Finra has adopted a new rule that makes it harder for brokers to receive an inheritance from clients’ estates or oversee them.
Once a registered representative learns he or she has been tapped as a beneficiary, executor or trustee or receives power of attorney from a client, the rep must now notify the brokerage in writing and get written permission from the firm to accept the arrangement, according to the regulation. It does not apply if the customer is a member of the broker’s immediate family.
The Financial Industry Regulatory Authority Inc. proposed the rule about a year ago. It is designed to address potential conflicts of interest and client harm that could arise from a broker holding a position of trust for a client.
“Problematic arrangements may not become known to the member firm or customer’s other beneficiaries or surviving family members for years,” the broker-dealer self-regulator states in a regulatory notice. “Senior investors who are isolated or suffering from cognitive decline are particularly vulnerable to harm.”
Finra said most, but not all, brokerages already prohibit or impose limitations on brokers becoming beneficiaries or assuming power of attorney for clients.
“Nonetheless, Finra observed situations where registered representatives tried to circumvent firm policies, such as resigning as a customer’s registered representative, transferring the customer to another registered representative, or having the customer name the registered representative’s spouse or child as the customer’s beneficiary,” the regulatory notice states. “This new national standard better protects investors and provides consistency across member firms’ policies and procedures.”
Peter Mafteiu, principal at Sound Compliance Services, said it will be a challenge for firms to design, implement and monitor policies and procedures for the rule given that there is a distinction between beneficiary status for a family member as opposed to someone outside a familial relationship.
“Since there is a lot of wiggle room in the rule, I wonder how the processes across firms can work, or can be supervised,” Mafteiu said. “I am not sure it can be.”
The rule, which was approved by the Securities and Exchange Commission, becomes effective on Feb. 15.
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