FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProfessional Conduct and Ethical ConsiderationsEasy
A registered representative (RR) has a close personal relationship with a client who is going through a difficult financial period. The client asks the RR to lend them $5,000 to cover immediate living expenses, promising to repay it with interest within six months. The RR does not have any direct financial interest in the client's account beyond standard commissions. What is the most appropriate action for the RR to take?
- AOffer to make a personal gift of $500 to the client, as this falls within FINRA's gift limits.
- BLend the client the money, ensuring all terms are documented in writing to protect both parties.
- CRefer the client to a reputable financial counselor or lending institution for assistance.
- DDecline the request, as FINRA rules generally prohibit RRs from lending money to clients.
Show answer & explanationAnswer & explanation
Correct answer: D. Decline the request, as FINRA rules generally prohibit RRs from lending money to clients.
FINRA Rule 3240 generally prohibits registered representatives from lending money to or borrowing money from clients. There are very limited exceptions, but a personal loan for living expenses is typically not one of them.
Why the other options are wrong
- A. Making a gift is different from a loan. While gifts have limits, the immediate issue is the loan request, which is prohibited.
- B. Lending money to a client, even with documentation, is generally prohibited by FINRA rules unless specific conditions are met, which are not present here.
- C. While referring the client to other resources is a helpful action, the most appropriate immediate action regarding the loan request itself is to decline it due to regulatory prohibitions.
Lending to Clients (FINRA Rule 3240)
FINRA Rule 3240 generally prohibits registered representatives from lending money to or borrowing money from clients. Exceptions are very limited and require firm approval and specific conditions.
- Prohibits RRs from lending to clients.
- Limited exceptions (e.g., family members, financial institutions) require firm approval.
- Designed to prevent conflicts of interest and exploitation.
Memory trick: Don't Lend, Don't Borrow, Just Follow the FINRA Flow.