FINRA Rule 3240: Borrowing Prohibition, Exceptions, and Notice

FINRA Rule 3240 prohibits any registered person at a member firm from borrowing money from or lending money to a customer, unless the arrangement fits one of five specific exceptions and the firm’s compliance conditions are met.¹ The amended version of the rule took effect on April 28, 2025, with broader definitions, tighter notice requirements, and explicit coverage of indirect lending arrangements.²

The ban does not depend on the dollar amount, the purpose of the money, or how the transaction is dressed up. Owner-financing deals, where a broker finances a customer’s property purchase or the other way around, count as borrowing or lending under the rule.² Neither can you get around it by lending first and opening the account later. A registered person cannot take on a new customer if the two already have a borrowing or lending arrangement unless the same exception conditions are satisfied.¹

The Five Exceptions

An arrangement is only permissible if it falls into one of the categories below and the member firm has written procedures on the books allowing that specific type of arrangement. No procedures, no exception, even if the relationship qualifies.²

The customer is a member of the registered person’s immediate family. The rule reads this term broadly: parents, grandparents, in-laws, spouse or domestic partner, siblings, children, grandchildren, cousins, aunts and uncles, nieces and nephews, and anyone in the registered person’s household whom they materially support financially. Step and adoptive relationships count.¹
The customer is a bank or other entity that regularly extends credit in the ordinary course of business, and the loan is on the same commercial terms available to the general public with similar creditworthiness.¹
Both parties are registered with the same member firm.
The arrangement grows out of a genuine, close personal relationship that existed before the broker-customer relationship and continues independently of it.¹
The arrangement stems from a genuine business relationship that exists independently of the securities business.

The personal-relationship and outside-business-relationship exceptions attract the most scrutiny. Expect the firm to ask when the relationship began, how long it has lasted, what kind of relationship it is, and whether anything suggests it was manufactured to get around the rule.¹

Notice and Approval

The compliance burden depends on the exception.

For the fellow-registered-persons, close-personal-relationship, and outside-business-relationship exceptions, the registered person must give the firm written notice and obtain written approval before entering into the arrangement. The same applies to any modification, including an extension.¹ The firm has to actually evaluate the request; it is not required to say yes.²

For the immediate family and financial institution exceptions, a firm’s written procedures may waive notice and approval. For the financial institution exception, the waiver depends on the loan being on commercial terms generally available to the public in a comparable position, and the firm can rely on the registered person’s representation to that effect.¹ The word “may” is doing work here. Individual firms can require notice and approval for all five exceptions if their own policies say so, so check your firm’s procedures rather than assuming the waiver applies to you.

Who Counts as a Customer

A customer is anyone who currently has a securities account assigned to the registered person, plus anyone who had such an account within the previous six months at any FINRA member firm.² That six-month lookback stops a representative from closing an account and immediately entering into a loan with the former client. The definition also reaches accounts held at other firms, not only the representative’s current employer. And it does not matter whether the loan has anything to do with securities. A purely personal loan to someone who was your client two months ago still falls under the rule.

On the other side, a “registered person” is anyone associated with a FINRA member firm in any registered capacity. Title is irrelevant. If you hold a FINRA registration, the rule applies to you.¹

Indirect and Related-Party Arrangements

The rule reaches beyond direct loans. If a broker arranges for a customer to lend to, or borrow from, someone related to the broker (a family member, an outside business, and the like), the arrangement carries the same conflict of interest and must satisfy every condition the rule imposes on direct loans: written firm procedures, a qualifying exception, and any applicable notice and approval.¹ The reverse is also caught: a customer who routes money to the registered person through a relative does not escape the prohibition. Firms are expected to spot this pattern.

What the Firm Has to Do

When a firm receives written notice, it cannot rubber-stamp the request. It has to perform a reasonable assessment of the risks the arrangement creates and then make a reasonable decision about whether to approve it. For arrangements claimed under the personal-relationship or business-relationship exceptions, the firm must weigh when the relationship began, how long it has lasted, what type of relationship it is, and any red flags suggesting it is not genuine or was formed to sidestep the rule. That list is not exhaustive; a review that hits those factors and ignores an obvious risk does not meet the standard.¹

Recordkeeping

Firms must preserve the written notice and written approval for at least three years after the arrangement ends, or three years after the registered person’s association with the firm ends, whichever is later.¹

Enforcement

FINRA takes these cases. Between 2018 and 2021, FINRA brought an average of 15 enforcement cases per year for Rule 3240 violations, and in most of them the registered person was the borrower rather than the lender. The amounts involved ranged from $1,800 to $1.35 million, with a median of $70,000. Customer-initiated complaints, arbitrations, and lawsuits over these arrangements averaged 23 per year during the same period.³

Sanctions can include fines, suspensions, and permanent bars from the industry, depending on the severity of the conduct and whether the violation involved customer harm or dishonesty.³ Borrowing from a customer without disclosure and approval is the kind of conduct that ends careers, not the kind that draws a warning letter.

1
Financial Industry Regulatory Authority. FINRA Rule 3240 – Prohibition on Borrowing From or Lending to Customers
2
FINRA. FINRA Regulatory Notice 24-12 – FINRA Adopts Amendments to Rule 3240
3
Securities and Exchange Commission. Notice of Filing of a Proposed Rule Change to Amend FINRA Rule 3240