On October 29, 2020 FINRA issued Regulatory Notice 20-38 announcing that Rule 3241 has been adopted in order to limit the ability of licensed personnel of FINRA member firms to be named as a beneficiary, executor, trustee of or have power of attorney for or on behalf of a customer. In pertinent part, Rule 3241 provides as follows:
- Registered personnel shall decline being named as a beneficiary of a customer’s estate (or receiving a bequest from a customer’s estate upon learning he/she was named as a beneficiary) unless (1) the customer is a member of the registered person’s immediate family, or (2) upon learning of the beneficiary status, the registered person provides written notice to his/her broker-dealer describing the status and receives approval from his/her broker-dealer.
- Registered personnel shall decline being named as an executor, trustee or attorney-in-fact for or on behalf of a customer unless (1) the customer is a member of the registered person’s immediate family, or (2) upon learning of the appointment, the registered person provides written notice to his/her broker-dealer describing the status, receives approval from his/her broker-dealer, and does not derive financial gain from acting in such capacity other than from fees or charges that are reasonable and customary for acting in such capacity.
In addition, the rule requires FINRA member firms, upon receiving the written notice specified above, to perform a reasonable assessment of the risks created by the registered person assuming the status as a beneficiary, executor, trustee or attorney-in-fact, including whether it will interfere with the registered person’s responsibilities to the customer, and whether the status should be approved, be approved subject to specific conditions or limitations, or denied. FINRA has indicated in Regulatory Notice 20-38 that it expects member firms to consider the following when determining whether to approve, deny or approve subject to the limitations, a registered person’s written notice as specified above:
- any potential conflicts of interest in 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 the registered representative has received other bequests or been named a beneficiary on other customer accounts;
- 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 customer 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.
The express purpose of the rule, according to FINRA, is to protect senior and vulnerable investors from harm, and to address the potential conflicts of interest registered personnel face when they are named as beneficiaries, executors, trustees or attorneys-in-fact, including the possibility of benefitting from the use of undue or inappropriate influence over the customer’s financial decisions. To accomplish these goals, FINRA mandated in Regulatory Notice 20-38 that the notice and approval requirements above apply equally to new arrangements, pre-existing arrangements in instances where a prior brokerage relationship did not exist, and in pre-existing arrangements where registered personnel, despite having prior approval, have moved firms.
The new rule becomes effective on February 15, 2021. If you have any questions regarding Rule 3241, or any other broker-dealer or investment advisor compliance questions, do not hesitate to contact a member of our Financial Services Professional Liability Group.
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