The US Financial Industry Regulatory Authority is proposing to make a new rule to oblige every firm that it regulates to review and grant prior approval to every registered person with whom it is associated who wants to be named as a customer’s beneficiary or to hold a position of trust for or on behalf of a customer.

The idea is to quash conflicts of interest as far as possible. The deadline for comments from interested parties is 10 January. The regulator wants to impose these safeguards to vet anyone registered with FINRA before he becomes a beneficiary, executor or trustee, or acquires a power of attorney or similar position of trust on behalf of a customer. It does not want the rule to apply if the customer is a member of the registered person’s “immediate family."

Conflicts of interest, the regulator argues, can take many forms and can result in registered persons taking advantage of their status as beneficiaries or their positions of trust for personal monetary gain. Problematic arrangements may not become known to the member firm in question, or the customer’s heirs, for years. Old investors who are isolated or suffering from cognitive decline are particularly open to harm. Many, but not all, firms deal with these problems by prohibiting or hampering their employees from being named as beneficiaries or appointed to positions of trust if there are no blood ties with customers. In some cases, however, relationship managers circumvent their firms' policies.

FINRA is promulgating new Rule 3241 (Registered Person Being Named a Customer’s Beneficiary or Holding a Position of Trust for a Customer) which it intends to force every registered person to 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 regulated 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:
a. the registered person provides written notice upon learning of such status and receives 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; 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.

FINRA wants to permit a firm to specify the required form of written notice for its registered persons. Upon receipt of a written notice, it wants to oblige the firm to:

• perform a reasonable assessment of the risks created by the registered person’s assumption of such status or capacity, including an evaluation of whether it will interfere with or otherwise compromise the registered person’s responsibilities to the customer; and
• make a reasonable determination of whether to approve the registered person’s assumption of such status or capacity, perhaps imposing conditions.

So many restrictions that one can hardly move

The regulator's notice is so long and tortuous that it is quite evident that it does not really want any registered representative to become a beneficiary. 'Immediate family,' for example, includes “parents, grandparents, mother-in-law or father-in-law, spouse or domestic partner, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person whom the registered person financially supports, directly or indirectly, to a material extent.” The term also includes step and adoptive relationships.

FINRA expects each firm’s assessment to consider such factors as:

• any potential conflicts of interest in the registered person being named a beneficiary or holding the position of trust;
• the length and type of relationship between the customer and registered person;
• the customer’s age;
• the size of any bequest relative to the size of a customer’s estate;
• whether, according to the facts and circumstances observed in the member’s business relationship with the customer, the customer has a mental or physical impairment;
• any indication of improper activity with respect to the customer or the customer’s account (e.g. excessive trading); and
• any indication (FINRA hilariously uses the FATCA word 'indicia') of vulnerability on the part of the customer or undue influence of the registered person over the customer.

A representative’s request to hold a position of trust for an elderly customer who had no relationship with him before the broker-customer relationship began is likely to pose risks that differ from a situation in which he asks to hold a position of trust for a longstanding friend. FINRA would not expect a registered person’s assertion that a customer has no viable alternative person to be named a beneficiary or to serve in a position of trust to be dispositive to the member firm’s assessment. One example that FINRA gives of an absence of financial exploitation is a registered person receiving a bequest from a customer who has been a friend/godparent since childhood.

Registered representatives move with some frequency between firms (again, somewhat amusingly, FINRA refers to its benighted charges as 'members'). If a registered person was named as a beneficiary or to a position of trust before he was associated with the 'member,' the proposal is to require the registered person, within 30 calendar days of becoming so associated, to provide notice to and receive approval from the member if he is to keep the status of beneficiary or position of trust.

There is, according to the regulator, more and more financial exploitation that involves weak investors. American regulators have always been quite keen to protect the elderly and this concern is now spreading to other parts of the vulnerable HNW investing public.