Brokers
There are few exceptions to FINRA Rule 3240, which forbids customer loans unless the customer is “in the business of providing credit or loans,” or the customer and broker are members of the same immediate family.
FINRA’s Rule 3240 defines immediate family as “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 daughter-in-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.”
Unfortunately, brokers routinely violate FINRA rules, borrowing money from unsuspecting clients while failing to disclose these deals to their financial institutions as required.
Rule 3240 requires brokers to report customer loans to their financial institutions and get consent beforehand in writing. And even when brokers repay a customer’s loan in full, FINRA prohibits the transaction. While registered investment advisors (RIAs) are not governed by FINRA Rule 3240, they still have a fiduciary duty to put the customer’s financial interest first, which similarly precludes their borrowing money from clients.
Take, for instance, a disciplinary action currently pending before FINRA involving a stockbroker at Edward Jones. According to the complaint from FINRA’s Department of Enforcement, the broker told his client, a 72-year-old retired mechanic, that he had debts partially derived from a failed golf cart business. The customer then offered to loan the broker money, and they agreed on a $150,000 loan, which the broker would repay in monthly installments at 10 percent interest. In order to effect the loan, the customer partially liquidated securities from one of his accounts at Edward Jones, causing the overall value of his accounts to fall by 21 percent, and cut the broker a check.
The FINRA complaint against the broker stressed that the customer loan was in violation of Edward Jones’ disclosure policy:
“Edward Jones’ written procedures in effect at the time of the loan prohibited registered representatives of the firm from borrowing money from firm customers unless an exception applied. Exceptions were possible for loans to or from members of a registered representative’s immediate family, from customers who were in the business of lending money, between two Edward Jones employees, or if the customer and representative had a personal or business relationship outside of their relationship at the firm. All these exceptions required prior written approval from the firm.”
Upon learning of the loan, Edward Jones terminated the broker’s employment. In its complaint against the broker, FINRA states, in part “The loan did not meet any of the five conditions set forth in FINRA Rule 3240.”
Financial Advisors Should Not Borrow Your Money
If you loaned money to your broker and it has not been repaid, contact Silver Law Group for a confidential consultation at mailto:ssilver@silverlaw.com or toll free at (800) 975-4345. Silver Law Group investigates cases of stockbrokers taking improper loans or committing stockbroker theft, whether through non-payment of debts or by deceptively selling investments directly controlled by a stockbroker or financial advisor.