The Financial Industry Regulatory Authority (“FINRA”) has announced a proposed rule to limit any associated person of a member firm who is registered with FINRA (each a “registered person”) from being named a beneficiary, executor or trustee, or to have a power of attorney or similar position of trust for or on behalf of a customer. The intent of the rule is to protect investors by requiring all member firms to affirmatively address registered persons being named beneficiaries or holding positions of trusts for customers.
In general overview, the proposed rule would require the member firm with which the registered person is associated, upon receiving written notice from the registered person, to review and approve the registered person assuming the status of a beneficiary, executor or trustee, or acting in such capacity. It should be noted that the proposed rule would not apply where the customer is a member of the registered person’s “immediate family.”
Background
FINRA notes that being named a customer’s beneficiary, executor or trustee, or holding a power of attorney or a similar position for or on behalf of a customer may present significant conflicts of interest for investment professionals. Conflicts of interest can take many forms and can result in registered persons taking advantage of being named beneficiaries or holding positions of trust for personal monetary gain. Further, problematic arrangements may not become known to the member firm or customer’s beneficiaries or surviving family members for years.
Many, but not all, member firms historically address these potential conflicts by prohibiting, or imposing limitations on being named as a beneficiary or to a position of trust when there is not a familial relationship. Nonetheless, FINRA has observed situations where registered representatives have tried to circumvent firm policies, such as resigning as a customer’s registered representative, transferring the customer to another registered representative, or having the customer name the registered representative’s spouse or child as the customer’s beneficiary. To that end, FINRA is proposing the new rule to further address the misconduct in this area.
Proposed Rule
Proposed FINRA Rule 3241 (Registered Person Being Named a Customer’s Beneficiary or Holding a Position of Trust for a Customer) provides that a registered person must decline being named:
- a beneficiary of a customer’s estate or receiving a bequest from a customer’s estate upon learning of such status, unless the registered person provides written notice upon learning of such status and receives written approval from the member firm prior to being named a beneficiary of a customer’s estate or receiving a bequest from a customer’s estate; and
- as an executor or trustee or holding a power of attorney or similar position for or on behalf of a customer unless (i) the registered person provides written notice upon learning of such status and receives written approval from the member firm prior to acting in such capacity or receiving any fees, assets or other benefit in relation to acting in such capacity; and (ii) the registered person does not derive financial gain from acting in such capacity other than from fees or other charges that are reasonable and customary for acting in such capacity.
The proposed rule specifically notes that it would not apply where the customer is a member of the registered person’s immediate family.
Knowledge
A registered person being named as a beneficiary, executor or trustee without his or her knowledge would not violate the proposed rule. However, the registered person must act consistent with the proposed rule upon learning that he or she was named as a beneficiary or to a position of trust. The proposed rule would apply when the registered person learns of his or her status as a customer’s beneficiary or a position of trust for or on behalf of a customer. It is important to note that a registered person may be required to decline being named as a beneficiary or to a position of trust and decline receipt of any assets or other benefit from the customer’s estate so as not to violate the proposed rule.
Firm Notice and Approval
The proposed rule would permit a member firm to specify the required form of written notice for its registered persons. Upon receipt of the written notice, the proposed rule would require the member firm to:
- perform a reasonable assessment of the risks created by the registered person’s assuming such status or acting in such capacity, including an evaluation of whether it will interfere with or otherwise compromise the registered person’s responsibilities to the customer; and
- make a reasonable determination of whether to approve the registered person’s assuming such status or acting in such capacity, to approve it, subject to specific conditions or limitations, or to disapprove it.
It should be noted that the firm would be required to reasonably supervise the registered person’s compliance with the conditions or limitations if the member firm imposes conditions or limitations on its approval. Additionally, the proposed rule would also require member firms to preserve the written notice and approval for at least three years after the date that the beneficiary status or position of trust has terminated or the bequest received or for at least three years, whichever is earlier, after the registered person’s association with the firm has terminated.
Reasonable Assessment and Determination
FINRA expects that a member firm’s assessment would take into consideration a number of factors in making its assessment, including the following issues:
- potential conflicts of interest that result from the registered person being named a beneficiary or holding the position of trust;
- the length and type of relationship between the customer and registered person;
- the customer’s age;
- the size of any bequest relative to the size of a customer’s estate;
- whether, based on the facts and circumstances observed in the member’s business relationship with the customer, the customer has a mental or physical impairment that renders the individual unable to protect his or her own interests;
- any indicia of improper activity or conduct with respect to the customer or the customer’s account (e.g. excessive trading); and
- any indicia of customer vulnerability or undue influence of the registered person over the customer.
While the proposed rule would not prohibit a registered person being named a beneficiary of or receiving a bequest from a customer’s estate, a member firm would need to carefully assess a registered person’s request to be named a beneficiary of or receive a bequest from a customer’s estate. This would including the firm making a reasonably determine that the registered person assuming such status does not present a risk of financial exploitation that the proposed rule is designed to address (e.g., a registered person receiving a bequest from a customer who has been a godparent since childhood or a customer who has been a friend since childhood).
Other Matters Addressed
- Scope of Proposed Rule. To address attempted circumvention of the restrictions (e.g., by closing or transferring a customer’s account), the proposed rule would define “customer” to include any customer that has, or in the previous six months had, a securities account assigned to the registered person at any member firm. In addition, a registered person instructing or asking a customer to name another person to be a beneficiary of the customer’s estate or to receive a bequest from the customer’s estate would present similar conflict of interest concerns as the registered person being so named. Accordingly, the proposed rule would not allow a registered person to instruct or ask a customer to name another person, such as the registered person’s spouse or child, to be a beneficiary of the customer’s estate or to receive a bequest from the customer’s estate.
- Beneficiary Status and Positions of Trust Prior to Association with Member Firm. If a registered person was named as a beneficiary or to a position of trust prior to the registered person’s association with the member, the proposed rule would require the registered person to provide notice to, and receive approval from the member to maintain the beneficiary status or position of trust,within 30 calendar days of becoming so associated.
- Pre-Existing Beneficiary Status and Positions of Trust. The proposed rule would require the registered person, and member firm to act consistent with the rule for any existing beneficiary status or position of trust, prior to the initiation of the broker-customer relationship.
Comments Requested by FINRA
Member firms are encouraged to submit comments on the proposed rule during the comment period, which ends January 10, 2020.