FINRA requested comments on a proposal that would restrict certain associated persons from acting as beneficiaries, or as executors or trustees, on behalf of or for a customer.
Under proposed Rule 3241 ("Registered Person Being Named a Customer's Beneficiary or Holding a Position of Trust for a Customer"), any associated person (other than a family member of the relevant customer) could not be named as:
- a beneficiary of a customer's estate or receive a bequest from an estate, unless the registered person provides written notice to the person's employer, at the time of receiving notice, that the registered person has been named and receives written approval (which may be subject to conditions); or
- an executor, trustee or holding a power of attorney for a customer unless the registered person (i) provides written notice to the person's employer, at the time of receiving notice, that the registered person has been named and receives written approval (which may be subject to conditions) and (ii) does not derive any financial gains from the position.
The employing firm would be required to "perform a reasonable assessment of the risks created" and "make a reasonable determination" of whether to provide the relevant approval and, if approval is granted subject to conditions, reasonably supervise compliance with such conditions.
According to FINRA, firms already have similar compliance practices in place (for example, treating acting as a trustee as an "outside business activity") that require approvals of similar activity by Associated Persons ("APs").
Comments on the proposed rule must be submitted to FINRA before January 10, 2020.
Commentary
Existing FINRA Rule 3240 generally prohibits an AP from borrowing money from (or lending money to) a customer. This rule proposal further addresses the concern that an AP may attempt to manipulate a customer, particularly a senior customer. On the one hand, the rule proposal would require firms to make a judgment that seems well outside the normal course of the securities business; on the other hand, firms do routinely have to determine whether a customer is making a genuinely independent decision. One question to consider is whether a broker-dealer would open itself up to a private lawsuit if it approved an AP to act as executor, and a relative of the deceased was unhappy with the outcome.
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