights the regulatory 

purpose of the rule to generally prohibit 

borrowing and lending arrangements. 

The proposed rule change would also 

make several substantive changes to the 

general prohibition on borrowing from 

or lending to customers, including 

extending the rule to cover borrowing 

and lending arrangements that pre-exist 

the broker-customer relationship; 

extending the rule’s limitations to 

borrowing or lending arrangements 

entered into within six months after a 

broker-customer relationship ends; and, 

specifying that certain borrowing and 

lending arrangements are covered by the 

general prohibition. The Commission 

addresses those changes below. 

1. Pre-Existing Borrowing and Lending 

Arrangements 

The proposed rule change would 

amend Rule 3240(a) to provide that the 

rule’s general requirements concerning 

borrowing and lending arrangements— 

including the general prohibition— 

apply to borrowing and lending 

arrangements that pre-exist a new 

broker-customer relationship. The 

proposed rule change would prohibit 

registered persons from initiating a 

broker-customer relationship with a 

person with whom the registered person 

has an existing borrowing or lending 

arrangement unless the conditions of 

the proposed rule are met.76

Two commenters supported this 

change.77 One of these commenters 

stated that conflicts of interest would 

exist in the relationship irrespective of 

whether or not a borrowing or lending 

arrangement existed before or after the 

broker-customer relationship is 

established.78 Thus, the commenter 

noted, broadening and applying the 

general prohibition to borrowing or 

lending arrangements that pre-exist the 

broker-customer relationship will 

protect investors.79 Another commenter 

supported covering borrowing or 

lending arrangements that pre-exist 

broker-customer relationship to the 

extent the proposed rule change would 

continue to permit any borrowing or 

lending arrangements.80 To the extent 


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https://www.sec.gov/comments/sr-finra-2024-001/ 

srfinra2024001-428019-1058522.pdf (‘‘NASAA’’). 

81See id. Specifically, two commenters who 

provided comments on specific provisions of the 

proposed rule change stated a preference for a broad 

prohibition on all borrowing and lending 

arrangements. See NASAA at 3–4 (identifying a 

complete ban with no exceptions as the most 

efficient and effective way to address ‘‘the serious 

conflicts inherent in such a relationship and the 

potential for investor harm’’); see also letter from 

Jenice Malecki, Jacqueline Candela, and Adam 

Schreck of Malecki Law, dated February 12, 2024, 

at 1, https://www.sec.gov/comments/sr-finra-2024- 

001/srfinra2024001-428039-1058683.pdf 

(‘‘Malecki’’) (stating that ‘‘lending arrangements 

between registered representatives and their 

customers should be strictly prohibited. 

Transactions amongst registered representatives and 

customers inherently involve parties negotiating 

from disparate bargaining positions.’’). In response, 

FINRA stated that it considered prohibiting all such 

arrangements but rejected the approach because 

such arrangements may be mutually beneficial to 

the contracting parties. See FINRA Comment 

Response at 1–2. FINRA stated also that the 

proposed rule change would strengthen the general 

prohibition against such arrangements by extending 

the scope of arrangements to which the rule would 

apply and by narrowing some exceptions. See 

FINRA Comment Response at 4. In addition, FINRA 

stated that the proposed rule change would 

strengthen the notice and approval requirements, as 

discussed more fully below. See id. As discussed 

herein, FINRA Rule 3240 generally prohibits 

registered persons from borrowing money from, or 

lending money to, their customers but permits such 

arrangements under limited circumstances designed 

to minimize the impact of conflicts of interest. The 

proposed rule change would strengthen the general 

prohibition against borrowing and lending 

arrangements between registered persons and their 

customers. Accordingly, for the reasons discussed 

in detail below, we find that the proposed rule 

change is consistent with the public interest and the 

protection of investors. 

82See FINRA Comment Response at 4. 

83 Id. 

84See Notice at 3969. 

85PIABA at 2. 

86 Id. 

87 Id. 

88See FINRA Comment Response at 14. Rule 

3241.01 defines ‘‘customer’’ as ‘‘any customer that 

has, or in the previous six months had, a securities 

account assigned to the registered person at any 

member.’’ FINRA Rule 3241 governs registered 

persons who are named a customer’s beneficiary or 

hold a position of trust for a customer. FINRA Rule 

3241 and FINRA Rule 3240 are both designed to 

prevent harm to customers due to registered 

persons being in a position of power and 

responsibility in their lives. See Notice 3977 n.56. 

89See FINRA Comment Response at 14. FINRA 

Rule 4111 addresses risks from broker-dealers with 

a significant history of misconduct, including firms 

with a high concentration of individuals with a 

significant history of misconduct (‘‘Restricted 

Firms’’). For purposes of calculating concentration, 

the rule covers persons registered with the member 

firm for one or more days within the one year prior 

to the date of the annual calculation used for 

determining Restricted Firm status. See Regulatory 

Notice 21–34 (Sep. 28, 2021), https://www.finra.org/ 

rules-guidance/notices/21-34. 

90See FINRA Comment Response at 15. 

91See id. 

92See id. at 14 (citing FINRA Regulatory Notice 

20–38 (Oct. 2020)). 

that any borrowing or lending 

arrangements are permitted, this 

commenter called for strong safeguards 

to protect investors from ‘‘predatory 

lending or undue influence in a brokercustomer relationship.’’ 81

FINRA stated that the proposed rule 

change would strengthen the general 

prohibition against borrowing and 

lending arrangements by extending the 

scope of arrangements to which the rule 

would apply to pre-existing 

arrangements.82 In addition, FINRA 

stated that the proposed rule change 

would strengthen the notice and 

approval requirements by, among other 

things, requiring member firms, upon 

receiving notice under the proposed 

rule, to conduct a reasonable 

assessments of the risks created by a 

borrowing or lending arrangement and 

make a reasonable determination of 

whether to approve it, as described 

more fully below.83

The proposed rule change reasonably 

extends the general prohibition against 

borrowing and lending arrangements to 

cover borrowing or lending 

arrangements that pre-exist a new 

broker-customer relationship. By 

extending this general prohibition to 

such arrangements, the proposed rule 

change reasonably extends the scope of 

the rule while preserving the 

opportunity for parties to enter into 

such arrangements in limited 

circumstances and subject to procedural 

protections (as discussed below) 

designed to minimize the impact of the 

potential conflict. For these reasons, the 

proposed rule change is reasonably 

designed to prevent fraudulent and 

manipulative acts and practices, to 

promote just and equitable principles of 

trade, and, in general, to protect 

investors and the public interest. 

