By Jay Fishman, J.D.
Christopher Gerold, the current President of the North American Securities Administrators’ (NASAA) and New Jersey’s Securities Bureau Chief, in a January 24, 2020 comment letter to the Financial Industry Regulation Authority (FINRA), applauded FINRA’s proposed rule to limit broker-dealer member firms’ registered persons from being named their respective customers’ beneficiaries. The proposed rule would allow a registered person to be named a beneficiary or hold a position of trust for a customer when the customer is an immediate family member or when the registered person’s member firm provides written approval. But Gerold, representing NASAA, asked FINRA to further restrict the rule’s application to better avoid conflicts of interest and elder abuse.
Prohibit registered person-beneficiary designations except to immediate family members. NASAA first suggested that FINRA amend the rule to prohibit a registered person from being named a beneficiary or holding a position of trust for a customer unless the registered person is an immediate family member. Additionally, said NASAA, the registered person should be required to obtain prior written approval from the member firm, and the firm should implement a heightened supervision over those customers’ accounts. NASAA declared that these suggested proposed rule revisions would provide the investor protections needed to address the conflicts of interest issue that FINRA identified in its request for comments on the proposed rule.
Further suggested revisions. NASAA also suggested that if the rule does, in fact, permit a customer to designate a registered person as a beneficiary or the holder of a position of trust, then FINRA should require the registered person to seek the member firm’s prior written approval, whether or not the registered person is an immediate family member. And moreover, proclaimed NASAA, the rule should guide the member firm on the type of information it should review before approving a request, e.g., the length of time the registered person has known the customer; the nature of the relationship between the registered person and customer; and the circumstances that precipitated the customer designating the registered person as beneficiary.
Heightened scrutiny of approved accounts. NASAA’s final pertinent remark about the proposed rule as written concerned the rule’s requiring member firms to only “reasonably supervise” a registered person’s compliance with conditions or limitations placed on the account rather than mandating a heightened scrutiny over immediate family member and non-family member accounts. NASAA pointed out the inherent conflicts of interest in the proposal even when the customer is an immediate family member of the registered person. NASAA suggested that the rule require heightened supervision for these immediate family member relationships by, for example, placing additional review on trades and transactions in, and withdrawals from, the account to ensure the registered person is making suitable recommendations to the customer and not taking advantage of the position of trust.
But aside from the proposed rule’s not going far enough to avoid conflicts of interest, NASAA emphasized that without the suggested revisions the proposed rule would not protect older customers from elder abuse, particularly older customers who belong to the registered person’s immediate family. NASAA cited a National Council on Aging report that in almost 60 percent of elder abuse and neglect incidents, the perpetrator is a family member, and two-thirds of the perpetrators are adult children or spouses. In light of this statistic, NASAA suggested that FINRA narrow the definition of “immediate family member” to require that any person “who the registered person financially supports” must reside in the same household as the registered person.