Loans to and from Customers
The rules on borrowing and lending between securities professionals and their customers are one of the most frequently tested topics on the Series 63. The critical distinction is between agents (absolute prohibition) and investment advisers (limited exceptions).
Agents - Absolute Prohibition
An agent:
- May never borrow money or securities from a customer
- May never lend money or securities to a customer
- May never act as custodian for a customer's money, securities, or executed stock powers
- There are NO exceptions - not for family members, not for financial institutions, not for affiliates
This is a bright-line rule with zero flexibility.
Investment Advisers - Limited Exceptions
Investment advisers (IAs) have a more nuanced set of rules. Borrowing and lending are generally prohibited, but there are specific exceptions.
When an IA May Borrow from a Client
The client must be one of the following:
- A broker-dealer (BD)
- An affiliate of the investment adviser
- A financial institution engaged in the business of loaning funds
When an IA May Lend to a Client
One of the following must be true:
- The IA is a financial institution engaged in the business of loaning funds, OR
- The client is an affiliate of the investment adviser
All other borrowing or lending by IAs from or to clients is prohibited.
Side-by-Side Comparison
| Agent | Investment Adviser | |
|---|---|---|
| Borrow from customer/client | Never | Only if client is a BD, affiliate, or financial institution |
| Lend to customer/client | Never | Only if IA is a financial institution or client is an affiliate |
| Act as custodian | Never | Subject to separate custody rules |
| Exceptions for family members | None | None (family relationship alone does not create an exception) |
| Exceptions for banks | None | Yes - banks qualify as financial institutions |
Exam Tip: Gotchas
- Common trap: "An agent's client is a bank. May the agent borrow from the client?" The answer is no. The financial institution exception applies only to IAs, not to agents. Agents face an absolute prohibition regardless of who the client is.