2. Expansion of the Definition of 

Customer 

The proposed rule change would add 

new FINRA Rule 3240.02 (Customer) to 

define ‘‘customer,’’ for purposes of Rule 

3240, to include any customer who has, 

or in the previous six months had, a 

securities account assigned to the 

registered person at any member firm. 

FINRA stated that the proposed rule 

change would extend the rule’s 

limitations to borrowing or lending 

arrangements entered into within six 

months after a broker-customer 

relationship terminates.84

One commenter supported this 

proposed extension of the rule’s 

limitations to borrowing or lending 

arrangements, but favored extending the 

covered time period to one year as a 

stronger anti-evasion measure instead of 

the proposed six months.85 The 

commenter stated that a one-year 

‘‘lookback’’ time period would curtail 

attempts to evade this rule and therefore 

‘‘enhance investor protection to a 

greater degree than the proposed six 

month time period.’’ 86 The commenter 

further stated that FINRA Rule 4111 

(Restricted Firm Obligations) uses a oneyear ‘‘lookback’’ time period.87

In response, FINRA stated that it 

proposed to align the new Rule 3240 

time period with the six-month time 

period in the definition of ‘‘customer’’ 

in Rule 3241, because Rule 3241 

addresses similar potential conflicts of 

interest,88 whereas Rule 4111’s one-year 

‘‘lookback’’ time period relates to the 

identification of firms with a significant 

history of misconduct.89 FINRA stated 

that there are costs associated with 

extending the general prohibition after 

the broker-customer relationship ends.90

Such costs relate to evaluating and 

making reasonable determinations on a 

host of arrangements about which the 

member firm was not previously 

notified, as well as costs associated with 

continued monitoring for prohibited 

borrowing and lending arrangements 

with every customer who transfers an 

account away from the member firms’ 

registered persons.91 FINRA stated also 

that the six-month time period ‘‘strikes 

an appropriate balance between 

achieving the regulatory objective of 

addressing circumvention of the 

proposed rule change and imposing 

requirements that are reasonable and 

appropriate, including reasonable 

requirements on member firms in 

tracking transfers of customers’ 

accounts.’’ 92

The proposed rule change reasonably 

extends the rule’s coverage to borrowing 

and lending arrangements involving 

customers who in the previous six 

months had a securities account 

assigned to a registered person. As a 

result, the proposed rule change 

protects investors by broadening the 

scope of customer relationships covered 

by the rule’s general prohibition and 

limited exceptions. Further, the sixmonth limit on how long a broker-dealer 

must monitor terminated customer 

accounts reasonably balances the 

benefits of the rule’s protections with 

the burden of complying with the rule’s 

requirements for an extended period 

after the termination of the brokercustomer relationship. For these 

reasons, the proposed rule change is 

reasonably designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, and, in general, to 

protect investors and the public interest. 


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93Notice at 3969. 

94See CSLC; PIABA. 

95PIABA at 2. 

96CSLC at 2. 

97Proposed Rule 3240.03. 

98See Notice at 3969 (referencing James K. 

Breeze, Letter of Acknowledgment, Waiver and 

Consent, Case ID 2008012846501 (June 30, 2009); 

Vincenzo G. Covino, Letter of Acknowledgment, 

Waiver and Consent, Case ID 2009020793901 (Feb. 

9, 2012)). 

99See Rule 3240(a)(2)(A). 

100See Notice at 3970. 

101Proposed Rule 3240(c). 

102 Id. 

103See, e.g., CSLC at 3 (stating that amending the 

‘‘any other person’’ clause would align the 

definition with ‘‘practical considerations’’ that 

would reduce the potential for misuse. Also stating 

that ‘‘[t]he modernization of this definition 

showcases a dedication to inclusivity and 

adaptability. It also works to strengthen the rule, 

making sure it stays relevant to contemporary 

society and prevents individuals from exploiting 

technicalities.’’); see also PIABA at 2. 

104Rule 3240(a)(2)(D). 

105Rule 3240(a)(2)(E). 

106Proposed Rule 3240(a)(2)(E). 

3. Borrowing and Lending 

Arrangements With Related Parties of 

the Registered Person or Customer 

The proposed rule change would 

extend the rule’s general prohibition to 

borrowing or lending arrangements with 

related parties of the customer or 

registered person that involve conflicts 

similar to those presented by borrowing 

or lending arrangements directly 

between registered persons and their 

customers. Specifically, proposed new 

FINRA Rule 3240.05 would provide that 

a registered person instructing or asking 

a customer to enter into a borrowing or 

lending arrangement with a person 

related to the registered person or to 

have a person related to the customer 

enter into a borrowing or lending 

arrangement with the registered person 

would present similar conflict of 

interest concerns as borrowing or 

lending arrangements between the 

registered person and the customer and 

would be inconsistent with Rule 3240 

unless the conditions set forth in Rule 

3240(a) are satisfied. FINRA stated that 

the proposed rule change would address 

the potential for customer abuse that 

arises when a registered person: (1) 

‘‘induces a customer to enter into a 

borrowing or lending arrangement with 

a person or entity related to the 

registered person’’ or (2) ‘‘induces a 

customer to have a person or entity 

related to the customer enter into an 

arrangement with the registered 

person.’’ 93

Two commenters supported the 

proposed rule change.94 One stated that 

it is a ‘‘good idea’’ because ‘‘[t]he same 

or very similar conflict of interest is 

present if a registered representative’s 

close family member obtains a loan from 

a registered representative’s client just 

as if the registered representative 

obtained it themselves.’’ 95 The other 

commenter stated that the proposed rule 

change would close ‘‘potential 

loopholes’’ and safeguard against abuses 

that may occur ‘‘when a registered 

person induces a customer to enter into 

financial arrangements with related 

individuals.’’ 96

The proposed addition of FINRA Rule 

3240.05 reasonably extends the rule to 

cover indirect borrowing or lending 

arrangements involving parties related 

to either the registered person or the 

customer, and thus prevents a registered 

person from evading the restrictions of 

Rule 3240. As such, the proposed rule 

change appropriately addresses conflicts 

of interest between registered persons 

and customers that may arise from 

certain borrowing or lending 

arrangements with related persons and 

entities. For these reasons, the proposed 

rule change is reasonably designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, and, in 

general, to protect investors and the 

public interest. 

