Proposed FINRA Rule 3241 (Registered Person Being Named a Customer’s Beneficiary or Holding a Position of Trust for a Customer)

            On July 2, 2020, the U.S. Securities and Exchange Commission (the “SEC”) published its notice to solicit comments on Proposed FINRA Rule 3241 (the “Notice”).[1] This proposed rule change would allow registered persons[2] to be named as beneficiaries or appointed to positions of trust,[3] and states as follows: 

            “Proposed FINRA Rule 3241 would provide that a registered person must decline: 

(1)    Being named a beneficiary of a customer’s estate or receiving a bequest from a customer’s estate upon learning of such status unless the registered person provides written notice upon learning of such status and receives written approval from the member firm prior to being named a beneficiary of a customer’s estate or receiving a bequest from the customer’s estate; and

(2)   Being named as an executor or trustee or holding a power of attorney or similar position for or on behalf of the customer unless:

a.       Upon learning of such status, the registered person provides written notice and receives written approval from the member firm prior to acting in such capacity or receiving any fees, assets, or other benefit in relation acting in such capacity; and

b.      The registered person does not derive financial gain from acting in such capacity other than from fees or other charges that are reasonable and customary for acting in such capacity.[4]” 

            Being designated a customer’s beneficiary, trustee or executor and/or holding a customer’s power of attorney raises actual or potential conflicts of interest, and registered person’s had been known to circumvent these conflicts in form rather than substance. FINRA proposed this rule change “to create a uniform, national standard to govern registered persons holding positions of trust” in order to ostensibly “better protect investors and provide consistency across member firms’ policies and procedures.”[5]    

A close examination of the rule change reveals that it would do little regarding a registered person’s actual or potential conflict of interest, which FINRA proposes to assess “to determine the effectiveness of the rule addressing potential conflicts of interest and evaluate whether additional rule making or other action is appropriate”[6] if the rule change passes. This further assessment may be why the NASAA[7] opposes the rule change as written, and instead proposes to limit its application to registered persons who are immediate family members, and even in that case require the member to implement heightened supervision standards regarding that registered person.[8] 

If passed, the proposed rule change would become effective either (a) within 45 days of the date of the publication of the Notice, or (b) within such longer period not to exceed 90 days of such date if the SEC finds it appropriate.   

 Author: Brian St. James

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC. 

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[1] SECURITIES AND EXCHANGE COMMISSION (“Release No. 34-89218; File No. SR-FINRA-2020-020").

[2] “Registered person” means an “associated person of a member” as set forth in FINRA By-Law Article I (rr).

[3] The text of the proposed rule is available at http://www.finra.org.

[4] The proposed rule change would not apply where the customer is a member of the registered person’s immediate family.

[5] SECURITIES AND EXCHANGE COMMISSION (“Release No. 34-89218; File No. SR-FINRA-2020-020.

[6] Id.

[7] North American Securities Administrators Association, Inc.

[8] NASAA comments to Proposed FINRA Rule 3241 (Registered Person Being Names a Customer’s Beneficiary or Holding a Position of Trust for a Customer), dated July 30, 2020.