Finra has proposed a new rule that would require registered representatives to get approval from their firms before becoming a beneficiary, executor, trustee, or holder of power of attorney for their customers.
The SRO says these types of relationships of trust may present significant conflicts of interest for a registered rep.
Last week, Finra issued a request for comment on the new proposed rule — Rule 3241 or Registered Person Being Named a Customer’s Beneficiary or Holding a Position of Trust for a Customer.
The proposed rule requires a registered person to decline being named a beneficiary of a customer’s estate, an executor, trustee, a holder of a power of attorney, or a holder of a similar position for or on behalf of a customer unless approval is sought from and given by the registered rep’s firm and certain conditions are met.
“The approach, I think, is intended to be a careful sort of step in this area,” Finra CEO and President Robert Cook said at the 2019 Senior Investor Protection Conference in Washington, D.C. last week.
“We’re trying to build on the practice that we’ve seen some firms employ today. Most of the firms we talked to — not all, but most — do have policies around this. Sometimes they outright prohibit it. Most seem to have a requirement that advisors give notice to the firm and get approval,” he added.
Cook noted that there are “a lot of factors that come into play” when assessing the person of trust-type relationships between a registered rep and a customer.
These include the nature of the relationship that the registered rep and the customer has had, how long that relationship has existed, as well as “cultural issues like different definitions of what is a family member or an uncle or auntie or whatever it is, those sorts of things,” Cook said.
“We want to try to be not too prescriptive, but set up a process where that notice and approval and reasonable oversight would have to happen and then see how it works,” he added.
Cook noted that while there’s a difference between what’s practiced in the industry and a regulatory requirement, Finra believes many firms already have policies in place on this matter.
“We think that we can sort of raise the bar across the board by having a more standardized requirement,” he said. “And then we empower the firm to require the advisors to provide this kind of information.”
Cook reminded the audience at the conference, however, that Finra’s proposed rules would only address the issue for the broker-dealer industry since it doesn’t have oversight of RIAs that aren’t dually registered as broker-dealer firms.
“I should note that we don’t regulate investment advisors and similar issues of potential conflicts can arise there. So this this clearly wouldn’t address that situation,” Cook said.
What does the proposal require?
According to Finra’s proposed new rule, a registered representative must provide their firm with written notice upon learning of being named a beneficiary of a customer’s estate or receiving a bequest from a customer’s estate. Then that registered rep must receive written approval from the firm prior to taking on the role of beneficiary of a customer’s estate or receiving a bequest from a customer’s estate.
When it comes to being named as an executor, trustee or a holder of a power of attorney or similar position for or on behalf of a customer, a registered rep must also provide their firm with written notice upon learning of such status. Then that registered rep must also receive written approval from the firm prior to acting in such capacity or receiving any fees, assets or other benefit in relation to acting in such capacity.
In addition, registered reps who become an executor, trustee or a holder of a power of attorney or similar position for or on behalf of a customer are barred from deriving financial gain from acting in such capacity other than from fees or other charges that are reasonable and customary for acting in such capacity.
Finra says the proposed rule would not apply to a registered rep if the customer is a member of the registered person’s immediate family.
If the proposed rule is approved, Finra would assess the conduct of a registered rep and a firm pursuant to the rule to determine the effectiveness of the rule in addressing potential conflicts of interest and evaluate whether additional rulemaking or other action is appropriate.
Conflicts of interest
In explaining the proposed new rule, Finra said being a customer’s beneficiary or holding a position of trust may present significant conflicts of interest for a registered rep and the SRO said it has previously taken steps to address misconduct in this area.
Conflicts of interest can take many forms and can result in registered persons taking advantage of being named beneficiaries or holding positions of trust for personal monetary gain, according to Finra.
Problematic arrangements may not become known to the firm, customer’s beneficiaries or surviving family members for years and senior investors who are isolated or suffering from cognitive decline are particularly vulnerable to harm, Finra added.
Comments on this proposed new rule must be submitted to Finra by January 10, 2020.
FA-IQ first reported Finra’s plan to address this issue in early October.