4. Owner-Financing Arrangements 

Proposed Rule 3240.03 would include 

owner-financing arrangements as 

borrowing or lending arrangements that 

are covered by Rule 3240.97 For 

example, the proposed rule change 

would cover situations where a 

registered person purchases real estate 

from their customer, the customer 

agrees to finance the purchase, and the 

registered person provides a promissory 

note for the entire purchase price or 

arranges to pay in installments.98

Commenters did not specifically 

comment on this proposed rule change. 

By extending Rule 3240 to cover 

owner-financing arrangements, the 

proposed rule change protects investors 

by addressing financing arrangements 

that present similar conflicts of interest 

and a similar potential for abuse as 

other borrowing and lending 

arrangements covered by Rule 3240. 

Generally prohibiting such financing 

arrangements, unless the conditions of 

the rule are met, is a reasonable 

approach to address the potential risk of 

harm associated with this type of 

borrowing or lending arrangement. For 

these reasons, the proposed rule change 

is reasonably designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, and, in general, to 

protect investors and the public interest. 

B. The ‘‘Immediate Family’’ Definition 

Rule 3240’s general prohibition on 

borrowing or lending arrangements 

provides an exception for arrangements 

between a registered person and a 

customer who is a member of the 

registered person’s immediate family.99

The proposed rule change would update 

the ‘‘immediate family’’ definition to 

include new relationship categories.100

Specifically, the proposed rule change 

would amend Rule 3240(c) to replace 

‘‘husband or wife’’ with ‘‘spouse or 

domestic partner’’ and amend the 

definition to include ‘‘step and adoptive 

relationships.’’ 101 In addition, the 

proposed rule change would amend the 

‘‘any other person’’ clause to state that 

it only applies to ‘‘any other person who 

resides in the same household as the 

registered person’’ and who the 

registered person ‘‘financially supports, 

directly or indirectly, to a material 

extent.’’ 102 Commenters supported the 

proposed rule change.103

By amending the definition of 

‘‘immediate family,’’ the proposed rule 

change updates the rule to encompass a 

broader set of familial relationships, 

while at the same time retaining a 

reasonably narrow and clear scope, 

which provides more compliance 

certainty. In addition, amending the 

‘‘any other person’’ clause to restrict the 

definition to those individuals who live 

with, and are financially supported by, 

the registered person is a reasonable 

approach to reducing the potential for 

the exception to be misused. For these 

reasons, the proposed rule change is 

reasonably designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, and, in general, to 

protect investors and the public interest. 

C. The Close Personal Relationship and 

Business Relationship Exceptions 

Rule 3240 currently includes a 

personal relationship exception 104 and 

a business relationship exception 105 to 

the general prohibition against 

registered persons borrowing or lending 

to their customers. The proposed rule 

change would narrow the personal 

relationship exception to apply only to 

personal relationships that are ‘‘bona 

fide’’ and ‘‘close,’’ and maintained 

outside of, and formed prior to, the 

broker-customer relationship. The 

proposed rule change would also 

narrow the business relationship 

exception to borrowing and lending 

arrangements that are based on a ‘‘bona 

fide business relationship’’ outside of 

the broker-customer relationship.106

In addition, proposed Rule 3240.04 

would provide factors for evaluating 


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107Proposed Rule 3240.04. 

108 Id. 

109 Id. 

110CSLC at 3. 

111 Id.; see also PIABA at 2 (commending ‘‘any 

effort to limit the exceptions and make very clear 

that this conduct is not allowed.’’). 

112CSLC at 3. 

113Malecki; NASAA. 

114See NASAA at 4. 

115See Malecki at 5. 

116See id. at 5–6. 

117See id. at 5–6 (expressing the view that the 

existing examples are limited and very specific and 

may not be relatable to most broker-customer 

relationships). 

118See id. at 5. 

119See FINRA Comment Response at 9. 

120 Id. 

121See id. at 9–10 (stating that the situation 

where an older or vulnerable customer loans money 

to a registered person who had befriended them 

after they already formed a broker-customer 

relationship, would be outside the scope of the 

proposed close personal relationship exception, and 

thus, would be prohibited). 

122See id. at 10. 

123See id. 

124See id. 

whether a borrowing or lending 

arrangement is based on a bona fide, 

close personal relationship or a bona 

fide business relationship, including 

‘‘when the relationship began, its 

duration and nature, and any facts 

suggesting that the relationship is not 

bona fide or was formed with the 

purpose of circumventing the purpose 

of Rule 3240.’’ 107 Proposed Rule 

3240.04 would also provide examples of 

‘‘close personal relationships,’’ 

