On October 29, 2020, FINRA issued Regulatory Notice 20-38, announcing the adoption of a rule imposing limits as to when brokers can be named as a customer’s beneficiary or hold a position of trust for or on behalf of a customer. The new Rule 3241, effective February 15, 2021, imposes several requirements on FINRA member firms and restrictions on their registered persons. While many member firms currently prohibit such activity by their employees in order to avoid potential conflicts of interest, not all firms do so. Furthermore, not all registered persons employed by firms having policies in place comply. FINRA’s new rule seeks to address these gaps, while protecting customers, especially seniors, from “problematic arrangements” that may not become known for years.

Potential conflicts of interest may arise when a customer names a registered person as a beneficiary, executor, or trustee, or to hold a power of attorney or similar position for or on behalf of the customer. A broker having influence over important financial decisions, to the potential detriment of a customer, presents risks to member firms and should largely be avoided as a matter of good policy. Accordingly, many firms prohibit or significantly limit these actions when no familial relationship exists between the broker and the customer.

In the absence of firm policies or in cases in which registered persons attempt to circumvent existing firm policies, FINRA has taken certain steps to mitigate potential harm. These steps have included identifying effective practices for member firms, setting the supervision of such accounts as an examination priority, reviewing customer complaints or reports submitted by member firms (including Form U5 filings), examining matters referred by an arbitrator for disciplinary investigation, and utilizing enforcement powers pursuant to FINRA Rules 2010, 2150, 3240, or 3270. 

FINRA describes the rule as creating a uniform and national standard for registered persons holding positions of trust in a manner that protects investors and provides consistency across member firms’ policies. Similarly, in the SEC’s published approval of FINRA Rule 3241, the Commission finds the rule to be “consistent with Section 15A(b)(6) of the Exchange Act, which requires, among other things, that FINRA rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest.”

Specifically, Rule 3241 provides the following:

• A registered person must decline being named as a beneficiary of a customer’s estate or receiving a bequest from a customer’s estate upon learning of such status, unless written notice is provided to and written approval is received from the firm before being named a beneficiary or receiving such a bequest.

• A registered person must decline being named as an executor or trustee or holding a power of attorney or similar position for or on behalf of a customer, unless, upon learning of such status, the broker provides written notice to and obtains written approval from the firm before acting in such capacity or receiving any fees, assets, or other benefits, and the broker does not derive financial gain other than from reasonable and customary fees and other charges. 

The rule does not apply where the customer is a member of the registered person’s immediate family.

While Rule 3241 does not prohibit a registered person from being named as a beneficiary of or receiving a bequest from a customer’s estate, a member firm is required to perform a reasonable assessment of the risks associated with a broker’s request, and should discuss the matter with the customer as part of the firm’s making a reasonable determination. Member firms should have written procedures and supervisory systems in place, and if a broker is allowed to proceed as a beneficiary or as a person holding a position of trust, subject to conditions or limitations, the firm must reasonably supervise the broker’s compliance and, if applicable, the customer’s account. Finally, if a registered person falls under Rule 3241 and moves to another member firm, that person is required, within 30 days of becoming associated, to provide notice and receive approval from the new firm.

The attorneys at Giarrusso Law Group LLC have considerable experience with issues unique to the financial services industry, including FINRA rules and regulatory developments affecting member firms and their registered persons. If you have a question regarding this recent announcement or any other FINRA matter, you may contact us at (201) 771-1115 or info@gialawgroup.com for a no-cost and confidential consultation.