Lawyers welcome proposed crackdown on brokers lending money to clients

investmentnews.com:

Finra is telling brokers more forcefully than it has before not to become a customer’s creditor or debtor.

The Financial Industry Regulatory Authority Inc. filed a rule proposal with the SEC this week that would tighten existing rules limiting the ability of brokers to lend money to or take loans from clients. Such arrangements can create conflicts of interest and lead to enforcement actions and customer complaints.

One of the provisions of the proposal demonstrates Finra’s position on the practice. It would change the name of the rule from “Borrowing From or Lending to Customers” to “Prohibition on Borrowing From or Lending to Customers.”

“Ninety-nine percent of the time, lending to customers or borrowing from them is a bad idea,” said Patrick Mahoney, owner of an eponymous securities law firm in Los Angeles. “This is Finra rightly trying to tighten the screws further on what is already a general prohibition on the practice.”

The proposal strengthens the general prohibition by preventing a registered representative from initiating a customer relationship with someone with whom the rep already has a borrowing or lending arrangement. It would prohibit borrowing or lending within six months of the termination of a broker-customer relationship and ban borrowing or lending arrangements with someone related to the rep or the customer. It also would curtail owner-financing arrangements.

The proposed rule would tighten “tailored exceptions” to the borrowing and lending ban by narrowing the definitions of an immediate family member and personal and business relationships. It also strengthens requirements that reps to notify their firms about borrowing and lending arrangements.

But the thrust of the rule is to get rid of the