including, ‘‘a childhood or long-term 

friend or a godparent.’’ 108 Finally, 

proposed Rule 3240.04 would provide 

as an example of a ‘‘business 

relationship,’’ ‘‘a loan from a registered 

person to a small outside business that 

the registered person co-owned for years 

for the sole purpose of providing the 

business with additional operating 

capital.’’ 109

One commenter supported the 

proposed rule change, stating that 

replacing the current requirement with 

the bona fide relationship requirement 

for both the close personal relationship 

and business relationship exceptions 

‘‘eliminates subjectivity and 

ambiguity’’ 110 and ‘‘emphasizes the 

genuine and sincere nature of the 

relationship, focusing on authenticity 

and legitimacy.’’ 111 This commenter 

also stated that the factors test 

introduced by proposed Rule 3240.04 

offer ‘‘clear criteria for evaluation, 

emphasizing specific aspects such as the 

duration and nature of the relationship 

. . ., providing a structured framework 

for assessing relationship 

legitimacy.’’ 112

Two other commenters opposed the 

proposed rule change.113 One stated that 

close personal relationships do not 

‘‘confer any additional protections from 

the kinds of conflicted, exploitative, and 

abusive practices that the rules should 

be designed to prevent.’’ 114 The other 

commenter stated the proposed 

amendments to the exceptions would 

result in the exceptions being too 

subjectively applied because it asks 

firms to make judgements of legitimacy 

and would be difficult to implement.115

Specifically, the commenter stated that 

the term ‘‘bona fide’’ is vague and 

ambiguous and that the lack of an 

explanation or test to discern what 

constitutes a relationship as legitimate 

would make it difficult to interpret the 

application of the exceptions.116 To 

address this issue, the commenter 

requested that FINRA provide more 

examples of relationships that would 

qualify for the close personal 

relationship and business relationship 

exceptions.117 In addition, this 

commenter stated that if the rule’s 

intent is to prohibit arrangements when 

the personal relationship is formed after 

the commencement of the brokercustomer relationship, it should 

explicitly say so.118

In response, FINRA stated that it 

proposed to narrow the exception and 

provide factors that are relevant to 

assessing whether a relationship falls 

within the scope of either the close 

personal or business relationship 

exception precisely because it shared 

concerns about the scope of these 

exceptions. In particular, FINRA stated 

that limiting the personal relationship 

exception to relationships that are (1) 

bona fide, (2) close, and (3) maintained 

outside of, and formed prior to, the 

broker-customer relationship, ‘‘would 

reduce the risk that a registered person 

would concoct a personal relationship 

with a customer for the purpose of 

borrowing from or lending to the 

customer, and . . . address concerns 

that this exception could be 

exploited.’’ 119 In response to the 

commenter’s request for clarification 

regarding whether the proposed rule 

change would cover personal 

relationships developed after the 

formation of the broker-customer 

relationship, FINRA reiterated that 

relationships formed after the 

establishment of the broker-customer 

relationship would not fall within the 

proposed close personal relationship 

exception, which would only apply to 

bona fide, close personal relationships 

maintained outside of, and formed prior 

to, the broker-customer relationship.120

According to FINRA, the close personal 

relationship exception is designed only 

to apply where the borrowing or lending 

arrangement is less likely to have 

resulted from the broker-customer 

relationship because the close personal 

relationship existed prior to the brokercustomer relationship and does not 

involve the two parties being introduced 

through the broker-customer 

relationship that may involve conflicts 

of interest.121

In response to commenter requests for 

more examples of close personal and 

business relationships, FINRA stated 

that the examples described in the 

proposed rule change ‘‘add helpful 

clarity while giving members the 

flexibility to consider factors relevant to 

whether these exceptions apply.’’ 122 In 

declining to provide additional 

examples, FINRA stated that, ultimately, 

the applicability of the exceptions 

depends on the facts and 

circumstances.123 However, to the 

extent any particular scenario raises 

questions regarding the application of 

the rule, FINRA would consider issuing 

additional guidance on a case-by-case 

basis.124

The proposed rule change reasonably 

limits the personal relationship 

exception to bona fide, close 

relationships maintained outside of, and 

formed prior to, the broker-customer 

relationship and the business 

relationship exception to borrowing and 

lending arrangements that are based on 

a bona fide business relationship 

maintained outside of the brokercustomer relationship. By narrowing 

these exceptions in this manner, the 

proposed rule change would help 

ensure that these exceptions to the 

general prohibition are limited to the 

types of relationships where the risk to 

investors should be reduced. Similarly, 

by providing factors for evaluating 

whether a borrowing or lending 

arrangement is based on a bona fide, 

close personal relationship or a bona 

fide business relationship, as well as 

examples of close personal relationships 

and business relationships, the 

proposed rule change would help 

parties comply with the terms of these 

exceptions. For these reasons, the 

proposed rule change is reasonably 

designed to prevent fraudulent and 

manipulative acts and practices, to 

promote just and equitable principles of 

trade, and, in general, to protect 

investors and the public interest. 

D. Notification and Approval 

Requirements 

As stated above, Rule 3240(b) requires 

notification and approval for certain 

borrowing or lending arrangements. 


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125See Notice at 3970. 

126See CSLC at 4 (stating that the proposed rule 

change ‘‘mitigate the risk of a conflict of interest by 

clarifying that member firms are empowered to 

approve or disapprove a proposed arrangement.’’); 

see also Malecki at 6 (stating that ‘‘member firms 

should not be able to ‘opt-out’ of reviewing and/or 

approving these types of lending/borrowing 

transactions with customers.’’). 

127Rule 3240(b)(2). However, as noted above, the 

current rule allows a member to require such 

notification and approval for borrowing and lending 

arrangements with immediate family or financial 

institutions if the member firm so chooses. See 

Notice at 3971 n.21. 

128Rule 3240(b)(3). 

129See Notice at 3971. 

130See id. 

131See proposed Rule 3240(b)(2). 

132See proposed Rule 3240(b)(3). 

133See NASAA at 4–5; see also Malecki at 6. 

134See NASAA at 5; see also Malecki at 6 (stating 

that ‘‘member firms should not be able to ‘opt-out’ 

of reviewing and/or approving these types of 

lending/borrowing transactions with customers, 

through their own firm procedures, as it defeats the 

purpose of and intent behind Rule 3240 itself’’). 

135Malecki at 3 (stating that ‘‘an ‘immediate’ 

familial relationship is not a barrier to committing 

fraud generally, and it should not be used as an 

exception for allowing lending arrangements 

between registered representatives and their 

customers.’’). 

136See FINRA Comment Response at 7; see also 

Notice at 3976. 

137See FINRA Comment Response at 6–7. 

Generally, the exceptions for borrowing 

and lending arrangements involving 

personal relationships, business 

relationships, and registered persons, 

require member firm notice and 

approval. The exceptions for borrowing 

and lending arrangements with 

immediate family members and 

financial institutions do not require 

member firm notification and approval. 

