Securities professionals have access to customer money and securities. Strict rules govern how they handle these assets and what financial relationships they can have with customers.
Borrowing From Customers
- Associated persons are generally prohibited from borrowing money from or lending money to customers
- This rule prevents exploitation of the trust relationship between a broker and their customer
Five Exceptions (With Firm Approval)
| Exception | Requirement |
|---|---|
| Immediate family members | Loans between the registered representative (rep) and a customer who is an immediate family member |
| Financial institution customer | The customer is a bank or other financial institution lending in the normal course of business |
| Pre-existing personal relationship | A personal relationship existed before the broker-customer relationship |
| Pre-existing business relationship | A business relationship outside the broker-customer relationship already existed |
| Registered person at same firm | Both parties are registered persons at the same member firm |
- All exceptions (except immediate family in some cases) require prior written approval from the member firm
- The rule also covers indirect arrangements: a rep cannot ask a customer to lend to the rep's family member to circumvent the prohibition
Exam Tip: Gotchas
- The borrowing prohibition works both ways. A broker cannot borrow from OR lend to a customer.
- It applies to ALL associated persons, not just the customer's assigned broker.
- "Pre-existing relationship" has a specific meaning. The relationship must have existed BEFORE the broker-customer relationship began. A friendship that develops after opening the account does not qualify.
Sharing in Customer Accounts
Associated persons may NOT share in the profits or losses of a customer account unless ALL of the following conditions are met:
- The customer provides written authorization
- The associated person's employer firm provides written authorization
- Sharing is proportionate to each party's financial contribution to the account
- Exception: Sharing can be disproportionate if the account belongs to an immediate family member
- Example: A broker contributes 30% of the capital but receives 50% of the profits. This is only allowed if the customer is an immediate family member.
Think of it this way: If you and a customer both put money into an account, you can only take out profits matching your share. Put in 30%, take out 30% of the gains. The only time you can take a bigger cut is if the customer is family.
Exam Tip: Gotchas
- Both the customer AND the firm must give written authorization. If only one approves, it is still a violation.
- Proportionate sharing is the default rule. Disproportionate sharing is only allowed for immediate family members.
Custody of Customer Assets
- Firms must segregate customer assets from firm assets (customer money and securities must be kept separate from the firm's own)
- Firms cannot use customer securities as collateral for the firm's own loans (except as permitted under margin rules)
- Misuse of customer funds or securities is one of the most serious violations in the industry
Exam Tip: Gotchas
- Segregation is the key word. Customer assets must be kept separate from firm assets at all times. Using customer securities for the firm's own purposes is a serious violation.