FINRA’s Department of Enforcement investigated McGrath and alleged he borrowed a total of $210,000 from one of his brokerage customers without disclosing the loans to Oppenheimer. According to FINRA, McGrath borrowed $30,000; $150,000; and $30,000 from the customer on three separate occasions. FINRA alleged McGrath arranged for these loan proceeds and loan repayments to be sent to accounts held away from the Firm before they were transmitted to McGrath or the customer. McGrath was supposed to provide the client with interest in the amount of 8% per annum; however, he subsequently defaulted on his loan payments.
FINRA alleges McGrath violated NASD Conduct Rule 2370 (now FINRA Rule 3240), among other rules, which prohibits registered persons from borrowing money from or lending money to any customer certain conditions and/or exceptions are satisfied. Specifically, FINRA Rule 3240 prohibits registered persons from borrowing money from or lending money to any customer unless: 1) the representative’s employing member firm has written procedures allowing borrowing from or lending to customers; 2) the borrowing or lending meets at least one of the conditions specified in Rule 3240(a)(2); and 3) the registered person notifies the firm of the borrowing or lending arrangement and obtains pre-approval in writing. A violation of FINRA Rule 3240 also constitutes a violation of FINRA Rule 2010, which requires associated persons to observe high standards of commercial honor and just and equitable principals of trade.
The aforementioned financial arrangements between McGrath and his brokerage customer constituted personal loans, which McGrath was required to disclose to Oppenheimer unless certain conditions were met. Indeed, none of the prescribed exceptions under FINRA Rule 3240 were satisfied because the customer was not related to McGrath, did not have a business relationship with McGrath outside the registered representative/customer relationship, and McGrath was not a financial institution engaged in lending. Further, McGrath borrowed the aforementioned funds from the customer without providing written notice to Oppenheimer.
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