The proposed rule change would amend 

the notification and approval 

requirements of Rule 3240. We discuss 

the proposed changes separately below. 

1. Approval Requirements for the Close 

Personal Relationship, Business 

Relationship, and Registered Persons 

Exceptions 

The proposed rule change would 

amend Rule 3240(b)(1) to clarify that, 

although registered persons are required 

to obtain the member firm’s prior 

approval of borrowing or lending 

arrangements within the close personal 

relationship, business relationship, or 

registered persons exceptions, the 

member firm is not required to approve 

such arrangements.125 Specifically, the 

proposed rule change would delete 

‘‘shall pre-approve’’ from the current 

rule and instead require the registered 

person to provide notice ‘‘prior to 

entering into such arrangements’’ or 

‘‘prior to the modification of such 

arrangements’’ and to ‘‘obtain the 

member’s approval.’’ Two commenters 

supported the proposed rule change.126

The proposed rule change would 

clarify that a member firm is not 

required to pre-approve borrowing or 

lending arrangements within the close 

personal relationship, business 

relationship, or registered persons 

exceptions. As such, the proposed rule 

change would strengthen an important 

existing control on such arrangements, 

by explicitly making clear that a 

member firm is not required to approve 

any such arrangement simply because a 

registered person notified the member 

firm. For these reasons, the proposed 

rule change is reasonably designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, and, in 

general, to protect investors and the 

public interest. 

2. Notification and Approval 

Requirements for the Immediate Family 

Member Exception and the Financial 

Institution Exception 

Current Rule 3240(b)(2) provides, in 

pertinent part, that a member firm’s 

written procedures may indicate that 

that registered persons are not required 

to notify the member firm or receive 

member firm approval either prior to or 

subsequent to entering into borrowing 

or lending arrangements with 

immediate family members.127

Similarly, current Rule 3240(b)(3) 

provides, in pertinent part, that a 

member firm’s written procedures may 

indicate that registered persons are not 

required to notify the member firm or 

receive member firm approval of 

borrowing or lending arrangements 

within the financial institution 

exception, provided that ‘‘the loan has 

been made on commercial terms that the 

customer generally makes available to 

members of the general public similarly 

situated as to need, purpose and 

creditworthiness.’’ 128

The proposed rule change would 

amend Rule 3240(b)(2) and Rule 

3240(b)(3) to apply the same approach 

to borrowing or lending arrangements 

within the immediate family exception 

and the financial institution exception, 

respectively, to such arrangements that 

pre-exist the broker-customer 

relationship.129 These changes are 

intended to correspond to and account 

for the fact that, under the proposed rule 

change, the general prohibition applies 

to borrowing or lending arrangements 

that pre-exist the broker-customer 

relationship.130

Specifically, to extend these 

provisions to pre-existing arrangements, 

the proposed rule change would amend 

Rule 3240(b)(2) to provide that the 

member firm’s written procedures may 

indicate that registered persons are not 

required to notify the member firm or 

receive the member firm’s approval of 

pre-existing borrowing or lending 

arrangements that would fall within the 

immediate family exception prior to 

initiating a broker-customer 

relationship.131 Similarly, the proposed 

rule change would amend Rule 

3240(b)(3) to provide that the member 

firm’s written procedures may also 

indicate that registered persons are not 

required to notify the member firm or 

receive member firm approval of preexisting arrangements that would fall 

within the financial institution 

exception prior to initiating a brokercustomer relationship, provided the 

borrowing or lending arrangements meet 

the restrictions of the exception set forth 

above.132

Two commenters expressed concern 

that the proposed rule change would not 

require notice and approval of 

borrowing or lending arrangements with 

immediate family members or financial 

institutions.133 One of these 

commenters stated that given the risk of 

financial exploitation in familial 

relationships, FINRA should require ‘‘at 

least the same notification and approval 

for arrangements with immediate family 

as it requires for other registered 

persons and ‘close personal’ and 

business relationships.’’ 134 The other 

commenter concurred, stating that the 

proposed rule change disregards 

‘‘important considerations about the 

perpetrators of financial fraud.’’ 135

In response, FINRA stated that, other 

than extending the Rule 3240(b)(2) 

obligations to borrowing and lending 

arrangements established prior to 

initiating a broker-customer 

relationship, the proposed rule change 

would not amend the existing 

immediate family exception or require 

notice or approval of borrowing and 

lending arrangements with immediate 

family members.136 FINRA further 

stated that Rule 3240 is not intended to 

encourage registered persons to avoid 

traditional financing arrangements, but 

rather to continue to allow for tailored 

exceptions to the general prohibition on 

borrowing or lending arrangements in 

limited situations where FINRA believes 

the likelihood that the registered person 

has borrowed from or lent money to a 

customer by virtue of the brokercustomer relationship is reduced (e.g., 

certain borrowing or lending 

arrangements with immediate family 

members and financial institutions).137

FINRA also identified ‘‘examples of 


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138 Id. at 8. 139 Id. 140See id. 141 Id. 142 Id. 143 Id. FINRA further stated that Rule 2010 

(Standards of Commercial Honor and Principles of 

Trade)—which provides that a member, in the 

conduct of its business, shall observe high 

standards of commercial honor and just and 

equitable principles of trade—protects investors 

from unethical behavior and is broad enough to 

cover a wide range of unethical conduct. See id. 

144See Rule 3110(b)(1). 

145See Rule 3110(a). 

146See infra Section III.D.4. 

147See Notice at 3971. 

148 Id. 

149 Id.; see proposed Rules 3240(b)(1)(A) and 

(b)(1)(B) and proposed Rule 3240.01. 

150See proposed Rule 3240.01. 

151See supra note 68. 

152See CSLC at 4. 

