What Is FINRA RULE 3241

FINRA Rule 3241 is designed to address the potential conflicts of interest that can arise when a registered person is named as a beneficiary, Trustee,  or executor of  a client’s estate. The intent of this rule is to ensure that registered individuals act appropriately and that the employing member carefully supervises the actions of registered individuals. A multitude of conflicts can arise when a registered person is named as a beneficiary or is placed in a position of trust over a client’s estate. One of the greatest concerns are cases where a registered person subjects an elderly client to undo or inappropriate influence. In these instances the representative may use this influence to be named as a beneficiary or to be placed in a position of trust upon the death of the client. The impact of this undue influence may not be known or realized by the client’s family for years. FINRA Rule 3241 establishes a National Standard to protect individuals and to provide  a consistent policy for member firms to follow. A registered person should decline being named as a beneficiary of, or placed in a position of trust over a client’s estate. If the registered person does not decline, the registered person must provide written notification to his / her employer and receive his / her employer’s written approval to  receive the bequest or to  accept the appointment as trustee or executor. Upon being notified that a registered person is going to be named to a position of trust or is being named as a beneficiary, the member firm is required to:

  • Perform an assessment of the risks created by the registered person being named as a beneficiary or to a position of trust. Specific emphasis should be placed upon evaluating whether such a scenario will interfere with or compromise the registered person’s responsibilities to the customer.
  • Make a determination to approve or disapprove the representative’s acceptance or to limit the registered persons activities by placing conditions upon the acceptance.

FINRA further States that the following factors should be carefully evaluated

  • The customer’s age
  • The length and type of relationship between the customer and the registered person
  • The size of the bequest relative to the size of the customer’s estate
  • If the representative has been named as a beneficiary or has received bequests from other customer accounts or estates 
  • An evaluation of the customer’s mental capacity and ability to protect their own interests. Specific weight should be given to any observations made by the member during the course of the relationship with the customer
  • Any red flags observed in the management of the customer’s account such as  excessive trading
  • Any red flags observed relating to instances of undue influence on the part of the registered rep

Member firms are well within their right to prohibit representatives from accepting bequests or appointments from clients. However, if the member firm allows representatives to receive bequests or appointments, the member firm must have clear policy and procedures designed to meet the National Standards and to supervise such matters. When evaluating the potential risks associated with the acceptance of a bequest or an appointment, the relationship between the representative and the client is a significant matter. For example, the risk associated with the acceptance or appointment being made by a client who has no other relationship with a representative other than that of a client is far greater than that being made by someone who is a lifelong friend of  the representative, who also happens to be a client.

Should the member firm allow the representative to accept the appointment or bequest, the firm must  carefully supervise the registered person’s activities and compliance with any limitations placed on the representative’s acceptance. An interesting situation may arise if a registered person is allowed to serve in a position of trust over a client’s estate for which the registered person is being compensated. The registered representative is now engaging in an outside business activity and as a result, the activity would be required to be disclosed and supervised by the member firm. The member firm is required to maintain all documents relating to notifications, approvals, denials,  bequests  and appointments for 3 years from the date of the bequest or the termination of the position of trust or termination of the registered rep by the member firm, whichever occurs first.  

All estate matters of the registered person’s immediate family are specifically excluded from this rule .Further, this rule does not apply to registered persons who do not manage customer accounts. A registered representative may not circumvent the rules by resigning from managing the customer’s account or transferring the customer’s account to another associated person. Other attempts to circumvent the rules, such as having the client  name the registered representative’s spouse or child as a beneficiary are also prohibited.  If the registered person is unaware that he / she has been named as a beneficiary or appointed to a position of trust for a client’s estate, the registered person will not have violated the disclosure rules. However, once the registered representative becomes aware of the bequest or appointment the knowledge of such triggers the disclosure and compliance requirements. 

We hope that this article has helped you better understand FINRA Rule 3241.

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