6.6 Outside Accounts, Borrowing and Lending, Account Sharing, and Guarantees

FINRA Rule 3210: Accounts at Other Financial Institutions

To prevent insider trading, market manipulation, front-running, and unauthorized trading, FINRA Rule 3210 governs personal securities trading by associated persons across outside broker-dealers and financial institutions.

Requirements for Associated Persons

• Prior Written Consent: Before opening or establishing an account in which securities transactions can be executed at another broker-dealer, investment adviser, or financial institution, the associated person must obtain the prior written consent of their employer member firm.
• Notice to Executing Firm: The associated person must notify the executing financial institution in writing of their association with the employer member firm prior to the execution of any transactions.
• Pre-Existing Accounts: If an account was opened prior to becoming associated with the member firm, the associated person must obtain written consent from the employer firm within 30 calendar days of becoming associated.

Transmission of Duplicate Statements

Upon written request by the employer member firm, the executing broker-dealer must promptly transmit duplicate copies of trade confirmations and periodic account statements directly to the employer firm's compliance department.

Scope of Beneficial Interest

Rule 3210 applies to any account in which the associated person has a beneficial interest, which includes accounts held by:

1. The associated person's spouse;
2. A child of the associated person or of the spouse, if the child lives in the same household or is financially dependent on the associated person;
3. Any other related individual over whose account the associated person has control; and
4. Any other individual over whose account the associated person has control and to whose financial support the associated person materially contributes.

For the spouse and child categories, the presumption can be rebutted if the associated person shows, to the employer's reasonable satisfaction, that the associated person derives no economic benefit from and exercises no control over the account. Rule 3210.03 exempts transactions in, and accounts limited to, mutual funds and other redeemable investment company securities, UITs, variable contracts, and 529 plans and other municipal fund securities.

---

FINRA Rule 3240: Borrowing From or Lending to Customers

Borrowing money from or lending money to customers creates an inherent conflict of interest that frequently leads to financial exploitation, particularly of senior or vulnerable investors. Consequently, FINRA Rule 3240 establishes a strong general presumption that borrowing and lending between registered persons and customers is prohibited.

The Five Permissible Exceptions

A registered person may enter into a borrowing or lending arrangement with a customer only if the member firm has written supervisory procedures permitting such arrangements, and the arrangement satisfies one of five narrow exceptions:

1. Immediate Family Member: The customer is a member of the registered person's immediate family (defined as parents, grandparents, mother- or father-in-law, spouse, brother or sister, brother- or sister-in-law, son- or daughter-in-law, children, grandchildren, cousins, aunts or uncles, nieces or nephews, and any other person the registered person supports to a material extent).
2. Financial Institution in the Business of Lending: The customer is a commercial bank, credit union, or financial institution in the business of providing credit, and the loan is made on standard commercial terms available to the general public.
3. Both Registered Persons of the Same Firm: Both the customer and the registered person are registered representatives of the same member broker-dealer.
4. Personal Relationship Outside the Brokerage Relationship: The loan is based on a bona fide personal relationship outside the broker-customer relationship (such as a childhood friend or longtime neighbor).
5. Business Relationship Outside the Brokerage Relationship: The loan is based on a bona fide commercial business relationship outside the broker-customer relationship.

Supervisory Approval Requirements

• Prior Notice and Written Approval Required: For Exceptions 3, 4, and 5, the registered person must provide prior written notice and obtain prior written approval from the member firm before entering into the loan.
• Exception 2 (Financial Institutions): Requires prior approval unless the firm's WSPs expressly exempt standard commercial loans (such as personal credit cards or residential mortgages on market terms).
• Exception 1 (Immediate Family): Does NOT require prior notice or firm approval, provided that the member firm's WSPs expressly permit lending to immediate family members without pre-approval.
• Record retention (Rule 3240.01): The firm keeps each written pre-approval for at least three years after the arrangement ends or after the registered person's association ends.

---

FINRA Rule 2150: Guarantees and Disproportionate Account Sharing

Prohibition on Guarantees Against Loss

Under FINRA Rule 2150(b), no member firm or registered person may guarantee any customer against loss in any securities transaction or account. Representatives cannot:

• Promise a customer that a mutual fund or variable annuity will not drop below its purchase price;
• Agree to personally reimburse a customer for portfolio declines or surrender fees;
• Guarantee a minimum dividend yield or investment return not contractually backed by an insurance carrier.

Sharing in Customer Accounts: The Three-Part Rule

Under FINRA Rule 2150(c), associated persons are strictly prohibited from sharing directly or indirectly in the profits or losses of any customer account, unless all three of the following conditions are met:

1. Prior Written Customer Authorization: The customer must execute a written authorization approving the joint account and profit-sharing arrangement.
2. Prior Written Member Firm Authorization: The member firm's designated principal must approve the sharing arrangement in writing.
3. Direct Proportionality: The associated person and customer must share in profits and losses in direct proportion to the financial contributions made to the account by each party.

The Immediate Family Exemption from Proportionality

The direct proportionality requirement does NOT apply if the customer is an immediate family member of the associated person (for Rule 2150, parents, mother- or father-in-law, spouse, children, or any relative the person supports). In an account with an immediate family member (e.g., a spouse or parent), a registered representative could contribute 10% of the funds while receiving 50% of the profits, or vice versa, provided prior written customer and firm approvals are documented.

---

After-the-Fact Reimbursement

Rule 2150.02 lets the member, but never an associated person, decide after the fact to reimburse a customer's transaction losses or correct a bona fide error, subject to any applicable reporting, such as reporting the payment as a settlement. The written authorizations required for sharing arrangements are kept for at least six years after the account is closed (Rule 2150.03).