153Proposed Rule 3240.06. 

mutually beneficial borrowing or 

lending arrangements between 

immediate family members, including 

senior family members (e.g., loans to 

cover medical expenses, dependent 

care, home repairs, etc.).’’ 138 FINRA 

recognized that ‘‘[p]ermitting family 

members to privately lend with each 

other, may also allow family members to 

obtain small or short-term loans, 

including at an interest rate lower than 

commercially available.’’ 139 Further, 

FINRA reiterated that a registered 

person is prohibited from entering into 

a borrowing or lending arrangement 

with a customer who is an immediate 

family member, including one who is a 

senior investor, unless the member firm 

adopts written procedures permitting 

such arrangements.140 FINRA noted that 

members firms may choose to prohibit 

all borrowing and lending arrangements, 

allow only some of the exceptions, or 

impose limitations on the exceptions.141

Finally, FINRA stated that requiring 

notice and approval for borrowing and 

lending arrangements with immediate 

family members ‘‘may invade legitimate 

privacy interests because such a 

requirement could interfere with or 

intrude upon personal or private family 

matters.’’ 142 According to FINRA, by 

strengthening the general prohibition 

and narrowing its exceptions, the 

proposed rule change would further 

protect all investors, including senior 

investors.143

The proposed rule change is not 

imposing new obligations on borrowing 

and lending arrangements within the 

immediate family exception or within 

the financial institution exception but 

would extend the existing regime to 

situations where such financial 

arrangements pre-exist the formal 

establishment of a broker-customer 

relationship. As with all the exceptions 

under the rule, a registered person can 

only enter into a borrowing or lending 

arrangement pursuant to the immediate 

family exception or financial institution 

exception if the member firm has 

adopted written procedures permitting 

such an arrangement. A member firm’s 

procedures may prohibit all such 

arrangements, allow only some of the 

excepted arrangements, or impose limits 

on the exceptions, as the member firm 

deems appropriate to be reasonably 

designed to achieve compliance with 

the proposed rule change.144

Accordingly, while not explicitly 

required, as part of establishing a 

reasonably designed supervisory system 

as required under FINRA rules,145

member firms may nevertheless require 

notification and approval of 

arrangements that fall under the 

immediately family exception and 

financial institution exception as part of 

their written procedures based on their 

assessment of the risks associated with 

such arrangements.146 By providing 

member firms the flexibility to 

determine whether or not to allow such 

arrangements, and if so, whether to 

require notice and approval for such 

arrangements, and in particular for 

arrangements within the immediate 

family exception, FINRA reasonably 

balances the potential risk of harm 

associated with such arrangements with 

the potential benefits of such 

arrangements and the potential 

associated privacy concerns. Moreover, 

as discussed above, the proposed rule 

change broadens and strengthens the 

application of the rule by, among other 

things, covering relationships that preexist a new broker-customer 

relationship, as well as borrowing or 

lending arrangements entered into 

within six months after a brokercustomer relationship ends, which will 

add protections to investors, including 

those whose arrangements fall within 

the immediate family exception. For 

these reasons, the proposed rule change 

is reasonably designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, and, in general, to 

protect investors and the public interest. 

3. Notifications in Writing and Record 

Retention 

As stated above, Rule 3240 does not 

require that registered persons who 

must notify their member firms of 

borrowing and lending arrangements do 

so in writing.147 Furthermore, the 

current rule does not require member 

firms to retain any notices of borrowing 

and lending arrangements that they may 

receive from registered persons; it only 

requires member firms to retain written 

approvals.148

The proposed rule change would 

require registered persons to notify their 

member firms in writing of those 

borrowing and lending arrangements 

under Rule 3240 that require 

notification and approval (i.e., the 

exceptions involving registered persons, 

close personal relationships, and 

business relationships).149 The 

proposed rule change would also amend 

Rule 3240.01 to require member firms to 

retain the written notifications and 

approvals 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’s association with the 

member has terminated.150 The 

proposed rule change would also 

require record retention of notices and 

approvals related to the immediate 

family and financial institution 

exceptions, unless the member firm’s 

procedures indicate that registered 

persons are not required to notify the 

member firm and/or receive member 

firm approval.151

One commenter supported the 

proposed rule change.152

By requiring registered persons to give 

written notice and requiring member 

firms to preserve records of such written 

notice—whether required specifically 

by the rule or by the member firm’s 

written procedures—for at least three 

years, the proposed rule change is 

reasonably designed to help ensure 

compliance with the amended Rule 

3240 and its exceptions. For these 

reasons, the proposed rule change is 

reasonably designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, and, in general, to 

protect investors and the public interest. 

4. Reasonable Assessment by Member of 

the Risks Created by the Borrowing or 

Lending Arrangement 

The proposed rule change would add 

proposed Rule 3240.06, which would 

require a member firm, after receiving a 

written notice under Rule 3240, to 

‘‘perform a reasonable assessment of the 

risks created by the borrowing or 

lending arrangement with a customer, 

modification to the borrowing or 

lending arrangement with a customer, or 

existing borrowing or lending 

arrangement with a person who seeks to 

be a customer of the registered 

person.’’ 153 The proposed rule change 

would also require that the member firm 

make a ‘‘reasonable determination of 

whether to approve the borrowing or 


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154 Id. 

155See Notice at 3971 (listing the following 

factors: (1) any potential conflicts of interest in the 

registered person being in a borrowing or lending 

arrangement with a customer; (2) the length and 

type of relationship between the customer and 

registered person; (3) the material terms of the 

borrowing or lending arrangement; (4) the 

customer’s or the registered person’s ability to repay 

the loan; (5) the customer’s age; (6) whether the 

registered person has been a party to other 

borrowing or lending arrangements with customers; 

(7) whether, based on the facts and circumstances 

observed in the member firm’s business 

relationship with the customer, the customer has a 

mental or physical impairment that renders the 

customer unable to protect his or her own interests; 

(8) any disciplinary history or indicia of improper 

activity or conduct with respect to the customer or 

the customer’s account (e.g., excessive trading); and 

(9) any indicia of customer vulnerability or undue 

influence of the registered person over the 

customer). 

156CSLC at 6. 

157NASAA at 5–6; Malecki at 6. 

158See NASAA at 5–6. 

159See id. at 6 (stating that an interview would 

help ensure the borrowing or lending arrangement 

does not put the customer at risk of undue 

influence). 

