On February 15, 2021, FINRA’s new Rule 3241 – “Registered Person Being Named a Customer’s Beneficiary or Holding a Position of Trust for a Customer” – becomes effective. The Rule sets forth the newly codified obligations both of registered persons and member firms encountering these issues.
Under Rule 3241, a registered person must decline being named a beneficiary of, or receiving a bequest from, any customer’s estate and must decline being named as an executor, trustee, power of attorney, or similar position for or on behalf of a customer1 unless (A) the customer is immediate family2 or (B) the representative provides written notice to his/her firm and receives written approval prior to the designation or appointment. If a representative serves in a position of trust, he/she must not derive any financial gain beyond those fees or charges that are reasonable and customary for such role.
As for members, upon receipt of written notice from a registered person as outlined above, the member must (A) perform a reasonable assessment of the risks created by the representative assuming such role, including an evaluation as to whether the role will interfere with or compromise any responsibilities to the customer, and (B) make a reasonable determination as to whether to approve the activity, approve it subject to specific conditions or limitations, or disapprove it. Upon completion of (A) and (B), the member must advise the representative, in writing, of its determination. If the activity is approved subject to conditions or limitations, compliance with those conditions or limitations must be reasonably supervised. Members are required to establish and maintain written procedures to comply with the obligations outlined in Rule 3241 and must retain records of any written notice and approval for at least three years after the status at issue has ended/terminated, or three years after the registered person has left the firm, whichever is shorter.
The new Rule further provides that if a registered person was designated as a beneficiary by, or served in a trust position for, a customer prior to being associated with the member, he/she must submit written notice and receive written approval to continue that status as outlined above within 30 calendar days of becoming associated with the member. Similarly, if the registered person held such role prior to the existence of a broker-customer relationship, written notice and approval must still be submitted and obtained as provided for in Rule 3241. In addition, in the event a registered person declines being named as a beneficiary, receiving a bequest, and/or serving in a trust position for a client, he/she may not instruct or ask the customer to name someone else, such as a spouse, child, or other relative, in the representative’s place.
Issues arising from the naming of representatives as beneficiaries or bequest recipients, or requesting that they serve in positions of trust, by customers are not new. While many firms already maintain policies and procedures on this topic, FINRA Rule 3241 clarifies the obligations and actions required of both representatives and members when such circumstances arise.
1 “Customer” is defined as “any customer who has, or in the previously six months had, a securities account assigned to the registered person at any member.”
2 Rule 3241 defines “immediate family” as “parents, grandparents, mother-in-law or father-in-law, spouse or domestic partner, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person who resides in the same household as the registered person and the registered person financially supports, directly or indirectly, to a material extent,” and includes “step and adoptive relationships.”