FINRA Focuses on Registered Representatives Named as Beneficiaries and Trustees for Client Accounts – Financial Services

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FINRA recently highlighted Rule 3241 in the Regulatory Item 2023 Learning Plan. Rule 3241 came into effect in early February 2021 and prohibits 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 client unless certain requirements are met. Under Rule 3241, a client includes “any client who has, or within the preceding six months, a securities account assigned to the Registered Person at any Member”. Rule 3241 only applies to personnel assigned to customer accounts.

FINRA has established Rule 3241 to improve investor protection, including addressing misconduct that may arise from conflicts of interest presented by these agreements. This could be an area FINRA will focus on during reviews in 2023including with respect to reviewing company policies, procedures, processes and compliance with the limits and requirements of Rule 3241.

When a firm receives written notice from a registrant, it is required to make a reasonable assessment of the risks, including an assessment to determine whether the designation will interfere with or compromise the registrant’s responsibilities to the client. Firms must make a reasonable decision as to whether to approve the appointment (perhaps subject to specific conditions or limitations) or disapprove. FINRA issued Regulatory Notice 20-38 and noted various related considerations, including that:

  • Companies should be aware of any indication of inappropriate activity or conduct related to client vulnerability or undue influence on the client
  • Businesses should speak with customers about potential designation, if possible
  • A claim that the customer has no other person to name as beneficiary or trustee should not be determinative in the valuation of a business

Except for a client who is an immediate family member of the registrant, registrants accepting these designations are prohibited from receiving any fees, assets or other benefits without receiving the written approval of the company. Rule 3241 prohibits any financial gain (including receipt of gifts) from serving in these capacities other than “reasonable and customary” fees and charges.

Several other notable limitations, requirements, and considerations include:

  1. Companies must establish and maintain written procedures to comply with Rule 3241 and retain written notices and approvals for a prescribed period of time

  2. A registrant named as a beneficiary or in a position of trust unknowingly does not violate rule 3241. However, compliance with the rule is required once the registrant becomes aware of the designation (or they can refuse it)

  3. For individuals changing companies, written approval from the new company for any inherited designations is required within 30 calendar days

  4. Registrants are prohibited from asking a client to designate another person as a beneficiary or to receive a bequest from the client’s estate (such as the registrant’s spouse or child). This prohibition applies to circumstances in which a registrant attempts to circumvent the Rule’s requirements, including communications to a client by a registrant’s spouse or other third party suggesting that the client appoint a particular person as beneficiary or to receive a bequest from the client’s estate.

Businesses are allowed to implement stricter requirements for their staff to seek written approval for covered activities than the rule requires, or even ban such provisions altogether. For example, many companies prohibit staff from receiving any financial consideration, even though Rule 3241 permits “reasonable and customary” fees in certain circumstances.

NEXT STEPS

The regulatory component of FINRA’s continuing education program focuses on compliance, regulatory, ethical, and sales practice standards. Effective January 1, 2023, FINRA Rule 1240 requires registrants to complete the regulatory element annually by December 31st for each registration they hold. Firms may also consider addressing Rule 3241 as part of the firm component of annual continuing education.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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