160 Id. at 6 (stating that heightened supervision 

would guard against the conflicts of interest that 

come with these relationships, and that an 

enhanced review of trades and transactions in the 

account should at least be required when the 

customer is elderly or otherwise vulnerable to 

exploitation). 

161See NASAA at 5. 

162See Malecki at 7. 

163See id. at 2–3 (stating that other than 

prohibiting borrowing and lending arrangements, 

the only way to ensure that a customer is not 

harmed is to require member firms to have ‘‘‘skin’ 

in such arrangements.’’). 

164See FINRA Comment Response at 12. FINRA 

also stated that the non-exhaustive list of factors 

FINRA expects members to consider address ‘‘many 

of the commenters’ concerns,’’ including 

consideration of: (1) any potential conflicts of 

interest in the registered person being in a 

borrowing or lending arrangement with a customer; 

(2) the material terms of the borrowing or lending 

arrangement; (3) the customer’s or the registered 

person’s ability to repay the loan; (4) the customer’s 

age; (5) whether, based on the facts and 

circumstances observed in the member’s business 

relationship with the customer, the customer has a 

mental or physical impairment that renders the 

customer unable to protect his or her own interests; 

and (6) any indicia of customer vulnerability or 

undue influence of the registered person over the 

customer. See id. at 13. FINRA further stated that 

those factors along with the guidance in FINRA 

Regulatory Notice 21–43 (Dec. 2021) would ‘‘help 

members evaluate the key risks and conflicts while 

giving members appropriate flexibility in evaluating 

which factors may apply to a particular situation.’’ 

See id. at 14. 

165FINRA Comment Response at 12–13 (stating 

that ‘‘FINRA rules concerning duties, conflicts and 

responsibilities related to associated persons 

generally do not set forth specific supervisory 

procedures that member firms must adopt to satisfy 

the requirements of FINRA’s supervision rule. See 

generally Rule 2000 Series (Duties and Conflicts; 

Rule 3000 Series (Supervision and Responsibilities 

Related to Associated Persons)’’). 

166 Id. at 12 (referencing guidance from Notice to 

Members 98–96 and Notice to Members 99–45 

regarding tailoring the supervisory system to the 

member firm’s business). 

167See id. at 14. 

168See id. at 12–13. 

lending arrangement, modification to 

the borrowing or lending arrangement, 

or, where there is an existing borrowing 

or lending arrangement with a person 

who seeks to be a customer of the 

registered person, the broker-customer 

relationship.’’ 154 FINRA stated that it 

expects a member firm’s reasonable 

assessment to take into consideration a 

non-exhaustive list of factors that may 

lead to undue harm to the customer as 

a result of a borrowing or lending 

arrangement with a registered person.155

One commenter supported the 

proposed rule change, stating that a 

reasonable assessment could result in 

‘‘more questionable arrangements being 

scrutinized, leading to improved 

investor protection.’’ 156 Two 

commenters suggested modifications to 

the reasonable assessment 

requirement.157 To help regulators 

assess and compare approval and 

supervision practices across firms, one 

of these commenters suggested that the 

reasonable assessment provisions 

should require a minimum amount of 

disclosure and include documentation 

of the steps the member firm took to 

assess the risk ahead of approving the 

loan agreement, the steps the member 

firm took to minimize the conflict of 

interest, how the member firm 

communicated the risk to the customer, 

and an outline of supervisory measures 

the member firm will take.158 In 

addition, this commenter suggested that 

a ‘‘reasonable assessment and 

determination process should include 

an interview (preferably by a 

compliance officer) with the customer 

outside the presence of the registered 

person’’ or, where that is not possible, 

a requirement that the member firm 

verify that the customer benefits from 

the loan and was not pressured into 

it.159 Furthermore, this commenter 

recommended that the proposed rule 

change require the member firm to 

apply heightened scrutiny to the 

underlying accounts or impose other 

appropriate conditions where a firm 

approves a borrowing or lending 

arrangement, or approves a new brokercustomer relationship where there is a 

pre-existing borrowing or lending 

arrangement.160 Finally, this commenter 

called for the list of factors FINRA 

provided in the Notice to be included in 

the rule text.161 The other commenter 

suggested that a registered person be 

‘‘required to disclose to a customer, in 

writing, that such arrangements are 

presumptively prohibited and to 

document the exception under which 

the lending arrangement falls’’ and that 

member firms should be required to 

consult with the customer before 

approving a borrowing or lending 

arrangement to ensure the customer 

receives a full and fair disclosure about 

the terms of the arrangement.162 In 

addition, this second commenter 

recommended that the proposed rule 

change require member firms that allow 

registered persons to enter lending 

arrangements with their customers to 

collateralize any such loans that such 

member firms approve.163

In response, FINRA stated that FINRA 

Rule 3110 (Supervision) requires each 

member firm to ‘‘establish and maintain 

a system to supervise the activities of 

each associated person that is 

reasonably designed to achieve 

compliance with applicable securities 

laws and regulations, and with 

applicable FINRA rules.’’ FINRA stated 

that member firms could consider 

incorporating the commenter’s 

suggested supervisory and disclosure 

requirements into their systems for 

supervising for compliance with Rule 

3240, but FINRA is not requiring them 

here.164 FINRA did not include the list 

of factors in the rule text, explaining 

that given the flexibility firms have to 

develop their own supervisory systems 

under Rule 3110, ‘‘it is not necessary or 

appropriate to prescribe specific 

supervisory procedures in Rule 

3240.’’ 165 FINRA did, however, 

highlight guidance regarding ‘‘the 

minimum that should be included in 

written supervisory procedures, 

including: (1) the specific identification 

of the individual(s) responsible for 

supervision; (2) the supervisory steps 

and reviews to be taken by the 

appropriate supervisor; (3) the 

frequency of such reviews; and (4) how 

such reviews shall be documented.’’ 166

With respect to the suggestion that the 

terms of the arrangement should be 

discussed with, and disclosed to, the 

customer, FINRA reiterated that it 

expects a member to consider the 

reasonable assessment factors noted 

earlier—several of which pertain to the 

terms of the arrangement and the nature 

of the parties—and to try to discuss the 

arrangement with the customer.167

FINRA also stated that regardless of the 

terms of a member firm’s supervisory 

system, Rule 3110 requires member 

firms to follow-up on red flags related 

to borrowing or lending arrangements 

between registered persons and their 

customers.168

Requiring a member firm, after 

receiving written notice under Rule 

3240, to perform a reasonable 

assessment of the risks created by the 

borrowing or lending arrangement with 


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77558 Federal Register / Vol. 89, No. 184 / Monday, September 23, 2024 / Notices 

169 15 U.S.C. 78o–3(b)(6). 

