FINRA Rule 3240: Borrowing Prohibition, Exceptions, and Notice

FINRA Rule 3240 prohibits anyone registered with a FINRA member firm from borrowing money from or lending money to a customer, unless the arrangement fits one of five specific exceptions, the firm has written procedures permitting that type of arrangement, and any required notice and approval are in place.¹ The prohibition applies regardless of the dollar amount, the purpose of the money, or how the deal is structured. Amendments that took effect on April 28, 2025 broadened the definitions, tightened notice requirements, and pulled indirect lending arrangements more clearly into the rule’s coverage.²

What the Rule Prohibits

The ban is blanket. No registered person may borrow from or lend to a customer, and the rule treats owner-financing arrangements, where a broker finances a customer’s purchase of property or the customer finances the broker’s, as borrowing or lending.²

The rule also blocks the reverse sequence. A registered person cannot take on a new customer if the two already have a borrowing or lending arrangement in place, unless the same exception, procedures, notice, and approval conditions are satisfied.¹ Structuring the loan first and the account second does not work.

Who Counts as a Registered Person and a Customer

A registered person is anyone associated with a FINRA member firm in any registered capacity. Title does not matter. Financial advisor, branch manager, operations supervisor: if you hold a FINRA registration, you are covered.¹

A customer is not just someone whose securities account is currently assigned to you. The definition also captures anyone who had such an account within the previous six months at any FINRA member firm.² That lookback stops a representative from closing an account and immediately writing a personal loan to the former client. It reaches accounts at other firms, not just your 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 Rule 3240.

The Five Exceptions

An arrangement can proceed only if it fits one of the categories below, and only if the member firm has written procedures on the books allowing that specific type of arrangement. A qualifying relationship on its own does not make the transaction permissible.²

The customer is a member of your immediate family. The rule defines this broadly to include parents, grandparents, in-laws, a spouse or domestic partner, siblings, children, grandchildren, cousins, aunts and uncles, nieces and nephews, and any other person living in your household whom you financially support to a material extent. Step and adoptive relationships qualify.¹
The customer is a bank or other entity that regularly extends credit in the ordinary course of business, and the loan is made on standard commercial terms available to the general public with similar creditworthiness.
Both you and the customer 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 is maintained outside 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 draw the heaviest scrutiny. Expect the firm to probe when the relationship began, how long it has lasted, its nature, and whether anything suggests it was created specifically to get around the rule.¹

When You Need Written Notice and Approval

Compliance obligations are tiered by exception. For the fellow registered persons, close personal relationship, and outside business relationship exceptions, you must give the firm written notice and receive written approval before entering into the arrangement.¹ The same requirement applies when modifying an existing arrangement, including extending its duration. The firm can say no. Nothing in the rule obligates it to approve.²

For the immediate family exception, a firm’s written procedures may allow you to skip notice and approval entirely. The firm still needs procedures permitting the arrangement, but the individual representative may not have to seek advance permission.¹ The financial institution exception works similarly. A firm’s procedures may waive notice and approval for loans from a bank or other regular lender, provided the loan sits on commercial terms generally available to the public in a comparable position, and the firm can rely on your representation that the terms meet that standard.

The operative word is “may.” Individual firms can still require notice and approval for all five exceptions if their internal policies demand it. Check your firm’s written supervisory procedures before assuming any waiver applies.

How the Firm Evaluates the Request

When a firm receives written notice, it cannot rubber-stamp the request. Rule 3240 requires a reasonable assessment of the risks the arrangement creates and a reasonable determination about whether to approve it.¹ For arrangements claimed under the personal relationship or outside business relationship exceptions, the firm must evaluate when the relationship began, how long it has lasted, what kind of relationship it is, and any red flags suggesting the relationship isn’t genuine or was formed to sidestep the rule.

Indirect Loans Through Related Parties

The rule reaches beyond direct loans. If you ask a customer to lend money to, or borrow money from, someone related to you (a family member, an outside business you’re tied to), the arrangement raises the same conflict-of-interest concerns and must satisfy all the same conditions: written firm procedures, a qualifying exception, and the applicable notice and approval.¹ The reverse also applies. A customer who channels a loan through a relative to you doesn’t escape the prohibition. Enforcement actions frequently target these workarounds, and firms are expected to spot them.

Recordkeeping

Firms must preserve the written notice and written approval for at least three years after the borrowing or lending arrangement ends, or three years after your association with the firm ends, whichever comes later.¹ The rule specifies preservation of the notice and approval documents themselves. It does not explicitly require firms to retain records of requests that were submitted and denied, though many firms keep those records as sound practice.

Penalties for Violations

FINRA actively enforces Rule 3240. Between 2018 and 2021, FINRA brought an average of 15 enforcement cases per year for violations. In the vast majority, the registered person was the borrower, not the lender. Amounts involved ranged from $1,800 to $1.35 million, with a median of $70,000.³

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