On October 29, 2020 FINRA released a regulatory notice detailing Rule 3241, a new rule that limits any associated person of a member firm who is registered with FINRA 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 customer. The rule requires the member firm with which the registered person is associated, upon receiving required written notice from the registered person, to review and approve or disapprove the registered person assuming such status or acting in such capacity. Rule 3241 does not apply where the customer is a member of the registered person’s “immediate family, and becomes effective February 15, 2021
Purpose
The purpose of this rule is to avoid the potential conflicts of interest that arise when an investment professional is named a customer’s beneficiary, executor, or trustee. Examples of these conflicts of interest include:
- A registered person benefiting from the use of undue and inappropriate influence over important financial decisions to the detriment of a customer.
- Problematic arrangements may not become known to the member firm or customer’s other beneficiaries or surviving family members for years.
- Seniors with cognitive impairments are especially vulnerable to this.
The Rule
Rule 3241 states that a registered person must decline being named a beneficiary of a customer’s estate or receiving a bequest from a customer’s estate unless:
- The registered person provides written notice and receives written approval from the member firm prior to being named a beneficiary; or
- The registered person doesn’t receive any financial compensation other than the fees and charges that are reasonable and customary.
If a registered person is named as a beneficiary or to a position of trust without his or her knowledge, they would not be violating the rule, but must act consistent with the rule but upon learning of this status. FINRA does not specify the form of written notice required, leaving that decision to the individual firms, but they do require some form of written notice. Upon receiving a written notice, a firm must:
- Perform a reasonable assessment and evaluate if it will interfere or otherwise compromise the registered person’s responsibilities to the customer; and
- Make a reasonable determination to accept, accept under specific conditions/limitations, or deny the request.
What Should Your Firm Do?
Rule 3241 will also apply to pre-existing relationships, so your Firm should start by reviewing all instances where a registered person acts as a beneficiary executor, or trustee to find if any of them are for a customer.
Your firm will be required to create policies and procedures to comply with the rule’s requirements. This would include the preservation of the written notice and approval for at least three years after the registered person’s association with the firm has terminated. It would also include the written supervisory procedures for identifying and managing these relationships.
Your firm should also develop a process for conducting reasonable assessments of risk for when a request comes in. FINRA provides a list of a few factors that should be considered Here (around half way down the page).
Also, your firm should send a notice to all registered persons regarding the new Rule 3241 to reduce the chances of being non-compliant.
MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting your firm’s compliance responsibilities. If there are any areas where you would like to explore additional assistance or services, please contact us.