170 15 U.S.C. 78s(b)(2). 

171 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A)(ii). 

4 17 CFR 240.19b–4(f)(2). 

5Pursuant to Section 11.3(b) of the CAT NMS 

Plan, FINRA filed a separate proposed rule change 

to establish fees assessed to Industry Members, 

payable to Consolidated Audit Trail, LLC, related to 

recoverable historical CAT costs incurred prior to 

January 1, 2022. See File No. SR–FINRA–2024–013. 

Unless otherwise specified, capitalized terms used 

in this rule filing are defined as set forth in the CAT 

NMS Plan and FINRA Rule 6800 Series 

(Consolidated Audit Trail Compliance Rule). 

6See Securities Exchange Act Release No. 67457 

(July 18, 2012), 77 FR 45722 (August 1, 2012). 

7See Securities Exchange Act Release No. 79318 

(November 15, 2016), 81 FR 84696 (November 23, 

2016) (‘‘CAT NMS Plan Approval Order’’). 

a customer and, based on that 

assessment, to make a reasonable 

determination of whether to approve the 

borrowing or lending arrangement, is 

reasonably designed to protect 

investors. Whether a specific borrowing 

or lending arrangement creates the 

potential for a conflict or other abuse 

that could harm an investor requires 

analysis of the facts and circumstances. 

Because of its supervisory obligations, a 

broker-dealer is both obligated and best 

positioned to analyze the facts and 

circumstances related to a borrowing or 

lending arrangements between one of its 

registered persons and a customer. In 

addition, consistent with the flexibility 

firms have to develop their own 

supervisory systems under Rule 3110, 

the member firm is also best positioned 

to determine reasonable controls to 

supervise for compliance with the 

proposed rule change based on its 

assessment of the risks involved with a 

borrowing or lending arrangement that 

falls within one of the five exceptions to 

Rule 3240. While not required, 

reasonably designed controls could 

include the supervisory, disclosure or 

other requirements suggested by 

commenters (such as providing 

disclosure, collateralizing loans between 

one of its registered persons and a 

customer, interviewing customers, and 

applying heightened scrutiny as it 

perceives higher risks). As such, the 

proposed rule change represents an 

important safeguard for protecting 

investors from conflicts or other abuses 

that could harm them in such 

arrangements. Moreover, in exercising 

its supervisory obligations under FINRA 

Rule 3110, a member firm may always 

choose to prohibit or restrict borrowing 

and lending arrangements as it sees fit 

and in light of the risks presented by an 

arrangement. For example, if the brokerdealer determines that the risks to the 

customer of lending money to a 

registered person cannot be effectively 

managed, the proposed rule change 

would allow the firm to disapprove or 

further restrict the arrangement. For 

these reasons, the proposed rule change 

is reasonably designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, and, in general, to 

protect investors and the public interest. 

IV. Conclusion 

For the reasons set forth above, the 

Commission finds that the proposed 

rule change is consistent with Section 

15A(b)(6) of the Exchange Act, which 

requires, among other things, that 

FINRA rules be designed to prevent 

fraudulent and manipulative acts and 

practices, promote just and equitable 

principles of trade, and, in general, 

protect investors and the public 

interest.169

It is therefore ordered pursuant to 

Section 19(b)(2) of the Exchange Act 170

that the proposal (SR–FINRA–2024– 

001), be and hereby is approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.171

Sherry R. Haywood, 

Assistant Secretary. 

[FR Doc. 2024–21622 Filed 9–20–24; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–101064; File No. SR– 

FINRA–2024–014] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing and 

Immediate Effectiveness of a Proposed 

Rule Change To Amend FINRA Rule 

6897(b) (CAT Cost Recovery Fees) To 

Implement a Historical Consolidated 

Audit Trail Recovery Assessment 

September 17, 2024. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on 

September 5, 2024, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

by FINRA. FINRA has designated the 

proposed rule change as ‘‘establishing or 

changing a due, fee or other charge’’ 

under Section 19(b)(3)(A)(ii) of the Act 3

and Rule 19b–4(f)(2) thereunder,4 which 

renders the proposal effective upon 

receipt of this filing by the Commission. 

The Commission is publishing this 

notice to solicit comments on the 

proposed rule change from interested 

persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

FINRA is proposing to amend FINRA 

Rule 6897(b) (CAT Cost Recovery Fees) 

to implement a historical Consolidated 

Audit Trail (‘‘CAT’’) recovery 

assessment designed to permit FINRA to 

recoup its contributions to recoverable 

historical costs of the National Market 

System Plan Governing the 

Consolidated Audit Trail incurred prior 

to January 1, 2022.5

The text of the proposed rule change 

is available on FINRA’s website at 

http://www.finra.org, at the principal 

office of FINRA and at the 

Commission’s Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

FINRA included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. FINRA has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Background 

On July 11, 2012, the Commission 

adopted Rule 613 of Regulation NMS, 

which required the self-regulatory 

organizations to submit a national 

market system (‘‘NMS’’) plan to create, 

implement and maintain a consolidated 

audit trail that would capture customer 

and order event information for orders 

in NMS securities across all markets, 

from the time of order inception through 

routing, cancellation, modification, or 

execution.6 On November 15, 2016, the 

Commission approved the CAT NMS 

Plan (‘‘Plan’’ or ‘‘CAT NMS Plan’’).7

Under the CAT NMS Plan, the 

Operating Committee has the discretion 

to establish funding for Consolidated 

Audit Trail, LLC (‘‘CAT LLC’’) to 

operate the CAT, including establishing 

fees for Industry Members to be assessed 

by CAT LLC that would be implemented 


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