Finra moves to limit brokers' ability to serve as executors, beneficiaries for clients

Rule proposal would require firms to review rep requests to hold such positions

Nov 12, 2019 @ 1:53 pm

By Mark Schoeff Jr.

Finra wants to limit the ability of registered representatives to become beneficiaries of their clients or to assume control over their finances.

Under a rule proposal released on Monday by the Financial Industry Regulatory Authority Inc., brokerages would have to review and approve requests by reps to become a client's beneficiary, executor or trustee or to assume power of attorney.

The rule would not prohibit a broker from inserting herself into a client's end-of-life affairs but would put some obstacles in the way of doing so.

"Given the potential conflicts of interest, Finra would expect a member firm to employ heightened scrutiny in assessing a registered person's request to be named a beneficiary of or receive a bequest from a customer's estate," the proposal states. "Approval should be given only when the member firm has made a reasonable determination that the registered person assuming such status does not present a risk of financial exploitation that the proposed rule is designed to address."

As an example of the problem, the proposal cites a case in which a former Ameriprise broker, Robert Charles Torcivia, accepted fiduciary and beneficiary designations from three clients in violation of firm policies between 2007 and 2015. Last year, Finra gave Mr. Torcivia a seven-month suspension and fined him $10,000. Ameriprise fired him in 2015.

In another 2018 case, Finra barred John W. Cutshall, a former Morgan Stanley broker, for taking approximately $400,000from the account of a deceased client and depositing it in his own account.

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Finra chief executive Robert W. Cook said the regulator is not trying to be prescriptive about how firms handle reps who assume positions of trust with clients but is trying to establish a process in which brokers receive permission from the firm.

"A lot of firms already do this," Mr. Cook said at a Finra conference on senior financial exploitation Tuesday in Washington. "We think we can sort of raise the bar across the board by having more standardized requirements to empower the firm to require advisers to provide this kind of information."

It will be up to the firm to determine whether there's something suspicious about the client's bequest or designation of power to a broker, said Daniel Nathan, a partner at Orrick Herrington & Sutcliffe.

"If things work as they should, the firm should look it over and approve the arrangement if there's no overreaching," said Mr. Nathan, a former Finra director of regional enforcement. "Finra is doing the best job it can in making clear to the firm what its obligations are and leaving it to the firm to make the subjective determination."

The thrust of the rule will gain support, but it would not be simple for firms to implement, said Marlon Paz, a partner at Mayer Brown. For instance, firms will have to monitor each of their representatives, review relationships with their clients and do a considerable amount of paperwork.

"When you get down to the granular, it does put a higher cost on compliance and operations," said Mr. Paz, a former senior counsel in the Securities and Exchange Commission's Division of Trading and Markets. "In the rulemaking process, I do hope Finra weighs the costs and administrative burden, and considers whether the goal is better met through a less costly means."

The proposal will be open for public comment until Jan. 10.

[More: Ask the Ethicist: Should a financial adviser accept an inheritance from a client?]


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