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FINRA Limits Registered Persons from being Beneficiaries or Holding Positions of Trust

In FINRA Regulatory Notice 20-38, FINRA has adopted Rule 3241 to limit registered persons from holding “positions of trust” for clients.  The new rule requires that registered persons have written approval from the member firm to act as a trustee, executor, or hold power of attorney for a client account.  It also requires written approval from the member firm for a registered person to be named a beneficiary on a client account, or if the registered person may receive a bequest from a client’s estate.  The rule does not apply if the client is a member of the immediate family of the registered person.

Effectively, Rule 3241 forces member firms and the registered persons to affirmatively address registered persons holding these “positions of trust”.  Rule 3241 is designed to better protect investors, especially senior investors, from any inappropriate or undue influence in making financial decisions.  The rule also creates a framework for a uniform standard for all member firms.

Specifically, under Rule 3241, the 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 a 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 a customer unless: 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 to acting in such capacity; and 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.

Rule 3241 addresses the numerous conflicts of interest that arise when a registered person is in the position of potentially receiving benefit from inappropriate or undue influence of the customer, to the detriment of the customer.  The rule addresses these potential conflicts which may not become known to the member firm, or other beneficiaries of the client, for months or even years.   As noted in the comments to the rule, FINRA states that “senior investors who are isolated or suffering from cognitive decline are particularly vulnerable to harm.”

Rule 3241 becomes effective Feb. 15, 2021.  The full text of Regulatory Notice 20-38 and FINRA Rule 3241can be found here .

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Author

David L. Ward is a Mintz attorney whose practice includes financial services regulatory matters, internal investigations, and securities-related litigation in state and federal courts. He represents financial services clients before the US Department of Justice, SEC, FINRA, and other regulators.