FINRA To Limit Brokers From Being Named as Customers’ Beneficiaries

By Attorney Jared Levy

A new rule adopted by FINRA aims to limit stockbrokers from being named as a customer's beneficiary, trustee, or executor. 

FINRA Rule 3241, which takes effect on February 15, 2021, requires all FINRA-member brokerage firms to address any situation where a customer appoints a firm’s stockbroker as beneficiary, trustee, or executor. The rule requires the brokerage firm to affirmatively permit or prohibit the stockbroker from acting in such capacity or receiving a bequest from a customer’s estate. 

The rule does not prohibit a stockbroker from being named a customer’s beneficiary or receiving a bequest from a customer’s estate, but brokerage firms will now be required to carefully determine whether to allow it. Firms that affirmatively approve of such a relationship must decide that it does not present a risk of financial exploitation.

FINRA adopted the new rule because investment professionals face potential conflicts of interest when they act in positions of trust for a customer.  For instance, a financial advisor could benefit from his or her influence over significant monetary decisions, which may harm the customer.  Also, senior investors – especially those suffering from mental impairments such as dementia – are particularly vulnerable when they appoint their advisor to a position of trust.

Under the new rule, the brokerage firm must assess the risks created by a customer’s appointment of a broker to a position of trust. Some of the risks include: potential conflicts of interest; the customer’s age; the size of any bequest as compared to the size of the customer’s estate; whether the stockbroker has been named as a beneficiary to other customers; and any indications of customer vulnerability or undue influence.

At Morgan & Morgan, our experienced securities attorneys are committed to fighting for justice against brokerage firms and investment advisory firms that exploit their customers. Our attorneys have helped investors recover tens of millions of dollars of investment losses.

We commend FINRA for passing Rule 3241, which hopefully will help protect customers from being taken advantage of by their financial advisors and stockbrokers. If you've been exploited by your stockbroker, please contact us today at 888.744.0142 or fill out our free, no-obligation case evaluation form.

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