An agent of a broker-dealer is found to have borrowed a significant sum of money from a non-family client. The loan was not disclosed to the broker-dealer, nor was it approved by the firm. Under FINRA rules and the Uniform Securities Act (USA), this action is considered:
- AOnly unethical if the agent defaulted on the loan or if the client suffered financial harm.
- BPermissible, provided the loan is repaid with interest within a reasonable timeframe.
- CPermissible, as long as the client willingly offered the loan and no conflict of interest arose.
- DA prohibited unethical business practice, regardless of client consent or outcome.
Show answer & explanationAnswer & explanation
Correct answer: D. A prohibited unethical business practice, regardless of client consent or outcome.
Borrowing money from or lending money to a client is generally a prohibited practice for agents of broker-dealers, unless certain strict conditions are met (e.g., the client is a family member or a financial institution, and the firm has written procedures and approval). Undisclosed and unapproved loans from non-family clients are a serious violation of ethical conduct and FINRA rules, designed to prevent conflicts of interest and exploitation.
Why the other options are wrong
- A. The prohibition is on the act of borrowing itself without proper authorization, not just on the negative consequences of the loan.
- B. Repayment does not retroactively make a prohibited transaction permissible.
- C. Client consent does not negate the prohibition on borrowing from non-family clients without firm approval.
Borrowing from Clients (Agent)
Agents of broker-dealers are generally prohibited from borrowing money from or lending money to clients, unless the client is a family member or a financial institution, and the firm has written procedures and provides prior written approval.
- Generally prohibited with non-family clients.
- Requires firm's written procedures and approval.
- Prevents conflicts of interest and exploitation.
Memory trick: No money handshake without firm's say and family ties.