Securities Regulation Daily FINRA cracks down on allowing professionals to serve as beneficiaries
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Friday, October 30, 2020

FINRA cracks down on allowing professionals to serve as beneficiaries

By Amy Leisinger, J.D.

The new rule limits the ability of "registered persons" to be named beneficiaries of customers and/or holding positions of trust in connection with accounts.

The Financial Industry Regulatory Authority (FINRA) has adopted a new rule to limit any associated person of a registered member firm from being named a beneficiary, executor or trustee (or to have a power of attorney) for or on behalf of a customer. New FINRA Rule 3241 is designed to protect investors by requiring FINRA member firms to affirmatively address these arrangements and, upon receiving required written notice from a registered person, to review and approve the status, according to the organization.

FINRA appears to have heeded some of NASAA’s suggested revisions, including that FINRA amend the rule to prohibit a registered person from being named a beneficiary or holding a position of trust for a customer unless the registered person is an immediate family member.

Reasoning. According to FINRA, an investment professional can encounter potential conflicts of interest when named as a customer’s beneficiary; senior investors who are isolated or suffering from cognitive decline are particularly vulnerable to harm, the organization noted.

Prior to adopting new Rule 3241, FINRA took steps to address misconduct in this area, including identifying effective practices, setting examination priorities, and reviewing customer complaints.

Investor protection. However, FINRA found, more needs to be done. To further address the potential for customers being taken advantage of, the organization adopted new Rule 3241 to create a uniform standard to govern registered persons holding positions of trust. This new mandate will protect investors and provide consistency across member firms’ policies and procedures. Under the rule, a registered person must decline:

  • being named a beneficiary of a customer’s estate or receiving a bequest unless the registered person provides written notice and receives written approval from the member firm; or
  • being named as an executor or trustee or holding a power of attorney or similar position without notice and written approval and does not derive financial gain other than from fees or other customary charges.

A registered person named to a position of trust without his or her knowledge would not violate the rule but must act in a manner consistent with the rule upon becoming aware.

Upon receipt of written notice, the rule requires each member firm to perform a reasonable assessment of the risks and supervise the registered person’s compliance with conditions and/or limitations.

Rule 3241 does not apply when the customer is a member of the registered person’s "immediate family" and becomes effective February 15, 2021.

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