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FINRA Floats Limit on Brokers as Beneficiaries

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The Financial Industry Regulatory Authority is seeking feedback on a new rule proposal that would limit any associated person of a broker-dealer from being named a beneficiary, executor or trustee, or to have a power of attorney or similar position of trust on behalf of a customer.

“Most of the firms we talk to — not all — have policies around this” type of arrangement; “sometimes they outright prohibit it,” Robert Cook, FINRA’s CEO, said Tuesday during the self-regulator’s Senior Investor Protection Conference in Washington.

Some BDs require that brokers “give notice to the firm” that such an arrangement exists “and get approval. That’s effectively what this proposed rule would require; it would require that outside of family situations, that the advisor give notice to the firm and get approval from the firm, and the firm would be expected to execute a reasonable approach in deciding whether it’s appropriate under the circumstances … for the advisor to be a beneficiary or a trustee,” Cook said.

A lot of facts can come into play, Cook said. “The nature of the relationship that the advisor and the customer have had; how long that relationship is…” While FINRA doesn’t want to be “too prescriptive, we want to set up a process where notice, approval and reasonable oversight would have to happen.”

As FINRA notes in Regulatory Notice 19-36, being a customer’s beneficiary or holding a position of trust “may present significant conflicts of interest, and FINRA has previously taken steps to address misconduct in this area.”

The proposed rule would require broker-dealers with which the registered person is associated, upon receiving written notice, to review and approve the arrangement.

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

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