Any registered representative with FINRA must receive written approval from their firm if they are named as a beneficiary of a client's estate, according to a new notice from the regulatory agency.
The new rule also applies if the representative receives a bequest from an estate, as well as if they are named as an executor, trustee or a designate to hold power of attorney for any client.
Additionally, the rule will not apply if the representative is named as a beneficiary or in a position of trust without their knowledge, but they must receive approval from their firm upon learning this information. The rule also does not apply if the customer is a member of the investment professional’s immediate family.
According to FINRA’s posted notice on Rule 3241, investment professionals could face potential conflicts if they are a customer’s beneficiary, or hold another position of power like executor or power of attorney.
“These conflicts of interest can take many forms and can include a registered person benefiting from the use of undue and inappropriate influence over important financial decisions to the detriment of a customer,” the notice read. “Moreover, problematic arrangements may not become known to the member firm or customer’s other beneficiaries or surviving family members for years. Senior investors who are isolated or suffering from cognitive decline are particularly vulnerable to harm.”
In addition to written approval from their firm, a representative can act as an executor, trustee or power of attorney only if they are not deriving financial gain from behaving in that capacity besides “fees or other charges that are reasonable and customary” for anyone who would be filling that role. Upon taking on such a role (or learning about it for the first time), the representative must inform their firm in writing, and the firm must assess what risks are incurred by the representative’s new role that includes whether it will interfere with or compromise the registered rep’s existing responsibilities for that customer. The firm can then approve the representative’s new role with or without certain conditions or limitations, or can disapprove.
The notice offers examples of factors firm’s should take into account when weighing the possible risks, including potential conflicts, the customer’s age, the size of the bequest relative to a customer’s total estate, the length and type of relationship between the client and representative, and whether there are indications of prior questionable conduct on the part of the representative when it comes to that client’s investments.
“If possible, as part of the reasonable assessment of the risks, FINRA expects a member firm to discuss the potential beneficiary status or position of trust with the customer as part of its reasonable determination of whether to approve the registered person assuming the status or acting in the capacity,” the rule read.
