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FINRA Rule 3240: Can My Stockbroker Borrow Money from Me?

FINRA Rule 3240 established rules governing stockbrokers borrowing from or loaning money to their customers. Stockbrokers may only borrow from or lend to a customer if their firm has a policy in place allowing this type of financial arrangement. Most brokerage firms generally prohibit the practice.  One reason is that the firm can be responsible if the broker fails to repay the customer.  So, if your broker borrowed money from you and failed to repay you as promised, you may have a case for an investment attorney.

Because investors generally trust their stockbroker, they can feel comfortable loaning them substantial amounts of money, thinking that everything will be fine.  But there are plenty of investment disputes filed each year which attest to the fact that loans between stockbrokers and investors often do not go according to plan.

5 Criteria for Stockbroker-Customer Loans

According to FINRA Rule 3240, the brokerage firm allows borrowing or lending between brokers and customers, the agreement must fit one of the following criteria: 

  1. The customer is a member of the stockbroker’s immediate family.

FINRA Rule 3240 defines family as parents, spouses, siblings, grandparents, in-laws, grandchildren, children, cousins, niece or nephew, and anyone the stockbroker materially supports.

  1. The customer is a financial institution regularly engaged in the business of providing credit, financing, or loans.
  2. The customer and the stockbroker are both registered with the same brokerage firm.
  3. The lending arrangement is based on a personal relationship with the customer that exists beyond their work with the brokerage firm.
  4. The lending arrangement is based on a business relationship outside the stockbroker-customer relationship.

Brokerage Firms Must Approve All Loans

Assuming the loan fits the requirements, the stockbroker must notify their firm before entering into a borrowing or lending arrangement. The brokerage firm must pre-approve any modifications made to the loan agreement in writing. If there are any changes to the loan agreement, the firm must also approve of those modifications. This would include any changes to the timeline for repayments.

How Do Stockbrokers Violate Rule 3240?

According to Regulatory Notice 19-27, FINRA is aware of several strategies that brokers have used to avoid reporting their customer loans. In one case, a broker attempted to disguise a loan as proceeds from the sale of farm equipment. Certain brokers have even used a spouse’s name on loan documents to avoid scrutiny.

Elder Financial Abuse

Violations of FINRA Rule 3240 frequently involve allegations of elder financial abuse. Unfortunately, vulnerable seniors are often the targets of fraudulent stockbrokers who seek to misappropriate investor assets for their own personal gain. RN 19-27 raised the possibility that Rule 3240 was not doing enough to prevent investor harm to senior customers.

The penalties for this type of misconduct can be swift and harsh.  In fact, FINRA has even barred a broker after learning that he had taken out loans from several elderly customers without disclosing them to his firm.  He also allegedly had not honored the terms of the loans in several cases.

One 80-year-old investor, for instance, allegedly lent the unscrupulous stockbroker $116,045. According to FINRA, she provided the funds by liquidating an annuity and an index fund. (The stockbroker agreed to factor in the early withdrawal charges for those securities into his payment plan.) The promissory note stated that the broker would pay the investor an interest rate of 8.25% per year. FINRA alleged that the stockbroker never made the promised payments.

What Happens When a Stockbroker Does Not Disclose a Loan?

Brokerage firms may terminate a broker for failing to disclose a loan and regulators can impose steep fines.

  • Brokerage firms may fire a stockbroker for borrowing money from an investor without following the rules.
  • The Tennessee Securities Division fined a stockbroker $45,000 in June 2020 following allegations that they failed to disclose three loans with three different clients.
  • A broker consented to a two-month suspension and $5,000 fine following allegations that they borrowed $230,000 from an investor without the firm’s knowledge.

Kurta Law Can Help

Investment attorneys know how frustrating it is when a stockbroker does not uphold their end of an agreement. Customers trust their stockbrokers with their investment portfolios and financial futures, so why not trust them with a loan? The reality is that unscrupulous stockbrokers may have personal debts or tax liens to pay, making your loan less of a priority.

Contact a securities attorney today if you have concerns about your loan to a stockbroker.