Nearly three years after the Securities and Exchange Commission's ("SEC's") approval of the merger of the NASD and the New York Stock Exchange into the Financial Industry Regulatory Authority, Inc. ("FINRA"), the rule consolidation process continues to plod along. The transitional rulebook remains a hodgepodge of old NASD rules that apply generally to all FINRA members; NYSE Rules to be incorporated into the consolidated FINRA rulebook that apply only to members of both FINRA and the NYSE (so-called "Dual Members"); and a growing number of FINRA rules that apply to all FINRA firms. For many compliance professionals, the coming and going of old rule numbers and new rule numbers is an unwelcome challenge at a difficult time.
On February 18, 2010, proposed amendments to old NASD Rule 2370: Borrowing From or Lending to Customers were approved by the SEC as new FINRA Rule 3240: Borrowing From or Lending to Customers. To make way for this FINRA rule, old NYSE Rules 352(e) Limitations on Borrowing From or Lending to Customers, (f) Loan Procedures and (g) bite the regulatory dust.
FINRA will announce the implementation date of the proposed rule change in a Regulatory Notice to be published no later than 90 days from February 18th, and the implementation date will be no later than 180 days.
Text of Proposed and Approved New FINRA Rule
(Marked to Show Changes from NASD Rule 2370; NASD Rule 2370 to be Deleted in its Entirety from the Transitional Rulebook)
Order Approving Proposed Rule Change to Adopt FINRA Rule 3240 (Borrowing From or Lending to Customers) in the Consolidated FINRA Rulebook (Release No. 34-61537; File No. SR-FINRA-2009-095; February 18, 2010) http://sec.gov/rules/sro/finra/2010/34-61537.pdf
3000. SUPERVISION AND RESPONSIBILITIES RELATING TO ASSOCIATED PERSONS
3200. RESPONSIBILITIES RELATING TO ASSOCIATED PERSONS
3240. Borrowing From or Lending to Customers
Bill Singer's Comment: Note that the Rule addresses both borrowing and lending, but that such activities are proscribed here only to the extent that the contra-side of the arrangement is a customer. However, members can choose to permit registered persons to borrow from or lend to their customers consistent with this rule OR the member may prohibit the practice in whole or in part. As such, simply because FINRA's Rule sets forth conditions that could permit borrowing/lending does not mean that a given FINRA member is required by the regulator to allow such activity.
(a) Permissible Lending Arrangements; Conditions
No person associated with a member in any registered capacity may borrow money from or lend money to any customer of such person unless:
Bill Singer's Comment: Note that the specific proscription here is from borrowing/lending to any customer of such person-- the limitation is on contemplated activity with "your" customer and not merely "a" customer of your firm.
(1) the member has written procedures allowing the borrowing and lending of money between such registered persons and customers of the member; [and]
Bill Singer's Comment: The threshold requirement is that you cannot borrow/lend with your customers unless your member firm has written procedures allowing borrowing/lending between registered persons and customers of the firm. If there are no written procedures, you can't get around this by walking into someone's office or making a phone call call to some compliance type and getting a verbal "okay."
(2) the [lending or] borrowing or lending arrangement meets one of the following conditions:
Bill Singer's Comment: Preliminarily, FINRA underscores that the Rule does not merely address borrowing from customers but also lending to them.
(3) the requirements of paragraph (b) of this Rule are satisfied.
(b) [Procedures]Notification and Approval
Bill Singer's Comment: It can't be spelled out any plainer: This is about notifying your member AND getting your member's approval. It's not one or the other.
(1) The registered person shall notify the member of the borrowing or lending arrangements described in paragraphs (a)(2)(C), (D), and (E) above prior to entering into such arrangements
Bill Singer's Comment: First off, the notification requirement must always be satisfied when your customer is not an immediate family member, a financial institution, or an entity/individual in the business of extending credit. The other side of that equation, is that you must always first notify your firm of the arrangement, if your customer is another registered person at your firm, or if you are claiming a personal/business relationship exists. Separately, the contemplated notice is prior to entering into the arrangement.
and the [M]member[s must] shall pre-approve in writing [the lending or borrowing] such arrangements [described in subparagraphs (a)(2)(C), (D), and (E) above].
Bill Singer's Comment: The Rule requires the member to pre-approve in writing the requested arrangement. You should not rely upon an oral okay -- and I don't care who at your firm tells you that it's okay to go ahead on the oral say-so. Just watch how that person double-tracks if FINRA asks for a confirmation of that advice.
The registered person shall also notify the member and the member shall pre-approve in writing any modifications to such arrangements, including any extension of the duration of such arrangements.
Bill Singer's Comment: Also, you can't play the old switcheroo. If you asked for permission to engage in X and you subsequently modify the loan (particularly an extension of the loan's term or repayment), then you have to go through the entire notification and pre-approval in writing protocol.
(2) With respect to the [lending or] borrowing or lending arrangements described in [sub]paragraph (a)(2)(A) above, a member's written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such [lending or] borrowing or lending arrangements.
Bill Singer's Comment: Again, a not so easy-to-follow statutory construction here. If you look back up to the top of the Rule, you will see the provision that would permit lending to or borrowing from customers who are also immediate family members (which still isn't formally defined, as yet, at this point of the Rule. Nonetheless, you may not need to notify your firm or get its prior approval if your customer is an immediate family member provided that your member has a specific written procedure waiving said notice and/or approval.
(3) With respect to the [lending or] borrowing or lending arrangements described in [sub]paragraph (a)(2)(B) above, a member's written procedures may indicate that registered persons are not required to notify the member or receive member approval either prior to or subsequent to entering into such [lending or] borrowing or lending arrangements, 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. For purposes of this subparagraph, the member may rely on the registered person's representation that the terms of the loan meet the above-described standards.
Bill Singer's Comment: As to arrangements involving financial institutions (or credit providing companies/individuals), there is an exemption from the need to give notice or obtain approval provided that the loan will be made on commercial terms generally available to the similarly situated general public (taking into account need, purpose, and creditworthiness). FINRA does not necessarily require you to document those preconditions to your member and your representation may be deemed satisfactory. The issue here is that you better not be getting a so-called "sweetheart deal." Bottom line, the arrangement better pass the sniff test.
(c) Definition of Immediate Family
The term "immediate family" [shall include] means 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 [shall also include] any other person whom the registered person supports, directly or indirectly, to a material extent.
Bill Singer's Comment: Ah, yes, finally -- here it is, the critical definition. Make sure to check the list and note that it can also cover folks whom you provide material support to on a direct or indirect basis.
.01 Record Retention. For purposes of paragraph (b)(1) of this Rule, members shall preserve the written pre-approval 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.
Bill Singer's Comment: This new language requires your member to preserve the written approvals for at least three years from the date the arrangement terminated or at least three years after the registered person's association has terminated with the member. I just know that some folks will mis-read this to require retention as of the earlier date of the loan's approval rather than the later date of termination.
Text of Incorporated NYSE Rule352: Guarantees, Sharing in Accounts, and Loan Arrangements to be Deleted in its Entirety from the Transitional Rulebook
Under the now deleted NYSE Rule 352: Guarantees, Sharing in Accounts, and Loan Arrangements, Section (f) provided an exemption (now withdrawn with the deleted Rule) for the pre-approval by a member of approval requirements of the rule for loans totaling $100 or less between registered persons of the same firm.