Alert
November 2, 2022

FINRA Focused on Registered Reps Named as Beneficiaries and Trustees for Customer Accounts

FINRA recently highlighted Rule 3241 in the 2023 Regulatory Element Learning Plan. Rule 3241 became effective in early February 2021 and prohibits a registered person from being named as a beneficiary, executor, or trustee or having a power of attorney or similar position of trust for or on behalf of a customer unless certain requirements are satisfied. Under Rule 3241, a customer includes “any customer that has, or in the previous six months had, a securities account assigned to the registered person at any member.” Rule 3241 only applies to personnel assigned to customer accounts.

FINRA established Rule 3241 in order to enhance investor protection, including addressing misconduct that may stem from the conflicts of interest presented by these arrangements. This could be an area of FINRA focus during examinations in 2023, including related to scrutiny of firms’ policies, procedures, processes, and compliance with the limitations and requirements of Rule 3241.

When a firm receives written notice from a registered person, it is required to perform a reasonable assessment of the risks, including an evaluation of whether the designation will interfere with or compromise the registered person’s responsibilities to the customer. Firms must make a reasonable determination of whether to approve the designation (perhaps subject to specific conditions or limitations) or disapprove it. FINRA published Regulatory Notice 20-38 and noted various related considerations, including that:

  • Firms should be mindful of any indications of improper activity or conduct related to customer vulnerability or undue influence over the customer
  • Firms are expected to converse with customers about the potential designation, if possible
  • A claim that the customer has no other person to name as beneficiary or trustee should not be determinative in a firm’s assessment

Except for a customer who is a member of the registered person’s immediate family, registered persons accepting these designations are prohibited from receiving any fees, assets, or other benefits without receiving written firm approval. 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. Firms must establish and maintain written procedures to comply with Rule 3241 and preserve written notices and approvals for a prescribed period of time

  2. A registered person being named as a beneficiary or to a position of trust without knowledge does not violate Rule 3241. However, compliance with the rule is required once the registered person becomes aware of the designation (or they can decline it)

  3. For individuals switching firms, written approval from the new firm for any legacy designations is required within 30 calendar days

  4. Registered individuals are prohibited from requesting that a customer name another person to be beneficiary of, or to receive a bequest from, the customer’s estate (such as the registered person’s spouse or child). This prohibition applies to circumstances where a registered person tries to circumvent the requirements in the rule, including communications to a customer by a registered person’s spouse or another third party suggesting that the customer name a particular person as the beneficiary of, or to receive a bequest from, the customer’s estate.

Firms are permitted to implement more stringent requirements for their personnel who seek written approval for covered activities than what the rule requires or even to prohibit these arrangements entirely. For example, many firms prohibit personnel from receiving any financial consideration, even if Rule 3241 permits “reasonable and customary” fees in certain circumstances.

Next Steps

The Regulatory Element of FINRA's continuing education program focuses on compliance, regulatory, ethical, and sales practice standards. Beginning January 1, 2023, FINRA Rule 1240 requires registered persons to complete the Regulatory Element annually by December 31st for each registration that they hold. Firms may also want to consider addressing Rule 3241 in the Firm Element component of annual continuing education.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.